China's largest securities brokers are setting their sights on expansion and overseas listing opportunities, according to KPMG China's latest survey of the sector.
The fifth annual survey of China's 106 securities brokers, notes that the sector continues to grow in 2011, as recent regulations have enabled them to expand out of their traditional revenue streams into new ones, such as margin financing, short selling and asset management.
Mainland brokers are looking to expand overseas, by way of acquiring overseas brokers and listing in Hong Kong. They are looking at H-share listings to diversify their financing channels, as well as to lay a foundation for future international business.
According to the survey findings, ten mainland brokers were approved to set up Hong Kong subsidiaries in 2006. By the end of June 2011, the number increased to 23. In addition, foreign financial institutions have been entering the Chinese market at a faster rate. The number of joint venture brokers had increased from 9 in 2010 to 12 in June 2011.
Bonn Liu, Partner, KPMG China, says: "The large players in China are looking to see how they can follow their client base investing overseas. Their advantage is that they have got deep pockets whereas overseas companies are struggling in the current market and therefore, could become targets. Valuations are also working in the Chinese firms' favour because of the current stress in financial markets overseas. If China wants to go out, this is the best time to do it."
Profit before tax of all brokers increased from RMB 34.6 billion (USD4.3 billion) in 2006 to RMB 108.1 billion (USD 15.9 billion) in 2010.
The proportion of income from brokerage and underwriting activities has decreased, while income from asset management business, margin trading and short selling is on the increase. Meanwhile, there has not been a significant change in market leader positions from 2006 to 2010. The top ten brokers with highest profit after tax represented 48 percent to 52 percent of all brokers' profit after tax from 2006 to 2010 respectively.
The survey also highlights the increased trend for China's securities firms to seek overseas listings. "In order to plan for overseas expansion, we have seen a large influx of brokers from China setting up office in Hong Kong over the past 12 months. The largest Mainland broker has recently listed in Hong Kong and others have already listed their Hong Kong subsidiaries," Bonn adds.
Foreign players may also be set to benefit from the planned launch of the Shanghai International Board. Firms with joint ventures in China may be able to leverage off their relationships with overseas clients and their experience of dealing with international players. However, they also face increased competition from domestic brokers in China.
"Chinese brokers have strong networks and relationships across the country and are keen to capture opportunities from these relationships offshore as well. As a significant number of capital markets transactions overseas involve Chinese companies, Mainland brokers will become serious competitors to their international peers as they expand outside China," notes Bonn.
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