Everbright Securities Shares Fall to Two-Month Low

Everbright Securities Co. shares fell to a two-month low after the company’s president resigned following erroneous buy orders by the firm that roiled Chinese stock markets a week ago.

The stock sank 1.1 percent to 9.87 yuan as of Shanghai’s 11:30 a.m. trading break, poised for the lowest close since June 25. Trading in the shares was suspended yesterday afternoon as Everbright announced Xu Haoming’s resignation four days after regulators announced a probe into the company.

Chairman Yuan Changqing will become acting president as the company seeks to allay investors’ concern and stem a 19 percent drop in its shares this week, after it made 23.4 billion yuan ($3.8 billion) of erroneous buy orders on Aug. 16. The China Securities Regulatory Commission banned Everbright from proprietary trading for three months following the error, which the watchdog called unprecedented.

“The president has paid a huge price,” Wei Tao, a Beijing-based analyst at China Securities Co., said by phone today. “While Everbright has come down a lot already, it’s difficult to say where the bottom for the stock will be.”

Everbright’s shares trade for 18.9 times 12-month projected profit, the lowest level since Nov. 29, data compiled by Bloomberg show. That’s three times the valuation of a gauge of financial stocks in the CSI 300 Index, the data show.

The brokerage earlier this week suspended Yang Jianbo, who oversees its proprietary trading as head of global markets.

Improved Supervision

Everbright estimated that it lost 194 million yuan on the trades, based on Aug. 16 closing prices, and said the figure may change. The final trading loss from the error could reach 400 million yuan, Paddy Ran, a Citigroup Inc. analyst, wrote in a note last week.

The CSRC will improve its supervision system to help prevent trading errors, China Securities Journal reported today, citing an unidentified person.

Xu follows other executives at state-controlled Chinese companies in resigning after trading losses. Citic Pacific Ltd. Chairman Larry Yung stepped down after the company reported a currency-derivative loss of about HK$15 billion ($1.9 billion) in October 2008, the biggest by a Chinese company. China Aviation Oil (Singapore) Corp.’s former head Chen Jiulin gave up his post in 2006 after a $550 million trading loss that prompted the company to seek protection from creditors.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon kept his job after last year’s record $6.2 billion trading loss that drew criticism from lawmakers and regulators. Shareholders in the largest U.S. bank by assets rejected a proposal in May to split his roles after Dimon guided the bank through the global financial crisis and three straight years of record profit.

Regulatory Limit

Everbright’s net income in the first half fell 2.2 percent from a year earlier to 810.9 million yuan, China’s seventh-largest brokerage by market value said in a statement to the Shanghai stock exchange yesterday. Revenue rose 13 percent to 2.39 billion yuan, it said. Larger competitor Haitong Securities Co. said yesterday first-half net income rose 32 percent to 2.67 billion yuan.

The investigation into the trades is the CSRC’s second probe of Everbright this year, after the watchdog in June began scrutinizing the brokerage’s role in an initial public offering. That forced the company to delay a $1.3 billion share sale.

Everbright’s strategic investment department, which oversees trades using the firm’s own money, made the incorrect buy orders on Aug. 16, causing a 6 percentage-point swing in the Shanghai Composite Index.

Client Departures

Everbright may suffer financial damage as investors seek compensation for stock losses, and some clients could leave the company due to concerns over its internal controls, Li Cong, a Shanghai-based analyst at GF Securities Co., wrote in an Aug. 19 note. Business expansion may be curbed due to penalties from the securities regulator, Li said.

The brokerage may be penalized because the value of equities, securities and derivatives held by its proprietary trading desk relative to net capital exceeded the regulatory limit of 100 percent, Everbright said on Aug. 18. The ratio was at 94.39 percent at the end of June 2012, according to its first-half earnings statement last year.

— With assistance by Aipeng Soo, and Stephanie Tong

Before it's here, it's on the Bloomberg Terminal.