(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)
By Wei Gu
HONG KONG, Sept 18 (Reuters Breakingviews) - China’s most venerable securities firm may need a new leader. China International Capital Corp’s success was largely built on the connections of chief executive Levin Zhu, the son of China’s former premier Zhu Rongji. But market shifts are pressuring CICC’s earnings and market share. And its influence will be further diluted when China’s new crop of political leaders is sworn in.
Political cycles often trigger changes at China’s top state-owned firms, as officials want to put friends and family in those powerful positions. CICC’s foreign ownership, as well as Zhu’s strong personality and family backing, has sheltered him from those personnel changes.
But CICC is under pressure. Revenue last year was down 40 percent, while earnings tumbled 85 percent to just $22 million. The smaller bonus pool has to be shared by a larger number of people, too. Headcount has tripled in the past five years to more than 2,000.
Dismal performance partly reflects the malaise in the industry. But it also underscores CICC’s relative decline. China’s first investment bank used to have a near-monopoly on privatising large state-owned companies: the fact that many executives used to report to Zhu’s father clearly helped. But now those deals are drying up, and competition has grown. In domestic equity offerings, CICC has fallen from top spot in 2007 to fourth place this year. Its market share shrunk from 25 percent to just 6 percent, according to Thomson Reuters.
A former Morgan Stanley joint venture, CICC now has backing from China’s state-owned investment company and buyout firms Kohlberg Kravis Roberts and TPG Capital. Yet its private status puts it at a disadvantage when rivals are using their balance sheets to secure business. Market reforms will lead to new opportunities such as margin trading, though listed rivals such as Citic Securities and Haitong Securities, which have more capital and broader networks, are likely to reap greater benefits. CICC's practice of giving shadow equity to employees means a listing on the domestic exchange still looks distant.
CICC could yet navigate China’s leadership change. Yet Zhu’s forceful, hands-on management style looks increasingly out of place. Just as his father’s influence is weakened by political transition, CICC may also be due a change of leadership.
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- China International Capital Corp. was established in 1995 as a joint venture between China Construction Bank and Morgan Stanley.
- Its current investors include Central Huijin, a state-owned investment company, the government of Singapore Investment Corp., and U.S. private equity funds TPG Capital and Kohlberg Kravis Roberts.
- CICC’s 2011 revenue was $518 million, down 40 percent from 2010. Its 2011 net profit tumbled 85 percent to $22 million.
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(Editing by Peter Thal Larsen and Katrina Hamlin)
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