When the world’s second-biggest economy is two-fifths the size of the biggest one, but has a securities industry a fifth the size relative to its economy, one easy conclusion is that brokerage opportunities abound in China. On that basis, the $1.4bn initial offering of China Galaxy Securities – the country’s biggest securities broker by sales – should be a winner. But that number one spot comes with just 5 per cent of the market, which says more about actual industry conditions than all the numbers about the potential.
There is an irony in a company that understands the importance of market mood braving these so-so conditions with a prospectus containing three years of falling sales, profits and margins. While the timing is more about the pace of China’s bureaucracy than a bold listing ploy, the figures underline the link between brokers and the market. Take this year. Volumes on the Shanghai Composite have risen two-fifths from last year while Galaxy’s first-quarter commission and fee income jumped a fifth.
Proceeds from the listing are expected to go into developing other businesses such as margin lending, where eased regulation helped sales more than double on 2012. While, or if, that business grows, Galaxy still faces fierce competition in stock broking, its main business. Average commissions dropped a fifth between 2010 and 2012. There are more than 100 brokers in total and the top 10 securities firms, of which Galaxy is number six, hold just two-fifths of the market. Yet size is no guarantor of market preference. Both Citic and Haitong Securities – numbers one and two in the ranking – are down more than a tenth this year. Perhaps an easier way to think of Galaxy, and other brokers that will follow it to market, is as a potential takeover target. But with so many firms in play, it would be simpler to stay a customer rather than a shareholder.
