Investment Banking Business

The investment banking business has a very wide scope. Based on the practice of international securities companies, it mainly includes securities underwriting and issuance, mergers and restructuring, and financial consultancy.

In China, the current profitability models of investment banking have the following three features:

1. Sponsors remain unavoidable for companies wanting to go public. The sponsor system is yet another manifestation of the channel system profitability model of securities traders.

TABLE 4.7 Revenue of Publicly Listed Securities Traders' Underwriting Business in 2007 through 2010 and Quarters 1 through 3 of 2011 (CNY in millions)

Source: Wind Information Co.

2. IPOs are still the most important source of revenues for the investment banking business. Mergers, targeted issuance of new shares, share placement, and bond underwriting are still relatively underdeveloped.

3. Due to the impact of secondary market fluctuations combined with policy factors such as IPO suspension, the investment banking business is constantly weathering market conditions.

Table 4.7 shows the revenues from securities underwriting business in 2007 through 2010 and in the first three quarters of 2011. Over those years, the revenues from securities underwriting business of listed Chinese securities companies have been steadily rising, with an increasing percentage in the total revenue, jumping from 4 percent in 2007 to 14 percent in 2010. The underwriting business has become an important revenue source among traditional business lines. To some extent, it may serve as one of the triumvirate of securities trader revenues, attenuating revenue fluctuations.

A major change in the investment banking field is that the securities issuing market has transformed from a market dominated by oligarchic monopolies to a market with more widespread competition between many contenders. Against this backdrop, the overall underwriting business pattern of listed securities trades has undergone significant changes. The percentage of the main board in the total financing amount has dropped from 70 percent in 2008 to 36 percent in 2011 while the percentages of the GEM board and the SME board have both reached 30 percent, respectively, giving rise to a trichotomous pattern (see Figure 4.8). In addition, as the number of big projects decreased, the average IPO financing amount has dropped from CNY 3.7 billion in 2007 to CNY 1 billion in 2011 (see Figure 4.9).

An explosion of small and medium projects has brought good opportunities to small and medium securities trades, which were excluded from large projects. Securities traders specializing in small and medium projects have a significantly increased share in the underwriting business. Large

FIGURE 4.8 Market IPO Financing Structure in 2008 through 2010 and Quarters 1 through 3 of 2011

securities traders, which previously benefited from large project issuance and were far ahead, now face great challenges. At the same time, with increased scale and scope of corporate bond issuance, as far as bonds underwritten by securities traders go, the monopoly by a few securities traders is also affected. First-tier markets have undergone a transition from oligarchic monopoly to competition among a number of powerful players. According to statistics from Wind Information Co., the combined market share of the top five traders in the industry dropped from 71 percent in 2008 to 36 percent in 2011. The same is true with bond underwriting. The combined market share of the top five traders has dropped from 65 percent in 2008 to 48 percent in 2011. (For consistency, only the amount of bonds underwritten by securities traders is included in these statistics.) CITIC Securities was the top-ranking securities trader in 2008, with a 24 percent share in the IPO underwriting market and a 26 percent share in the bond underwriting markets. However, its market share significantly decreased in the first three quarters of 2011, down to 11 percent in the IPO underwriting market and 14 percent in the bond underwriting market. By the third quarter of 2011, CITIC still ranked number one in revenues from securities

FIGURE 4.9 Average Market IPO Financing Amount in 2008 through 2010 and Quarters 1 through 3 of 2011

Source: Wind Information Co.

underwriting business, Merchants Securities had risen to second place, and Everbright Securities and GF Securities saw their underwriting business revenues increase markedly. Figure 4.10 shows that the distance between the several securities traders near the top is no longer significant. Against the background of high and stable levels of first-tier market issuance, the competition between securities traders over the underwriting business will intensify going forward.