CLSA and Citic Securities’ cultural concoction

The decision from Citic Securities to buy 19.9% of CLSA and French brokerage Cheuvreux marks the first step in an international alliance, but rivals are sceptical. ASIAMONEY asks companies how the cooperation will unfold.

  • 19 Jul 2011
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Yin Ke goes to great lengths to make sure Asiamoney understands one particular point when discussing Citic Securities’ investment into CLSA: his company is buying a minority stake, not taking it over.

“The [almost] 20% stake is a meaningful point to extend our conversations but we don’t want the French people [at CLSA’s parent Crédit Agricole or its European research house Cheuvreux] and CLSA staff to feel that the Chinese people will control everything,” states the CEO of Citic Securities International and vice-chairman of Citic Securities. “I cannot say whether we will ever increase our stake [in CLSA and Cheuvreux]; we can only say that we are open-minded.”

His caution on this point is understandable: CLSA’s ability to retain its independent research voice is one of the most important issues in this alliance.

The announcement on June 9 that Citic Securities was buying into Hong Kong-based brokerage CLSA was not entirely surprising. It was well-known that the two had been in discussions for months.

The market was, however, surprised by its decision to buy not just a 19.9% stake in CLSA but also in Crédit Agricole’s wholly owned French research brokerage subsidiary Cheuvreux for a combined US$374 million, ahead of CLSA merging with its sister company.

Exactly how, rivals wonder, can an internationally staffed, Hong Kong-based brokerage known for its quirky and thought-provoking Asian research merge with a Paris-based European broker, and the two then cooperate with a Chinese investment bank that is ultimately owned by Beijing?

Scepticism is rife. “Citic Securities has wasted its money,” is the view of an equity sales head at a rival bank. “Minority stakes mean you have no control over what’s going on, so CLSA has basically taken its money for nothing. But if Citic Securities takes a bigger stake it risks undermining CLSA’s reputation for independent research.”

“There’s no way that Citic Securities just wants to remain a minority shareholder with no control; it’s using this as a first step to conduct a soft takeover of CLSA,” asserts the head of research at a rival Chinese bank.

Similarly doubtful views were echoed by virtually every investment banker, equities salesperson or analyst that Asiamoney asked. Nearly all rivals appear to believe that this alliance is doomed.

“By tying up with Citic Securities CLSA risks destroying the one thing that makes it unique: its genuinely independent research,” says a hedge fund manager that uses the Hong Kong broker.

Yet while both partners are acutely aware of the risks involved, they’re fully prepared to go ahead.

CLSA does so because it wants access to the investment-banking possibilities that come with Citic Securities’ major corporate client base, and it wants to deliver more of its research into China. Citic Securities, for its part, wants to use CLSA’s international distribution network to push more primary deal flow – initially via equity offerings, but eventually including renminbi bonds and other areas.

It’s a statement of Citic Securities’ seriousness about this alliance that it is prepared to make the investment just ahead of its own initial public offering (IPO) in Hong Kong (which Yin declined to discuss, citing a blackout period before the deal).

But good intentions are not enough. This fate of this cooperation depends on the two companies convincing the market and CLSA’s own staff that it will not break the brokerage’s precious business model.

Transitional talks

While Citic Securities and Crédit Agricole only announced the investment plans last month, the two have been in discussions for about two years.

Citic Securities initiated the talks with the French bank after considering other international options (see box opposite), and talking through some ideas with CLSA.

“CLSA’s French shareholders have for the last few years been focusing on the European market [with] no long-term strategy in Asia-Pacific,” says Yin. “As a result it took us several months to present our ideas to them and convince them to develop their strategy in Asia-Pacific.”

The final stages of the tie-up are not yet complete. Citic Securities has just signed binding term sheets with Crédit Agricole to make the 19.9% investments, and the China Securities & Regulatory Commission (CSRC) favours the plan. It next needs to finalise its agreement and get approval for it from the Chinese authorities.

After that CLSA needs regulatory approval from around 13 countries for its merger with Cheuvreux, and then the support of the labour union in France that represents the brokerage. Of all this, the latter might prove the most taxing to get.

