New Overseas Target for CITIC Securities Cash

(Caixin Online) Despite the disappointing failure of a Bear Stearns stake-purchase proposal, CITIC Securities has not abandoned its ambitious plans for overseas expansion.

Indeed, sources told Caixin Online that the cash-rich Chinese securities firm is now in talks for a minority stake in the French firm Credit Lyonnais Securities Asia (CLSA).

One source close to CITIC Securities said the firm has been in talks for a CLSA stake for some time, although a deal remains uncertain. Another source said the firm decided to seek a minority stake after the possible seller initially set a steep price.

Meanwhile, recent personnel changes point to the still-burning overseas ambition at CITIC Securities. In addition to other management changes announced February 11, the firm promoted Yin Ke, international division vice chairman and CEO, to company vice chairman.

"This sends a message that the company attaches great importance to its international business," said a company executive.

Looking Abroad

As a subsidiary of CITIC Group and China's oldest publicly traded brokerage, CITIC Securities is a domestic industry leader. But the firm was not always in a position to make industry waves.

On the contrary, in its early years, the firm had to rely fully on CITIC Group's background and could not compete against other, better connected securities firms.

In the second half 2003, CITIC Securities launched an expansion policy by buying three, rival securities firms. Overnight, it became one of China's leading integrated brokers.

In 2007, the firm started looking abroad. That October, CITIC Securities and Bear Stearns signed a comprehensive strategic cooperation agreement. The firms were to exchange about US$ 1 billion in shares and open a joint operation in Hong Kong to pursue cooperative businesses, splitting the investment 50-50.

The regulatory process for the venture was still in progress when the sub-prime mortgage crisis erupted in the United States and Bear Sterns, once the fifth-largest U.S. investment bank, entered a precipitous decline. Eventually, JP Morgan Chase acquired Bear Stearns, and CITIC Securities escaped unharmed.

Later, CITIC Securities said that, while the original Bear Stearns deal had been terminated, the company's strategic development objectives remained intact. The firm was determined to continue an international development strategy.

Cash Paradox

CITIC Securities' overseas strategy has been supported by a pile of cash. A company insider told Caixin Online that Chinese-funded institutions such as CITIC Securities have been relatively "over-funded" since 2007 compared to international counterparts, many of which were negatively affected by falling global asset values.

According to a third quarter 2009 balance sheet, CITIC Securities had banked 24.8 billion yuan, excluding customer deposits.

"We raised 25 billion yuan in the past and were not affected by the financial turmoil," the insider said. "With the fall in global asset prices, 25 billion yuan now is equivalent to maybe 70 billion yuan.

"We're exploring options for going overseas. We may go to Europe. Why would we go to America or Europe? We need the human resources and experience. Without local experience, there is no globalization."

Moreover, the firm would rather not continue to cling to all that cash.

"The completion of a stock market listing or re-issuance results in a lot of cash for a brokerage," explained a broker executive. "Because there is little new innovation business to be done, this amount of cash is actually a burden."

CITIC Securities was rumored to have started contacts with a number of European securities firms, including CLSA, even during the Bear Stearns negotiations.

The CITIC Securities insider said CLSA management holds a major stake in the company: Employees control 35 percent, while Banque de l'Indochine holds the rest.

To support management interests, the employee portion is structured to prevent a hostile takeover. So the minority stake sought by CITIC Securities may come from management holdings.

The financial crisis had a limited effect on CLSA. The firm's then-chairman and CEO Rob Morrison told reporters in mid-2008 that CLSA had been only indirectly affected by the sub-prime crisis, since the brokerage was it's main business.

To avoid negative impacts from cyclical industries, Morrison said the firm's best route would be to expand market share. Thus, CLSA started pursuing an aggressive expansion in the Asia-Pacific market – a strategy that may well fit growth plans at CITIC Securities.

"Successful cooperation between CITIC Securities and CLSA would significantly expand CITIC Securities' international platform," said a source close to the talks.

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