ICEA is the joint venture investment bank that is 75% owned by ICBC and 25% by Bank of East Asia. It was formed in 1998 and for a while was high flying thanks to a string of IPOs for small and mid-cap Chinese P-chips. However, trouble arose when one of the firms it sponsored - the notorious Euro-Asia, controlled by Yang Bin - went bankrupt in Enronesque circumstances, and ICEA was put under the spotlight. ICEA did the IPO for Euro-Asia in 2001. Here the new Managing Director, Gary Sik talks about how the go-go firm has been reformed and its new strategy for winning back clients and confidence.

Where does this situation with Euro-Asia stand now?

Sik: The company was de-listed and a liquidator appointed. I guess it'll be liquidated eventually. There was a lot of press coverage about its demise, plus a lot of criticism and argument about whose responsibility it was - the company, the sponsor, the accountants or other professionals. The problem is somewhat political and quite complicated.

Is that chapter closed for ICEA, or is it still dogging you?

There was a lot of market speculation about whether the regulators would do anything and whether ICEA could continue in business - particularly between October 2002 till the first half of 2003. It did affect our business.

Did you make a loss last year because of this?

No, we were profitable last year. From October 2002 to the first half of 2003, we didn't do much, partly because of Euro-Asia and partly because of SARS. Business started to pick up in the second half. Our brokerage business generated good results. We also completed two IPOs in the second half of 2003.

Which ones?

The first one is a pharmaceutical company called Dawnrays and the second one is an automobile component manufacturer called Norstar Founders. These two IPO's together raised more than HK$500 million ($64 million). We've also completed a number of small M&A deals and participated in a number of large IPOs like China Life and China Resources Power

Were some investors concerned that your track record wasn't too good after your involvement with Euro-Asia?

Investors never really had a problem. Since 1998, we've positioned ourselves as a medium-sized firm focusing on institutional investors. We haven't changed that focus. We've worked hard to present investors with the fundamentals of the companies we sponsored and then they evaluated whether the company was worth investing in.

If we look back over the last twelve months, the problem has been more on the issuer side, particularly with SOEs whose management felt hesitant about choosing a bank with even a remote chance of having problems.

The Euro-Asia demise received extensive press coverage and there were rumours about whether ICEA would continue in business. We've also had a lot of management changes since 2002. Meocre Li left in 2002 and then we had a new CEO called Fang Fenglei, who had spent a few years at CICC and BOCI before joining us in March 2002. By the time he joined, we'd recruited a lot of new people, mostly in Beijing. There were over 30 people, primarily focused on orgination rather than execution. There were lots of marketing activities going on, but there was a lack of real focus.

We tried pitching for large SOE type deals hoping they'd improve our profile and generate large income. At the same time, we didn't want to give up the small and medium sized transactions, which had always been our bread and butter. But pitching for mega deals normally takes two or three years. You also need to devote a lot of resources and compete with other banks that might have been working on the relationship for years. We ended up having a lot of people doing marketing, but there was limited execution capacity.

Fang Fenglei didn't stay very long, is that correct?

No, he spent about one year with ICEA. He left in mid-2003.

And then you were promoted to MD at that point?

I was promoted to MD in January 2003 and assumed responsibility for the investment banking business. At that time, we faced problems with low staff morale and were also overstaffed on the origination side and understaffed on the execution side. Some of our competitors were also still trying to discourage clients, or potential clients from engaging us. We knew we needed to restructure the department. We trimmed down our marketing presence in Beijing from over 30 to just over 10. We also reduced the size of our team in Hong Kong from 15 to 12.

On execution?

The Hong Kong team do both execution and marketing. Alongside cutting down staff numbers, we also cut down the number of mandates we were working on. We found that some of the transactions we were doing were far too small and didn't fit with out client base. We discussed this with the clients in question and introduced to them other sponsors. Eventually, we managed to cut down our IPO pipeline to five so we could devote adequate resources to each of them.

So there are five deals in the pipeline at the moment?

We want to keep our pipeline of transactions to no more than six. We're also trying to spend more resources on cultivating existing business. Eventually, I'd like to see at least 50% of the business coming from existing clients.

And then do more business for the clients like follow-ons, or M&A?

Yes. M&A, equity fund raisings, or even syndicated loans.

