The answer to our pop quiz is the low-profile ICEA, subsidiary of China's ICBC. In this interview its CEO, Meocre Li talks about why this has been an incredibly successful year for the Hong Kong-based Chinese investment bank:
What is the strategic objective behind ICEA? Is it to grow along with China?
Basically yes. We are a Chinese house in the sense that our major shareholder is the biggest commercial bank in China. We are 75%-owned by the Industrial and Commercial Bank of China (ICBC). And the reason why ICBC established ICEA was to allow it to gain access to the investment banking business, so as to be able to offer full universal services. Their strategy is to retain their dominance in China. At the moment it accounts for 40% of the renminbi business in China.
What is the relationship with Bank of East Asia, which owns 25% of ICEA?
Bank of East Asia is the largest independent local bank in Hong Kong, serving the Hong Kong, China and overseas Chinese communities. It has an excellent relationship with ICBC, and therefore when ICBC contemplated the formation of ICEA, it wanted an international partner to help with this international side of the business.
How many staff do you have now?
We have in excess of 300 people. The Jardine house premises are the head office, and we also have two floors in Wanchai that principally serves our retail clients. Head office deals with institutional clients and also houses our corporate finance team.
And the idea is to become experienced in Hong Kong and then export that talent to China? Are you making any inroads into China?
Yes. We already have offices in major cities in China and are in the process of applying for a license to deal in A shares in China.
Are your main competitors the likes of CICC and BOCI?
Yes. We want to get onto the big deals with the US banks. Most major PRC clients will want to use a Chinese bank to jointly lead their transactions and that means choosing ICEA, CICC or BOCI. And of the three we believe we will get our fair share.
You are speaking of winning these big deals in the future. But this year and last your position has been much more in the small and mid-cap sector. Can you talk about some of the deals you've led this year?
We are the leader this year in fundraising for small and mid-caps. Up till the end of last Friday, we raised HK$2.3 billion in IPOs as bookrunner, or sponsor. Our competitors have raised less than half of that.
And Forbes magazine chose the 200 best small companies and out of those 10 are in China - we have led four of those IPOs, which shows the quality of the deals we've done (Chaoda Modern Agriculture, Euro-Asia, Xinao Gas and TravelSky Technology).
And UBS Warburg came up with a list of the 12 best private (P chip) companies in China, and we led deals for three of the four (Chaoda Modern Agriculture, Euro-Asia, and Xinao Gas). Again this is more than anyone else can claim. By any measure - by amount raised, the quality of the companies we've sponsored - we are top.
We did a secondary placement for Chaoda Modern Agriculture less than a month ago, which raised more funds than in the IPO. It was for HK$700 million, making it the largest placement in the second half of the year.
How long did it take you to do that?
Two days. And what's interesting is that another international firm tried to do the same deal twice and failed. The company then came to us one Friday afternoon and in the following Wednesday it was completed.
In the case of Xinao Gas, it was initially marketed by another European investment bank but it held back shortly after the launch, citing adverse market condition. We got the mandate and within a month we relaunched it and it was very well received (in May).
Another deal we did just last week for IIN International, had a strange prospectus cover. It shows that the joint sponsors were one European and one Taiwanese house , and then suddenly, ICEA came in as the joint bookrunner. Again, this was a weekend job. The client came to us, and over one weekend we took over the deal and got it done. This is a client that makes software for China Telecom.
These deals just demonstrate our placing power.
And if you look at share price at the end of November, none of the six deals we did this year was below issue price. And Xinao Gas, which ICEA relaunched in May is up 121%.
To what do you attribute the fact that you succeeded where they failed?
We probably have a more rounded distribution. We have very strong institutional coverage. We also have China sales, as well as retail sales. The China sales is obviously the more unique aspect of our business.
So take your deal for IIN International. How much of that would have gone to retail and how much to China?
China sales would have covered 70% of the deal.
These are rich individuals from the Mainland?
Yes, high net worth. The key for us is to get a number of our Chinese clients interested in a deal. They knew China Telecom, so it was an angle they could understand.
Are there regulatory issues about Chinese individuals buying Hong Kong dollar shares?
A lot of these individuals opened accounts with us in Hong Kong, where they have their foreign currency funds. These are regular clients who trade with ICEA regularly.
In practice, this is your real advantage. How much money can you bring to the table from these China clients?
On good deals, we could easily do HK$300 to HK$400 million. By Hong Kong standards, that is not small. In Euro-Asia, we raised over HK$600 million, and the IPO tranche had a 90 times oversubscription. The placement was split almost identical between institutions and high net worth clients. And all tranches were well oversubscribed.
What are the average fees on these deals?
Generally 3.5% to 4%, depending on the size and complexity, and I have set a minimum revenue per transaction. So, for example, if a deal is small, then we will need a higher percentage fee.
You also make money on the trading?
We do. But we also find it important to give our institutional, high net worth and retail clients a trading platform to trade those deals where we played a principal role and to allow our research team to serve these trading clients in the best possible way. As I mentioned before, a complete investment banking service.
So, looking at these numbers, you've basically made HK$100 million of fees this year?
We are doing better than last year. We are the most successful in this area in today's market.
What would be your return on capital?
Last year we paid a dividend of 55% of capital. This year I expect about the same.
You have a good platform. What could go wrong?
This is a people business. And the important thing is to keep the team together and be able to maintain high morale. When we do deals over weekends, we all have to be working at 110%.
As a small/medium sized house we just have to be better than the others all the time.
What percentage of your people come from Mainland China versus Hong Kong?
Very few.
So it's really a Hong Kong operation?
ICBC has given our team a large amount of autonomy and that has been key to our success today.
How will that change when you start to do deals in the A share market?
I would expect the percentage of Mainland Chinese to increase. The key is to have well trained PRC people, as opposed to just PRC Chinese. The plan is to have PRC staff trained here in Hong Kong and arm them with the international experience which they can then use to build a successful A share business in China.
How do you source these private clients in China? Is it via ICBC?
Not entirely, they are also sourced by our salespeople. And again, at the beginning they will say "ICEA, we don't know who you are". But now we can point to the quality of our deals over the last two years, which have good performance both in terms of fundamental results and share prices.
So if they bought all of your deals this year they'd be up 47%?
Yes, they'd have a better performance than with most other houses. As a result, now we say to our clients, "Look, it's a good deal, believe in us", and they do.
There is no better way of convincing clients than helping them make some money.
What would be the biggest ticket sizes that one of these Chinese clients would take?
On IPOs we've seen single orders of HK$100 million, although on a fair basis we can't allocate them that much. But in order to have good secondary market performance we try to allocate to a mix of investors, otherwise there will be insufficient liquidity.
