With Its IPO Ahead, China’s CICC Seeks Path Back to Success

Back in the day, China International Capital Corp. was an investment bank to be feared. Run by the son of then-Premier Zhu Rongji, it brought some of the country’s biggest Red Chips and state-owned firms to market, becoming known as China’s answer to Goldman Sachs Group Inc.

That was long ago. Having fallen in a decade from first place in revenue to 21st as of 2013, it hasn’t been China’s top investment bank since 2005. Now, its princeling head Levin Zhu is gone, it has new leadership as of last month, and it’s planning an initial public offering this year to raise capital and infuse new lines of business -- moves that Zhu had once resisted. The question is: Can CICC get its mojo back, or will its efforts be too little too late?

“The firm has hit a bottleneck and is stuck in the middle,” said Chi Man Wong, a Hong Kong-based analyst at China Galaxy Securities Co. “They have a decent investment-banking business, but that’s not an exciting story, and I can’t see a growth driver. They’re no longer leading the pack.”

The man who ran investment banking at CICC during its heyday, Bi Mingjian, returned as its new chief executive officer in mid-March, filling the position vacated when Zhu resigned in October. The IPO he will oversee, which may raise $1 billion by September, would potentially double capital that could be put to use building up new lines of business: margin lending, brokerage and asset management.

Dramatic Changes

Those have been the biggest profit contributors at CICC’s competitor Citic Securities Co., China’s largest securities firm by assets. Net revenue from underwriting and financial advisory services fell to 12 percent of the industry’s total revenue last year from 17.8 percent in 2011, according to the Securities Association of China. Investment income -- what the firms make from activities such as trading for their own accounts -- jumped to 27 percent from 3.7 percent in the same period, the data show.

“The market landscape has undergone dramatic changes, and it’s no longer investment-banking focused,” Bei Duoguang, who had worked with Bi at CICC and was formerly CEO of JPMorgan Chase & Co.’s China securities venture before leaving to set up his own micro-finance business, said by phone from Beijing. “It’s critical to see if CICC can adjust strategy according to the market changes amid the intensifying competition.”

CICC won’t discuss the business or its turnaround plan, and Bi is unavailable for an interview, according to Beijing-based spokeswoman Sherry Tan.

Catching Up

Bi was most recently a partner at private-equity firm Hopu Investment Management Co. in Beijing. He’ll “have some catching up to do” to oversee a wider portfolio, said Bob Dodds, who worked at CICC with Bi for seven years and is now the Hong Kong-based founder of DRP Capital Ltd., which advises on cross-border China acquisitions.

“When he was at CICC, the firm basically only had investment banking,” Dodds said. “They have to develop new products and find new revenue sources. Sometimes that also requires a different style of banking and a different type of team as well, so they’ve got a lot of challenges.”

Already there’s some progress. When CICC’s 2014 earnings are released in late May, they will show a 60 percent increase in revenue over the year before, primarily due to the resumption of China’s IPO market and an increase in fees from the brokerage and wealth management, according to two people familiar with the numbers who asked not to be identified because they aren’t yet public. The recovery is in line with the industry: Revenue at 120 securities firms totaled 260.3 billion yuan ($41.9 billion) last year, a 63 percent increase from the year before, when 115 companies were tracked, according to the Securities Association of China.

Good Valuation

CICC’s revenue increase, along with the soaring of Hong Kong’s Hang Seng Index to a seven-year high, means that its IPO will be well-received by the market, said Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong.

“It’s a good time. You want to list your company when the market’s up,” he said. “They should have a really good valuation.”

China eased rules governing its securities industry in 2012, allowing for the first time such businesses as margin financing and loans collateralized by securities.

CICC’s competitors were quick to seize the opportunities. By 2013, Citic, with 5 billion yuan in fees and commissions, ranked first in generating revenue from margin financing, followed by Guotai Junan Co. and Huatai Securities Co. That year, CICC earned 1.9 billion yuan in fees and didn’t show up in Securities Association of China rankings. Tan declined to say whether the company did margin financing.

Too Late?

CICC was concentrating instead on state-owned companies and their IPOs -- after all, the firm was formed under Zhu’s father’s direction in 1995, as a joint venture with Morgan Stanley to help import foreign capital into China through overseas listings.

Now, it may be too late to catch up, said China Galaxy’s Wong.

“To run head-to-head with Citics and the like will be unrealistic,” he said. “CICC will be a latecomer, and it’s questionable if they can be a meaningful player in those businesses operated by existing rivals.”

During his 12 years at the helm of CICC, Zhu had resisted expansion and opportunities to take advantage of China’s stock-market boom in the mid-2000s, including adding proprietary trading and taking over unprofitable brokerages, according to people who worked with him at the time and asked not to to be identified.

Zhu couldn’t be reached for comment. Four calls to his mobile phone went unanswered, and no messages could be left.

‘More Aggressive’

“Levin could have done more,” said Fraser Howie, co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “He could have been more aggressive when they were profitable to expand into other businesses.”

A number of CICC executives left, some because of Zhu’s leadership style and reluctance to accept outside ideas, people who worked with him said at the time. Bi departed as co-head of investment banking in 2005 after being sidelined by Zhu, and took a role as a senior adviser developing CICC’s fledgling U.S. business, according to two people familiar with his departure who asked not to be identified because they’re not permitted to speak publicly.

‘Quirky Individual’

Zhu was a “quirky individual” who came to work in the late afternoon or sometimes not until 10 p.m., and then secluded himself in his office, according to author and consultant James McGregor in his book “One Billion Customers: Lessons from the Front Lines of Doing Business in China.”

Zhu is a princeling, the term for children of current or former senior Chinese officials. Employees at CICC “deferred to Levin, as they would to the son of any Chinese emperor” due to his father’s position as premier, McGregor wrote. The way CICC operated internally as well as externally, including the fact that CICC was in on almost every major overseas listing, “illustrates the political fears that guide the behavior of Chinese officials and their families,” he wrote.

CICC managed 75 percent of the value of China’s overseas IPOs worth more than $1 billion in the 2000-2005 period, according to data compiled by Bloomberg. Its biggest deals included the $9.2 billion IPO of China Construction Bank Corp. and $3.5 billion share sale by China Life Insurance Co.

Public Disclosure

Zhu’s reservations about taking CICC public involved the fact that company details, including manager compensation, would be subject to public disclosure, said two people with knowledge of the situation at the time.

After the global financial crisis, the firm continued to experience more departures and the 2010 end of its partnership with Morgan Stanley. Underwriting Chinese IPOs took a hit in 2012 after the country banned new listings to curb fraud. The ban was lifted in December 2013. CICC’s revenue fell to 2.2 billion yuan in 2013, its lowest since 2005. Zhu, along with Chairman Jin Liqun, resigned in October.

Now, with Bi at the helm, CICC has a chance to seize new opportunities. The era of mega IPOs may be gone, but Bi can build on CICC’s brand and connections and being charting a path for the company’s future, according to Galaxy’s Wong. The capital infusion from its planned IPO can help.

“Connection is no longer key to success in China’s securities market,” said Bei, Bi’s former colleague. “He’s got to position the company right, got to have capital and a good team.”

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