Sun Hung Kai & Co., the Hong Kong-based financial services company backed by CVC Capital Partners Ltd., is considering selling a stake in its brokerage and wealth management business, three people familiar with the matter said.
The company, run by Malaysian businessman Lee Seng Huang, has been approached by and held informal discussions with potential buyers from Asia and elsewhere for its SHK Financial unit, said the people, who asked not to be identified and declined to name any companies. No formal talks are currently being held, they said. Sun Hung Kai jumped in Hong Kong trading.
Sun Hung Kai is also considering seeking a partner to help it expand outside Hong Kong as competition from overseas and mainland securities firms in Asia’s second-biggest financial hub squeezes margins, the people said. The median operating profit margin among 10 brokerages traded on Hong Kong’s stock exchange slumped to 5.2 percent in 2010 from 10 percent five years earlier, data compiled by Bloomberg show.
“The traditional brokerage business in Hong Kong is getting more crowded with new entrants, such as deep-pocketed Chinese banks, even as commissions continue to see compression,” said Desmond Cheung, a Hong Kong-based analyst at Royal Bank of Scotland Group Plc.
Sun Hung Kai surged 13 percent at the close in Hong Kong after earlier rising 15 percent, the biggest intraday gain since December 2008. The company isn’t related to Sun Hung Kai Properties Ltd., the world’s biggest real estate developer by market value.
“The company has been exploring opportunities to expand our various businesses of brokerage and wealth management, corporate finance, asset management and consumer finance and has entered into a number of preliminary confidential discussions with different third parties, one or more of which could result in a transaction,” Sun Hung Kai said in a Hong Kong stock exchange filing in response to the Bloomberg News article.
Sun Hung Kai hasn’t yet signed a “definitive agreement” on any deal, which may take the form of partnership, joint venture, collaboration or “other commercial arrangement,” according to the statement.
SHK Financial has a net book value of about HK$4 billion ($513 million) to HK$4.5 billion, two people said. Using a valuation multiple of two times net assets would imply a price tag of as much as HK$9 billion for the entire unit, which also includes corporate finance and asset management advisory. The final book value may vary depending on which assets are included, one person said.
Hong Kong-listed brokers trade at a median of 1.31 times book value, Bloomberg data show. Haitong Securities Co., China’s second-biggest publicly traded brokerage, bought a controlling stake in Taifook Securities Co. in late 2009 for HK$1.82 billion. Haitong paid 1.87 times book value for an initial stake of 53 percent.
Taifook, which has since been renamed Haitong International Securities Group Ltd., now trades at 1.4 times book value, according to Bloomberg data.
Consumer finance accounted for 53 percent of Sun Hung Kai’s revenue last year while its brokerage and wealth management operations contributed 36 percent, according to Bloomberg data. Sun Hung Kai has ruled out any sale of its consumer finance operations, the people said.
Sun Hung Kai’s profit dropped 14 percent last year to HK$1.09 billion, reflecting an accounting loss following the sale of Tian An China Investments Co., a Chinese property developer and investment company. Net income peaked at HK$1.9 billion in 2007.
The company has been trying to expand beyond its home market by forging alliances overseas. Sun Hung Kai sold shares to Dubai Investment Group, a unit of Dubai Holding, in 2007 and issued HK$2.14 billion of mandatory convertible notes and warrants to CVC Capital last year. The London-based private equity firm will own 19 percent of the company if the notes are fully converted.
“Having a partner with experience and a network in China would appear to make more sense for Sun Hung Kai, as opposed to other regional players, given that the company is focusing on developing its consumer finance business in the country,” RBS’s Cheung said.
Sun Hung Kai was founded in 1969 by Chinese businessman Fung King Hey. Merrill Lynch & Co. invested in the company in 1980, and sold its stake in the late 1980s. Fung’s family sold 33 percent of Sun Hung Kai to Allied Properties (H.K.) Ltd. in 1996 and held talks to sell some of its financial services businesses to a unit of Shanghai-based Shenyin Wanguo Securities Co. that same year, after profit dropped 33 percent.
The company runs businesses including wealth management and brokerage, asset management, corporate finance, consumer finance and principal investment. It entered the consumer finance industry by acquiring United Asia Finance Holdings Ltd. in 2006, and built its China business through a venture with Zhejiang Province Yongan Futures Broker Co.
Lee Ming-tee, former chairman of Allied Group, was imprisoned for a year in November 2004 after he pleaded guilty to two counts of publishing false accounts.