Assuming everything goes smoothly, the Hong Kong-based broker should finish merging with Cheuvreux by the end of the year, leaving Citic Securities with a 19.9% stake in the combined entity. Employees will hold a little under 35% of the combined company, and Crédit Agricole the rest.

The combined entity’s headquarters will be CLSA’s Hong Kong office. CLSA’s head Jonathan Slone will be the CEO and Cheuvreux’s leader Jean-Claude Bassien will become the chief operating officer, eventually moving to Hong Kong.

Tying up

On paper the tie-up looks compelling.

Citic Securities is already one of China’s top-three investment banks, and was last year’s most prolific equity-capital-markets bookrunner, according to Dealogic. But it lacks much offshore presence at a time when more Chinese companies are expanding internationally.

In other words it needs international distribution, top investor relationships, and quality research. CLSA has all of that and will gain even more once its merger with Cheuvreux is complete.

“We can bring a good primary pipeline, including RMB [renminbi] products such as bonds, or equity issues such as IPO placements,” says Yin. “And we can help more Chinese names list in North America and other areas.”

For its part, CLSA wants to make more money from investment banking – avenues that Citic Securities can offer due to its strong mainland corporate relationships.

“I’d describe it as a very friendly partnership of like-minded companies that have the ability to lever off of each other’s areas of strength,” says Slone. “I don’t have nationwide bankers [in China]; they have 550 bankers. They don’t have a 22-year record in London of selling Asia and a stellar client [international investor] list.”

Additionally CLSA’s merger with Cheuvreux will give it more heft in Europe, raising its international coverage and making it easier for international asset managers to nominate it as one of their leading brokers. That’s no bad thing in a time of continuously declining broking fees.

The two intend to regularly conduct equity listings together, with Citic Securities supplying corporates to list in Hong Kong, and CLSA selling them via its global distribution network. Both parties will then earn money from the deals in an undisclosed split.

However Yin says that Citic Securities will not touch CLSA and Cheuvreux’s daily operations, merely offering support and advice from the board level, where it will have a seat. And, initially at least, the two do not intend to set up any joint teams.

In addition to this CLSA intends to begin offering equity derivatives, something that is eminently achievable with the balance-sheet backing of Crédit Agricole, which will remain its largest shareholder.

Culture clash

Yet while the alliance makes sense in theory, both parties know major hurdles exist.

To date China’s investment banks have had limited success building their operations in Hong Kong, let alone further afield.

In large part this stems from cultural issues; western salespeople and analysts are individualistic and reward-orientated, whereas Chinese companies tend to be hierarchical and very political.

Asiamoney spoke to non-Chinese staff in mainland securities houses away from Citic Securities who say that they frequently feel sidelined by senior management, who sometimes reveal seemingly abrupt strategic shifts without consultation.

Language also plays a role. “You’d be surprised how few Chinese bankers speak any English,” says the research head.

Cooperating on equity issues is a great idea in theory, but it’s likely to prove much harder in practice to get Putonghua-speaking investment bankers at Citic Securities and CLSA salesmen to agree on whether and how to market scores of little-known mainland company shares into Hong Kong.

“You can see the rationale of doing this; having good international equity distribution, equity derivatives backed by Crédit Agricole’s balance sheet and a strong banking pipeline of deals looks like a strong combination,” says a head of equities at a rival investment bank. “But the key is in the execution; it took us years to make progress, and CLSA and Citic are basically at the beginning of that, and they face these huge cultural divides.”

Slone says that CLSA’s staff is on board with the alliance. He recounts a big offsite meeting the brokerage had to discuss the proposed Citic Securities investment, during which he asked employees for any feedback on their key concerns and how best to go about the cooperation.

He adds that “nobody yet” has left due to the proposed tie-up (according to Slone the resignation of head of brokerage Basil McIlhagga in early June was unrelated).

Limited alliance

Citic Securities is evidently aware of the execution challenges it faces, hence its rather coy minority-stake purchase into CLSA.

“To my mind this [the 19.9% acquisition] is an important step, but there might be or might not be a next step,” says Yin. “Investment banking relies on people, we don’t wish to invest in a financial institution without talent.”

Slone agrees. “[The] 19.9% [stake] is a good investment level right now as it gives us the opportunity to see if it works,” he says. “I’m confident that it will work but if it doesn’t it’s not a big problem for either company.”

