By Julie Zhu
HONG KONG (Reuters) - China International Capital Corp (CICC) (HK:3908) is in advanced talks to acquire China Investment Securities, two sources with knowledge of the matter said, as China's leading investment bank seeks to bolster its presence in the retail brokerage business.
Earlier on Friday, CICC halted its shares from trading, saying in a statement the move was pending an announcement of "a very substantial acquisition", without elaborating.
The discussions between CICC and state-backed China Investment Securities have been underway for a couple of months, the sources told Reuters. The transaction could be announced as early as Friday, said one of the sources. The sources declined to be identified as the discussions are confidential.
The deal, viewed by analysts as complementary for the two firms, will provide investment banking-focused CICC the means to boost its retail business in a country where frequent trading by mom-and-pop investors have boosted revenues at brokerages.
Chinese newspaper 21st Century Business Herald reported late on Thursday "a merger" between CICC and China Investment Securities has been approved by "senior leadership".
CICC declined to comment further than what it said in its statement, while China Investment Securities could not be reached immediately for a comment.
Beijing-based CICC, the oldest investment bank in China, has played a crucial role in helping many large Chinese state-owned enterprises list in Hong Kong. That includes the $21.9 billion initial public offering of Industrial and Commercial Bank of China (HK:1398) in 2006 and the $22 billion listing of Agricultural Bank of China (HK:1288) in 2010.
It is also recognized for its strong performance in mega cross-border mergers and acquisitions by Chinese companies. It was ranked second behind Morgan Stanley (N:MS) for China-related M&As last year with an 11 percent market share, Thomson Reuters data shows.
But its retail stock broking business is relatively small compared to those of its rivals.
An acquisition of China Investment Securities, which ranked No. 17 by operating revenue among China stock brokers last year, will help CICC to boost its presence in retail broking. CICC was ranked No. 23 by operating revenue, according to data from the Securities Association of China.
"If the deal takes place, it will benefit both CICC and China Investment Securities as the two firms are very complementary," said Hong Hao, chief strategist of BOCOM International. "CICC lacks a strong footprint in retail business, which is the expertise of China Investment Securities."
Shenzhen-based China Investment Securities runs about 200 retail branches across China, compared to 20 by CICC, according to the two companies' websites.
DIVERSIFICATION
The deal also comes as CICC looks to diversify and broaden its product offering in areas such as fixed income, currencies and commodities.
China's share trading turnover reached $9.8 trillion in the first half of this year, 1.7 times the rest of Asia Pacific, according to financial services consultancy Quinlan & Associates.
The brokerage business contributed more than a third of 126 Chinese securities firms' total revenue of 157 billion yuan ($23.24 billion)over the same period, according to the securities association.
Founded in 1995 as China's first Sino-foreign investment bank by China Construction Bank <601939.SS>, Singapore sovereign investment fund GIC (GIC.UL) and Morgan Stanley, CICC was led for a decade by Levin Zhu, the princeling son of former Chinese Premier Zhu Rongji. Zhu resigned as CEO in 2014.
Morgan Stanley sold its 34.3 percent stake in CICC in 2010 to a consortium that included KKR & Co (N:KKR) and TPG Capital (TPG.UL). Central Huijin Investment Ltd, a unit of China's sovereign wealth fund China Investment Corp (CIC.UL), owns about 28.45 percent of CICC.
Unlisted China Investment Securities is 100 percent owned by Central Huijin, according to the brokerage's website. As of the end of last year, it had total assets of 92.2 billion yuan and debt of 78.6 billion. It posted 8.5 billion yuan in operating income in 2015.
($1 = 6.7568 Chinese yuan renminbi)