Key takeaways:
• China Renaissance’s revenue fell by a third in the second half of last year from the first half as the number of U.S. IPOs it handled dropped to one from nine
• China International Capital Corp. saw a similar drop in its U.S. IPO business but fared better due to a more diversified business portfolio
By Warren Yang
A crackdown on U.S.-listed Chinese stocks on both sides of the Pacific took some shine off last year’s earnings at boutique dealmaker China Renaissance Holdings Ltd. (1911.HK) and China International Capital Corp.(3908.HK), a heavyweight investment bank better known as CICC. But bustling equity markets on the Chinese mainland and in Hong Kong are keeping the pair’s prospects from turning too dark.
Between the two, China Renaissance was hit harder by the regulatory turmoil surrounding Chinese stocks trading in New York, as it depends more on fees from U.S. IPOs.
Its total revenue, including net investment gains, decreased about 8% to 2.5 billion yuan ($392.6 million) last year from 2020, while its operating profit dropped 23%, according to its latest results released last Thursday. Net profit attributable to shareholders still grew 56% to 1.6 billion yuan, but that was mainly because of a one-time gain related to the value of shares in its CR Securities unit.
For China Renaissance, which was founded in 2005 by former Morgan Stanley banker Bao Fan, the results marked a disappointing end to what could have been a stellar year. Its business boomed in the first half of last year, with revenue more than doubling and net profit tripling from a year earlier.
But revenue, including investment income, all but evaporated in the final six months of 2021 to just 46 million yuan, compared to 2.46 billion yuan during the January-June period. The huge drop appears mostly due to a net investment loss in the second half of last year. But even excluding that, revenue dropped by a third both from the prior six months and the same period a year earlier.
A large part of that second-half slowdown was due to a near-halt in new U.S. listings by Chinese companies, which flourished in the earlier part of the year, as both the U.S. and Chinese securities regulators expressed different concerns about such trans-Pacific IPOs.
Chinese regulators, wary about data security risks, turned up the heat on technology companies starting last July after the Uber-like Didi Global (NYSE:DIDI) proceeded with its New York IPO the previous month despite failing to get a required data security review.
Soon after DiDi’s $4.4 billion listing, the largest since Alibaba’s in 2014, Beijing launched a probe into how the company handles its data and initiated similar data security reviews on several other U.S.-listed Chinese companies. DiDi responded by taking steps to delist from the U.S. and move its stock to Hong Kong, though that plan is also in jeopardy after China’s online regulator said the company’s proposal to prevent data leaks wasn’t good enough.
Meanwhile on the U.S. side, the Securities and Exchange Commission (SEC) temporarily halted new listings by Chinese companies around the same time over concerns about risk disclosure related to a controversial corporate structure used by many of those Chinese companies. Concurrently, the U.S. has threatened to delist some or all Chinese companies unless Beijing agrees to alter a law that currently bans them from providing their audit records to the SEC.
Dependent on U.S. listings
The regulatory assault from both sides of the Pacific was particularly problematic for China Renaissance because it relies heavily on U.S. listings, many by “new economy” tech companies China, for a big chunk of its investment banking business.
With all the regulatory noise in the background, only four U.S. IPOs by Chinese companies took place in the second half of last year, down sharply from 37 in the preceding six months, according to data included in CICC’s earnings reports for the first half of 2021 and for the whole year.
As the activity tanked, China Renaissance pulled off only one U.S. IPO in the second half, a far cry from nine such deals during the January-June period. As a result, its investment banking revenue, excluding net investment gains, was just half the level of the previous two six-month periods. Investment banking is China Renaissance’s bread-and-butter, accounting for about 44% of its revenue in 2021, even though the share was down from nearly 90% as recently as 2015.
It’s a similar story for CICC. The firm participated in eight U.S. IPOs last year, all in the first half and none in the second.
Yet the impact on CICC was much milder because it’s much less dependent on investment banking in general. Also, unlike China Renaissance, which is solely focused on Hong Kong and the U.S. for its IPO business, CICC is active in the Chinese mainland IPO market, as well as two other international financial hubs. CICC also enjoys an advantage in Hong Kong, where it has a bigger share of the IPO market than China Renaissance.
With that more diverse base, CICC’s revenue and net profit both increased in the second half of 2021, not only from a year earlier but also from the prior six months. For the whole of last year, the company’s net profit grew nearly 50% to about 10.8 billion yuan on a 26% increase in revenue as income rose across all business segments, most notably equities and wealth management. That said, the results would have been even better if the company continued to win U.S. IPO deals in the second half at a similar pace to the first.
Shares in both China Renaissance and CICC fell after their earnings releases. But while China Renaissance dropped 9% in the two days through last Friday, CICC shed just 1% on Thursday and more than recovered the loss the following day. CICC stock, which has gained about 76% since its Hong Kong IPO in 2015, also trades at a much higher price-to-earnings (P/E) ratio of 6.8 than China Renaissance’s 2.76. The latter has lost about two-thirds of its value since its 2018 market debut.
The good news for China Renaissance is that Hong Kong will remain a popular choice for Chinese companies making first-time IPOs, especially with so many uncertainties in New York. A growing number of U.S.-listed Chinese companies are also seeking shelter with second listings in Hong Kong, which should keep the investment banking business flowing. For CICC, new opportunities with the opening of the new Beijing Stock Exchange in September could also be a boon.
