Citic Securities is expected to buy back a 10% stake in China’s largest asset manager for exactly the same price it sold it for in 2011 – an indication of diminished profits in an overcrowded industry, says consultancy Z-Ben Advisors.
According to an announcement filed with Hong Kong Stock Exchange this Tuesday, Citic Securities was the only party that placed a bid by the cut-off time, at less than Rmb2 billion.
It is bidding for a 10% stake owned by Wuxi Guolian, which paid Rmb1.6 billion for it a year-and-a-half ago, as part of a reluctant sale of 51% of China AMC by Citic Securities.
Originally Citic Securities owned 100% of China AMC. However, that holding flouted rules introduced by the China Securities Regulatory Commission (CSRC) in 2004, which limited firms to a 49% shareholding in a domestic asset manager.
Owing to Citic Securities' non-compliance, China AMC was banned from launching new products from January 2010. This only resumed the following year once Citic Securities had offloaded a 51% stake in sales to five separate buyers, one of which was Wuxi Guolian.
However, last June the CSRC abolished the 49% equity cap, enabling Citic Securities to buy back its shares.
Once the stake was put up for sale on the Wuxi Property Exchange, Citic Securities made its move. The transaction is subject to CSRC approval, although Citic Securities has not offered a timeline. If successful, its interest in China AMC will jump back to 59%.
Asked by AsianInvestor if it planned to continue increasing its holding in China AMC, a spokesman for the firm was non-committal, saying only it would not rule out the possibility “as long as there are suitable market opportunities”.
In a statement, the company says: “With the relaxation of regulatory measures, innovative business operations and the recovery of the secondary market, the fund industry is going to undergo rapid development."
But analysts expect Citic to seek to increase its stake. Lillian Zhu, senior Z-Ben analyst, points out that China AMC’s profit contribution "is crucial to Citic Securities, so it is reasonable for it to buy back the stake, especially as Citic was reluctant to sell it in 2011".
The fact that it could be purchased at the same price points to the diminished profits in the industry, observes Z-Ben in a note.
China AMC is the largest fund manager in China. In the first quarter of this year, it attracted Rmb25 billion in new product fundraising, bringing its total AUM to Rmb240 billion, by Z-Ben estimates.
However, competition in China’s funds industry is fierce, which could have prompted Wuxi Guolian to exit its position in China AMC, suggest analysts.
One Beijing-based analyst notes that fund houses will face profitability challenges as insurance companies and securities firms can now invest in mutual funds directly, eroding the attractiveness of fund management firms.
It comes after the CSRC introduced new regulations from June 1 this year to allow insurers, securities firms and private funds to engage in mutual fund business.
Back in 2011, Citic Securities sold 51% of China AMC for Rmb8.3 billion to five investors – 11% to China South Industries AMC; and 10% each to Shandong Rural Economic Development, the Power Corporation of Canada, Wuxi Guolian Development and SITC International.