Hong Kong and China Brokers:Growing overseas presence

Offshore expansion has accelerated. The history of the Chinesebrokers in Hong Kong, based on what we know, can be tracedback to 1993, when Shenyin Wanguo Securities first established apresence through acquisition. The pace of expansion has steppedup in recent years, with over 30 China-affiliated brokers nowoperating in Hong Kong. The number is still growing, with thelaunch of the Shanghai-Hong Kong Stock Connect (SHSC)announced in April 2014 as a catalyst.

    Some are looking beyond Hong Kong. Leveraging their HongKong presence, some leading brokers have moved further abroad.

    Most notably, CITICS has acquired CLSA and gained a pan-Asian platform. Haitong is also attempting to get a bigger overseasfoothold through its planned acquisition of BESI.

    But near-term impact looks limited. Overseas expansion is adifficult path to follow, and its near-term contribution lookslimited: we forecast CLSA will contribute c1% of CITICS’stotal profit in 2015e, and we expect BESI to just break even inthe same year. That said, we note there are some favourableinitiatives – such as the mutual recognition of funds (seeAppendix 1) – supporting the brokers’ overseas growth; thismay also become a way for the leading brokers to acquire moresophisticated know-how and bolster their integrated, crossborderservice capabilities.

    Initiate on Haitong International (HTI) with Hold; we preferthe Chinese brokers. Haitong Securities acquired TaifookSecurities in 2009 and later renamed it HTI, and HTI has beengrowing rapidly in recent years; however, we believe its growthrelies heavily on balance sheet expansion, which could lead to acontinued need for capital. We initiate on HTI with a Hold ratingand a HKD9 target price (2.4x 2015e PB). We reiterate our Hold onGuotai Junan International (GTJAI) and raise our target price toHKD14.2 (from HKD10.8) on our increased brokerage marketshare and margin loan growth forecasts. In comparison, we preferthe Chinese brokers on valuation.