The Bigger the Better as China's Brokerages Face Tough 2019
(Bloomberg) -- China’s small brokerage firms face a grim 2019.
After a year when as much as $2.9 trillion was wiped from mainland equities, securities companies without scale will struggle to survive, market watchers say. Even government policies aimed at supporting stocks will tend to favor larger players, who stand to gain from more business opportunities coming their way.
The nation’s top five brokers handled about 56 percent of all equity, equity-linked and rights offerings in 2018, data compiled by Bloomberg show. That’s the biggest market share the companies have taken since 2009. (In China, the investment banking arms of securities firms typically handle such transactions.)
“The rising concentration in the brokerage industry will become a trend in the next three to five years, and may result in an industry-wide reshuffle," said Zhu Zhenxin, a Beijing-based analyst at Reality Institute of Advanced Finance. “We’re likely to see some mergers and acquisitions, as well as changes of ownership among brokerages.”
China has about 130 securities firms but only around 28 percent are publicly traded. All the top five equity underwriters are listed, namely CSC Financial Co., China International Capital Corp., Citic Securities Co., Huatai Securities Co. and Guotai Junan Securities Co. CICC said in a research note earlier this month that the combined net profit of the 28 companies it tracks dropped 27 percent from January through November from a year earlier.
Investors aren’t impressed, sending a gauge that tracks mainland brokers down 29 percent this year versus a 23 percent decline in the Shanghai Composite Index. The gauge rose 0.7% on Thursday morning, while the Shanghai stock market fell 0.4 percent.
A pledge by President Xi Jinping in October to shore up the economy and offer support to the private sector gave shares a much-needed fillip, and Beijing has also outlined plans to set up a new trading venue for tech stocks plus allow more frequent refinancing by listed firms.
But those initiatives will mainly provide business opportunities for the larger companies.
“The current regulatory mindset is to support big brokers at the expense of smaller ones," Hong Jinping, an analyst at Huachuang Securities Co., said. “Big brokers will be the first to benefit from favorable policies, while smaller ones can hardly get a piece of the pie in emerging areas, such as the new tech board and the Shanghai-London stock-link scheme.”
For smaller brokerages, the key will be to offer tailored investment advice and a more personalized service, according to Zhu Guan, an analyst at Cinda Securities Co. in Beijing.
Those with “excellent investment management ability in the secondary market” will get the attention of investors, she said. “The investment business has relatively less correlation to capital strength and business scale compared to traditional businesses such as brokerage and investment banking.”
©2018 Bloomberg L.P.