JPMorgan's Wallace explains firm's China success in 2006

JPMorgan's Sean Wallace says the firm's focus on SOEs and entrepreneurial mid-caps has helped push the bank to the top of the ECM tables for Hong Kong and China.
In 2003 it was 11th and last year the bank just about squeezed into the top 10 - while being accused by some critics of not having a China strategy. But after a couple of sizeable placements over the past few weeks it is JPMorgan that sits at the top of the equity capital markets league tables for China and Hong Kong.

Its moment in the number one spot, which puts it ahead of Citigroup and Credit Suisse in places two and three according to Dealogic data, will be brief as JPMorgan is not involved in the Bank of China listing that is planned for June 1 and looks set to become the largest IPO in the world for five years. Nor is JPMorgan involved in the even larger ICBC offering which is expected later in the year.

But with 14 deals already under its belt and a number of Hong Kong and China mandates on its books, the US investment bank believes it has found the momentum that will keep it in a competitive position for the rest of the year and beyond.

Its business so far includes CNOOCÆs $1.98 billion secondary share sale in late April, which it arranged together with Credit Suisse and Goldman Sachs, and a $601.8 million placement of mainly new H shares for Aluminum Corp of China where it worked with CICC and CLSA. It has also done a convertible bond for Chaoda Modern Agriculture with was marketed together with a secondary share sale by the chairman, and a pre-IPO convertible and private equity sell down for mainland property developer Greentown.

On the IPO side, it was a bookrunner on Champion REITÆs $812 million share sale last week together with Citigroup and Merrill Lynch and recently replaced Merrill as one of three bookrunners for the upcoming IPO of China Merchants Bank. It also holds mandates for at least six other IPOs that are expected to happen this year.

Here, JPMorganÆs head of capital markets for Asia, Sean Wallace talks to FinanceAsia about the strategies that have moved the bank up the rankings, why he prefers locals over expats and why he is so excited about mainland mid-caps.

How is your ECM business looking right now?

Our backlog is the biggest it has ever been and a number of transactions we have completed this year werenÆt even in the backlog by March. In December, we took a view that the markets were going to be very, very strong - which they have been - and we singled out a half dozen targets that we believed were likely capital raisers. Three of those, CNOOC, Chalco and Chaoda, have borne fruit already.

What is notably different is that two years ago, the flavour of our business would have been 80% convertible bonds, and 20% equity, and now the majority is straight equity. We are optimistic that 2006 will be another record year for us in terms of fees in our ECM business. Obviously league tables are going to change, but year to date, we have done 20% more than anybody else in Greater China and we have about a 17% market share.

WhatÆs behind this improvement?

It has been four years of very hard work. When I arrived in 2001 we had very challenging league table positions in equity and equity-linked. In addition, we had just gone through the mergers of Jardine Fleming, Chase and JPMorgan, and the capital markets in general were very difficult in 2001 and 2002.

Success has been built upon a coordinated and integrated effort of banking coverage, industry coverage, ECM and research. Coverage bankers such as Charles Li, Sherry Liu and Fang Fang have made a huge difference in providing access to Chinese clients and in conjunction with their access we have utilised talented industry and product bankers. One example is Ivor Orchard, who covers natural resources and has an almost encyclopedic knowledge of that business.

We have also vastly improved our research under the leadership of Jose Linares. Recent rankings place us number one in Asia and specifically China. Companies are now seeking us out because we are thought leaders on individual stocks and the China stock market.

Distribution is hard to measure, but on a lot of these transactions we believe that we are differentiating our distribution versus the competition. We are proud of the quality of the books on Chalco, CNOOC and Chaoda - there was significant demand, quality buyers and great long term holders.

We have had our share of challenges and yet we have now got every box checked û coverage, industry content, ECM, research, distribution û and on top of that our ability and willingness to take on risk.

Companies want smart bankers who work hard every day, who come up with great ideas and who have integrity. I believe we now have an organisation that delivers that on a daily basis.

