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Haier cuts stake in CICC
Before the Shanghai listing of China International Capital Corp. (CICC) at the end of 2020, an investment branch of Haier Group (Qingdao) Jinying Holding Co. purchased a nearly 10% interest in China's oldest investment bank. However, the relationship between the two entities now appears to be cooling, as Haier publicized that they decreased their ownership to 6.32% from 8.26%.
Haier attempted to dismiss the sale of its shares, claiming it was due to a need for cash. Indeed, such sales by pre-IPO investors are not unusual after a few years when they are looking to secure some of their profits. However, this action indicates a more subdued attitude towards Chinese investment banks compared to two years ago.
In November 2020, when CICC was launched in Shanghai, it was met with an enthusiastic response from investors that pushed its stock up by 44%, the maximum daily limit. The surge in interest was due to CICC's rising standing among global banks and was further fueled by its lead role in underwriting the Ant Group's IPO, which was estimated to be valued at $37 billion and would have been the largest in the world at the time.
Just 24 hours after its initial approval, China abruptly denied the Ant Group listing, beginning a widespread regulatory clampdown on sectors ranging from top tech firms to educational programs. The increased supervision of overseas listings by Chinese companies sent a wave of fear through the stock market, in which CICC had been earning a great deal of money.
Currently, the stocks of CICC listed on the Shanghai Stock Exchange have fallen by more than 50% from their peak value earlier this year, notwithstanding the recent recovery. In addition, its Hong Kong-traded shares hit a six-year low at the end of October before they began to increase again. The bank is expecting a drop in both earnings and profit for the first time since the big market crash in 2016.
CICC's stock value has dropped significantly due to macroeconomic issues such as the global economic downturn, the weakening stock exchange, and the potential for more foreign competition. Additionally, there are business-specific problems that the organization is facing, as it is perceived to be the most internationally-oriented investment bank in China and once had Morgan Stanley as a partner and stakeholder.
The geopolitical climate and worries about a further decoupling between American and Chinese financial markets are hampering the international aspirations of CICC. Moreover, the requirement to maintain capital adequacy is restricting its expansion, as it plans to issue billions of dollars in new shares.
Despite all the points above, CICC is still one of the leading investment banks in China. It stands on the same footing with renowned domestic contenders such as Citic Securities and Haitong Securities. Moreover, as the ninth biggest securities firm by total assets in China, CICC is more resilient to market fluctuations than its smaller competitors since it has a broader portfolio ranging from reasonably secure wealth and asset management to more recurrent brokerage and proprietary brokerage trading.
Even though CICC has had an excellent overall standing in the long run, it experienced some difficulties in the short term, according to its latest quarterly report. Its revenue decreased by 10.7% to 19.38 billion yuan ($2.77 billion) in the first nine months of 2022 compared to the same period in the previous year, while its net profit dropped 19.4% to 6 billion yuan.
The most significant drop in revenue occurred in CICC's brokerage and investment businesses, which slowed by 18.5% and 39%, respectively. However, this was cushioned by a 14% increase in investment banking revenue, triggered by the Chinese government's efforts to stimulate the economy and enhance its tech sector through capital markets.
Analysts forecast that CICC will experience a net profit reduction of between 16% and 21% for this year, which will be its first annual drop since its revenue fell by 7.1% in 2016 during a severe correction in China's stock markets.
The CSI300 Index saw an enormous drop of over 20% in the nine months of 2020 due to the repercussions of the pandemic as well as the enforcement of various control measures. Moreover, the conflict between Russia and Ukraine that started in February added to the pressure of foreign capital departure, resulting in the plunge.
Even with the known challenges, the IPO market in China is anticipated to grow 5% this year, as Chinese corporations raised an unprecedented 610 billion yuan, which accounts for almost half of the worldwide IPO funding. By contrast, the US IPO market is projected to experience a reduction of more than 90%. In comparison, Hong Kong fell by more than 70%, underscoring the effect of hard-hitting US monetary tightening.
The combined revenue of China's almost 150 securities companies fell by 19% during the first nine months of 2022, a steeper decline than the 10.7% drop recorded by CICC. The fiercely competitive nature of the sector is expected to be exacerbated by China repealing foreign ownership restrictions in 2020, allowing firms such as Morgan Stanley, Goldman Sachs, and Credit Suisse to have full ownership of their activities in China.
Established in 1995 as a partnership between China and the US, CICC is China's most veteran western-style investment bank. It has an international presence with offices in Hong Kong, New York, London, Singapore, San Francisco, Frankfurt, and Tokyo. It has been a significant factor in assisting Chinese corporations in securing foreign capital.
For the past year and a half, Chinese offshore listings have mostly been on ice, but CICC still makes around 20 percent of its income outside China. Therefore, its future growth in non-China areas will be determined by politics. Last week, when it seemed that tensions had abated, CICC and other firms offering US IPOs for Chinese companies got a boost, yet it is still not sure how China will employ its brand-new assessment system for these offshore listings.
CICC has readied itself to offer services for companies that want to trade on alternative trading platforms, such as Switzerland and Frankfurt, within the scope of China's broadened "Shanghai-London Connect" program. However, none of these venues can match the size of deals and liquidity offered by the New York market.
The investment bank, which is nearing the maximum allowed debt ratio as determined by regulators, has said it will boost its capitalization up to 27 billion yuan by selling new shares. As a result, as the markets recover and CICC broadens its range, it is expected that CICC will show a 33% growth in earnings in 2023 and 11% in 2024, reversing the decrease in the current year. Nevertheless, it is significantly lower than the 50% growth in 2021 and 70% gain in 2020.
The price-to-book (P/B) ratio for CICC's Shanghai-listed shares is currently around 1.6 times, over the average of 1.4 for the sector, implying that the potential for this firm's growth has already been priced in. This may have had something to do with Haier's recent decision to liquidate partially. It is also worth noting, however, that investors outside of China have a less optimistic attitude, evidenced by the considerably lower P/B ratio of 0.7 for CICC's Hong Kong shares.