He adds: “If you don’t have an economic interest in each other you see things differently. [Citic] having an economic interest in us changes the way we think about them as a partner. Number one we want to make them happy, and number two we want to give them a good dividend.”

Yin also feels that the relationship will be fine because Citic Group as a whole has frequently dealt with different cultures. He points to the fact that the conglomerate has conducted international joint ventures since the early 1980s, including in the US, Africa and Latin America.

“Our leadership reflects this [international experience] too,” he adds. “Our chairman [of Citic Securities] Wang Dongming graduated from Georgetown University in the US and then spent several years in Canada before returning to China.”

Perils of perception

The success of this creeping alliance between Citic Securities and CLSA could well hinge on one fact: its impact on the latter’s research image.

Despite the fact that all investment banks are required to keep Chinese walls between their research and banking divisions, many investors are extremely sceptical that equity analysts at major investment banks are totally candid about companies which are also clients of their employer.

In contrast, CLSA heavily promotes itself on its ability to generate unique and unbiased research. A large part of the reason it can do so is because it doesn’t have a major investment banking operation.

Given its numerous number one rankings in Asiamoney’s annual Brokers Poll, investors appreciate this relatively unique business model.

But once CLSA takes advantage of a pipeline of China equity deals it will start looking more like its market peers.

“We don’t trust the research of many banks out there because they’re trying to get business from the companies they analyse. CLSA wasn’t like that, but now it’s tied up with Citic it will be under pressure to sell a bunch of Chinese companies, some of which might not be particularly good,” says the hedge fund manager.

What would happen if Citic Securities were to press the listing of a Chinese company that CLSA’s analysts didn’t like?

“Then we won’t do it,” responds Slone. “That’s the great thing about this [alliance]. However, we have a process for an IPO and it has to go through our deal review committee. And don’t forget, people don’t just come and say ‘Hey we’ve an IPO, would you like to join?’ You have to pitch.”

He adds that Citic Securities can distribute deals however it wants, and that “there are no agreements [between CLSA and Citic Securities] saying you cannot do this or that”.

But rivals are less sanguine that CLSA can so easily refuse business from its new minority shareholder.

“CLSA’s kidding itself if it thinks it can tie up with a Chinese company and then turn down any deal it doesn’t like,” asserts the rival head of equities.

Cautious cooperation

Citic Securities’ investment into CLSA is the financial equivalent of dipping a toe in the water; it’s a face-saving first step for both companies while they gauge their own ability to work together.

The potential certainly exists for the cooperation to be successful, and if it is it would be extremely profitable. But pulling it off will not be easy.

The key to doing so is to be reasonable – for Citic Securities in particular. It should not use its shareholder status to bully its new partner into doing business with which it is not completely comfortable.

Meanwhile CLSA needs to ensure it can sell more IPOs, bonds and equity derivatives in a way that doesn’t frustrate its own salespeople or taint the independence of its research in the eyes of global investors.

These are tough tasks to achieve. No wonder both companies are being so careful with their comments.

  • 19 Jul 2011

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1 Citi 41,733.81 194 9.42%
2 HSBC 40,945.92 235 9.24%
3 JPMorgan 37,214.87 151 8.40%
4 Bank of America Merrill Lynch 29,284.07 123 6.61%
5 Deutsche Bank 20,416.10 78 4.61%

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Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 13,268.07 33 6.30%
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5 Santander 9,533.17 25 4.53%

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1 Citi 13,617.40 57 11.05%
2 JPMorgan 12,607.77 55 10.23%
3 HSBC 9,327.72 50 7.57%
4 Barclays 8,643.78 30 7.02%
5 Bank of America Merrill Lynch 6,561.15 18 5.32%

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4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

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1 UniCredit 3,966.12 27 13.01%
2 SG Corporate & Investment Banking 2,805.90 16 9.20%
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4 Citi 2,526.98 15 8.29%
5 HSBC 1,663.71 16 5.46%

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1 AXIS Bank 5,944.45 123 18.53%
2 HDFC Bank 3,792.05 100 11.82%
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4 Standard Chartered Bank 2,299.63 31 7.17%
5 ICICI Bank 1,894.86 51 5.91%