How has your allocation of resources changed during these four years?

If you had walked onto our floor, be it investment banking, ECM, sales and trading or research four years ago, you would have seen a lot of expatriates. But we collectively have taken the view that over time, our business needs to be staffed by talented locals who can not only deliver world class investment banking services but also understand and communicate local nuance. We have made a concerted effort to find talented Asians succeeding in places like New York or London and recruited them to come to Asia. We now have a team dominated by Asians who have superb training from the money centres but are now applying that knowledge in Asia. Over time, they will come to dominate our staff. This has been our strategy since 2002, but we have accelerated it over the past year.

And in terms of staff numbers?

We had a very big team of about 500 people in capital markets - debt and equity - and investment banking in 2001. It is now materially smaller, but most importantly, of that number probably 80% are people we have recruited in the marketplace to change and improve our organisation. Thus we have not only rationalised the headcount but we have also upgraded our talent across the board.

We also have a team of professionals sitting in Mumbai and Shanghai whose sole job is to support the corporate finance and capital markets efforts.

Right now, I think we have the right level of staffing on our China team within investment banking given the opportunity. The team is designed to provide great coverage and to offer world class execution. Indeed, execution may be one of our biggest priorities to make sure all our deals are done flawlessly. I think we probably need to add more people to our debt and ECM business, but that feels like an incremental issue, it's not as if we have a wholesale problem.

How to you divide your resources in terms of what companies to approach and which mandates to pitch for?

We have a bar-bell approach, which means we go after the big, state-owned enterprises, but we also seek to do business with companies like Neo-China and Celestial NutriFoods in the mid-cap segment of the market. We are very excited about the growth potential of these companies in China where new business models can grow very rapidly. One of our new coverage bankers Sally Shan, who worked for Lehman Brothers in Silicon Valley for eight years, is highly effective at networking and at finding these interesting growth companies. She is a real entrepreneur.

At the same time, our success in doing big deals for Chinese enterprises such as CNOOC or Chalco shows that we have relationships with these companies and that they will come to us for important capital markets transactions. A year ago we were working with CNOOC on their proposed takeover of Unocal, which as everyone knows did not move forward. But what became clear to the CNOOC management during that process was that from a coverage, industry and financing perspective we were a great investment banking partner for them. So the work at that time has paid real dividends, because now we are able to go and talk to them about their capital structure very effectively.

So you have shown that you can bring in the volumes, but what about profitability?

Looking at emerging Asia, in 2004 China basically accounted for 24% of overall ECM fees and we had a market share of less than 5%. This year, China could account for 50% of all the fees and I think our share could be in the double digits. So, the China ECM wallet is expected to double and we hope that our market share will double, which indicates that our business may be up four times from where it was in 2004. I give Jonathan Back, Rupert Fane and the rest of the ECM team real credit for this growth.

With regard to the mid-cap companies, we find them interesting because they need less major restructuring, have fewer competitors and higher spreads in spite of the lower deal sizes. They are also generally run by entrepreneurs who have already figured out what they need to do and they get it done.

For some of the large SOEs to go public can take almost three or four years, whereas an exciting developer we are expected to take public in the next couple of months only decided to go public last fall. The growth in the number of these privately-owned businesses is accelerating and they could produce more than 50% of the fees (going forward).

What are the challenges and how do you ensure that you stay towards the upper end of the league tables?

From a macro perspective, the war for talent is intense. And it is not just from firm to firm. The most challenging brain drain is to private equity and hedge funds who are trying to pick up research guys and bankers who understand the industries incredibly well. That is a big challenge for us.

It is also an incredibly competitive marketplace. We just have to keep up the momentum as success begets success. We saw it in London and we have seen it in other parts of Asia. We have done 16 deals (since the beginning of 2005), and given our backlog, I feel pretty comfortable that we have a shot at doing at least another 16 through the end of the year. The markets are great and we need to go all out to take advantage of this opportunity.
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