Our China JV will be competitive, says Credit Suisse

Credit Suisse's Zhang Liping says the firm's recently approved JV with Founder Securities already has a pipeline of mandates in hand, but predicts a challenging year for all players in the domestic Chinese market.
Just before the end of 2008, the securities joint venture set up by Credit Suisse and Founder Securities received a long-awaited and coveted business permit that will enable it to start offering investment banking services in the domestic Chinese market. Credit Suisse Founder Securities, which is one-third owned by Credit Suisse and two-thirds by its Chinese partner, is the first Sino-foreign entity to secure all the necessary approvals to underwrite domestic Chinese equity and bond offerings since a moratorium on sino-foreign securities JVs was lifted in May 2007. Through the JV, Credit Suisse will now be able to compete head on with Goldman Sachs and UBS, which have operated in the domestic Chinese market since 2006 and 2007, respectively.

Zhang Liping, Credit SuisseÆs vice chairman of investment banking for non-Japan Asia, talks to us about his hopes and expectations for the JV as it opens for business in the midst of the fiercest financial crisis in decades.

Given that this JV has been so long in the making, what are your hopes and expectations now that you can finally start to participate in domestic A-share and bond issuance?
First of all, we do this JV not for quick money. It is an integral part of our overall China strategy and franchise. If we donÆt have a JV, we are missing something. We have been pitching for û and winning û big elephant deals even without a licence, but now that the CSRC is pushing for dual A- and H-share listings, if you donÆt have an A-share licence you become less competitive.

In the short term, given the market environment, I will be pretty happy if the JV can break even in 2009. In terms of business, bond offerings will definitely be the main theme of the local market in 2009, but the underwriting spread on bond offerings will be very insignificant compared with equity offerings. As a result, neither the domestic firms nor the Sino-foreign JVs can expect a spectacular year this year.

There will be some primary equity issuance in the second half of the year in tandem with the recovery of the international equity market and investment sentiment will be boosted in the second half by the results of the financial stimulus plan announced by the State Council. Our focus will be on the big caps.

Do you have any mandates already?
We do have good live debt and equity mandates in the pipeline from our Chinese partner, which we expect to execute this year. The JV will also be busy pitching for mandates for the second half of 2009 and for 2010.

Except for these mandates, what does Founder bring to the new venture and what is the division going to be between Founder Securities and the JV?
Founder Group and also Founder Securities are very well established in China and very well regarded in the industry. They have nation-wide investments and operating businesses with a nice client network. The JV will benefit from this û there is no doubt about it. People is the other thing. Founder Securities has a very nice talent pool and the JV has retained 100% of its former investment banking division, or around 50 people.

Founder Securities has carved out the investment banking division to do this JV with us. According to CSRC rules, they are restricted from doing primary business so all the primary business will come to the JV. The current Founder Securities will only be doing brokerage and secondary trading. ItÆs a very clear division.

And whatÆs Credit SuisseÆs contribution?
We have appointed the CEO and the COO and also the heads of compliance and HR. We have also transferred several vice president-level execution bankers to the JV and are trying to hire some of the key department heads from our competitors.

Through the Credit Suisse platform we will also bring in international best practice banking standards and our expertise in investment banking, with regard to both front and back office operations. And the JV will be able to access our global platform in terms of research, global market information and deal flow. Also, the existing Credit Suisse Greater China investment banking team will work very, very closely with the JV coverage team. They will do joint pitches and also joint execution on mandates.

Another part is training. We have already been sending very senior bankers on a rotational three-month basis, at our cost, to Beijing to help train the corporate finance team and bring in best practices, for example on putting together pitch books. We have also helped them to set up models on coverage and market analysis, as well as a coverage strategy for 2009. This is extremely important and critical at the very beginning of the set-up.

Effective control is one of the key concerns among international investment banks with regard to setting up a China securities JV since Chinese regulations limit the foreign ownership to 33%. How would you describe the level of management influence that Credit Suisse will have?
It is important to make a distinction between the shareholders and the management. A JV can only work successfully when its management has the right professional attitude, working toward the strategic goals of the company.

As the newcomer, how are you going to be able to compete in the domestic market û against the multitude of domestic firms, and against Goldman Sachs and UBS which have a head start?
The JV will leverage our existing Greater China platform to win and execute mandates and will rely heavily on the marketing machine of the existing Credit Suisse Greater China team. I feel very confident. Before we got the JV approved, Credit Suisse was already a top-tier franchise in terms of international underwriting rankings for China deals. So, I donÆt see any difficulty for us to put ourselves in the same rank as UBS and Goldman on domestic deals. We are as big and strong as they are. We did two big bank IPOs out of three, while the other banks only did one, for example.

At the end of the day, I expect the top 10 international banks will all get a licence in China, but the market is big enough to accommodate more players. We are all competing for international China business now and everyone has a share. The key issue for the JVs is how to stay in the top three or top five position in terms of market share.

The big deals will still be dominated by the big brokerage houses, but the market will be more fragmented going forward. I think no one can get more than 10% market share. The differences will be narrower, which is similar to the situation for international business.

Do you see any particular themes that will drive the domestic market when it starts to recover?
The bond market in China will be more active this year than in 2008. In close connection with the governmentÆs stimulus plan you will see more municipal bond issuance as local governments will issue more bonds to raise money for their local infrastructure development. And corporate bonds will continue to be very active.

When the equity market recovers, investors tend to have more appetite for infrastructure-related offers, such as cement companies, because they will benefit from the early part of the cycle. Railways and energy are other themes, retail/consumption has always been a favourite and banks definitely will still be favoured by investors. Issuance by technology and property companies will lag behind.

Is there any hope for property companies to seek capital in the domestic equity market this year?
I do not anticipate that will happen. The window will not be open for property companies until 2010. They will mainly get funding from commercial banks. The government is trying hard to help the property market stabilise. They donÆt want it to collapse for sure.
¬ Haymarket Media Limited. All rights reserved.