So basically you want to know your client much better so you don't have another Euro-Asia?

We have some unwritten rules now. For example, we must know the client for at least one year before we sponsor their listing. Typically, we'll spend at least six months completing due diligence, reviewing corporate and management structures. Sometimes we might bring in new professionals for their management team, or introduce strategic investors. In the following six months we'll work on the listing application. It takes us much longer to do an IPO than before.

Given that your parent is ICBC, do they introduce many clients to you?

Not a lot at this time. ICBC tends to focus on the large SOE's. This is not a sector we're currently focusing on. We want to improve this situation in the coming few years. But we need to expand further before we can tap the large SOE market. On the advisory side, we do have some referrals from ICBC. For example, we participated in the APP debt restructuring in 2003. We were also advising on the debt restructuring and subsequent transactions of Guangdong Investment. We have recently introduced Heineken to Guangdong Brewery. We also advised ICBC (Asia) in a number of acquisitions and fund raisings

In terms of the IPOs, what is the target size and which sectors are you looking at?

We're focusing on IPOs of between $50 to $100 million. The companies will have market capitalisation of HK$1 to HK$2 billion at IPO. Our aim is to help them grow after listing. We'd like their market cap to expand over HK$5 billion within two to three years.

Banks like CLSA, BNP, HSBC, etc., seem to be targeting more $100 million to $500million, or mid cap companies. You're small cap, who do you see as your main competitor in the small cap stakes?

We've been seeing a lot of competition from CLSA and HSBC in the clients we approach. We also see companies like Cazenove, First Shanghai or Tai Fook pitching to some of the companies we've contacted.

So actually there is fierce competition in your space?

There is fierce competition in this sector. There are lots of companies in China making HK$20 to HK$30 million a year, but not many have profit exceeding the HK$100 million level. Such companies will be sought after by large numbers of banks.

But the best way to secure mandates from these privately-owned enterprises, is not a 100-page pitch book telling them how good you are. It's more important to establish trust between yourself and the client. You need to work with these companies and their shareholders for a long period of time, even before they have an idea of getting their company listed.

So you aim to meet the entrepreneur in the early stages?

Yes, we help them to streamline their corporate structure, carry out tax planning, obtain bank facilities, and through all this we build up a strong working relationship.

And you're basically focusing on the private sector?


Do you ever invest in these companies as well?

No, we don't. Although ICEA has the flexibility of investing at the pre-IPO stage.

Are you focusing on any particular industrial sectors?

We tends to like those sectors where products are consumed on a daily basis. We've been looking at the chemical and pharmaceutical sectors. We are also looking at the publishing and media sector.

What's your take on whether China is going to have a hard landing, or a soft landing, and what it means for IPOs?

There are lots of discussions about hard or soft landings. Over investment is only happening in a few sectors such as construction, infrastructure, and steel. It's still too early to conclude whether it is a hard or soft landing. But it's not really affecting the life of the mass public. Unlike Europe or the US, individuals in China are not borrowing a lot of money. The economic slowdown will only affect certain sectors and the banks.

What about the private sector entrepreneurs, are they going to be less affected by this slowdown?

I think they'll be affected very seriously as banks will tighten lending. The problems with most privately owned enterprises in China is they tend to measure their achievement by the size of their factory, the land they occupy, and the size of their assets. They don't pay too much attention to efficiency and profitability. They don't really care how much money they owe to the bank. I think a lot of private sector owners just borrow if they can without really considering how they will repay the debt.

So far this year you haven't done any IPOs?

We have done a number of share placements and one IPO on the GEM board, for a company called Lang Chao, which is one of the largest mainland IT companies focusing on servers and commercial sector software.

In this transaction, we're not listing their business in the PRC, but the offshore holding company in Hong Kong through a red-chip structure.

In the second half, which companies are you hoping to list?

We are working on five IPO mandates ready for listing in the next 12 to 18 months. We hope to bring at least two companies to the market in the second half. One is a chemical company seeking to raise $60 to $80 million.We've also been working on a household appliance manufacturer based in Guangdong. It exports most of its products into Europe and the US. We anticipate it will be around $50 million. Then there are three companies in the pipeline that are slightly smaller, at about $20 to $30 million.