“Investors Network” Meng Xing

With the implementation of a comprehensive registration system, the supervision of brokerage investment banking business is also becoming stricter. According to statistics, since this year, more than 20 brokerage firms have been punished for irregularities in the investment banking business. Recently, Caitong Securities Co., Ltd. (hereinafter referred to as “Caitong Securities”, 601108.SH) also became one of the penalty cases.

On November 15, the Zhejiang Securities Regulatory Bureau issued a penalty decision against Caitong Securities. The Zhejiang Securities Regulatory Bureau said that Caitong Securities has not been diligent and conscientious in engaging in bond underwriting and fiduciary management business, has failed to effectively manage the behavior of business personnel, has not implemented effective control over business risks, and has not strictly fulfilled its obligation to supervise fund-raising. There are problems where some documents and evidence do not match the actual situation.

The Zhejiang Securities Regulatory Bureau determined that Zhao Meng, as the head of the corporate bond financing headquarters and project leader, Li Chen as the project trustee and contractor, and Guo Xinhao as the project site leader, were responsible for the irregularities relating to Caitong Securities.

The Zhejiang Securities Regulatory Bureau decided to take corrective supervisory and administrative measures against Caitong Securities, and stated that Caitong Securities should take it as a warning, carefully investigate and thoroughly rectify issues, establish and improve internal control systems, work processes and operating standards in the investment banking business, further strengthen personnel management, effectively improve the quality of investment banking business, and at the same time carry out internal accountability for those responsible in strict accordance with the internal accountability system.

Violations in the bond underwriting business

Since this year, the investment banking business of CaiTong Securities has achieved significant growth. The three-quarter report shows that in the first three quarters of 2023, the company's investment banking business fee net revenue was 549 million yuan, an increase of 62.13% over the previous year. At the third quarter results briefing, CaiTong Securities stated that the company's stock underwriting revenue for the first three quarters was 203 million yuan, an increase of 192% over the previous year.

CaiTong Securities did not mention the details of the bond underwriting business in the three-quarter report and performance briefing, but a recent announcement showed that from January to August 2023, the company completed the underwriting of 175 bonds, with an underwriting amount of 95.372 billion yuan, an increase of 36.62% over the previous year. As of the end of August, 62 bond projects have been approved for issuance in terms of corporate bonds. The estimated financing scale is 79.9 billion yuan, and the annual issuance amount of stock and bond projects has reached a record high.

CaiTong Securities pointed out in its semi-annual report that the company's share of underwriting of corporate bonds and local bonds in the province increased significantly compared to the same period last year, and that the increase in market share in newly signed regions was higher than average. It also broadened business boundaries through strategic cooperation, achieved zero breakthroughs in many regions, and more reserve projects blossomed, further spreading to surrounding regions.

It is worth mentioning that in October of this year, according to the credit evaluation results of the 2022 corporate bond lead underwriters and credit rating agencies released by the China Securities Association, CaiTong Securities was awarded Class A.

As for CaiTong Securities being fined for irregularities in the bond underwriting business, some analysts believe it may be related to the regulatory authorities' increased supervision of brokerage bond underwriting business.

On October 20, the China Securities Association issued a notice specifically for businesses such as bond underwriting, adjusting and optimizing the self-regulatory management system mechanism for securities companies' bond underwriting, due diligence, and fiduciary management, etc., to include corporate bonds in the scope of regulation, and make adaptive revisions to promote overall supervision and collaborative development.

The China Securities Association said that the next step will be to strengthen business training for industry institutions, supervise compliance, strengthen self-regulatory management, deal seriously with irregularities in accordance with the law, do a solid job of transferring corporate bonds to routine after the transition period, continue to promote the improvement of the quality of practice of bond underwriters and trustee managers, and promote the high-quality development of the bond market.

Furthermore, the China Securities Association also recently revised the “Measures for Evaluating the Quality of Investment Banking Business of Securities Companies (Trial)” and recently solicited comments from the industry. The outstanding feature of this investment banking business quality evaluation is that it has achieved full chain coverage, and the bond underwriting business has been included. The method points out that the revised draft for solicitation of comments includes all investment banking services related to bond underwriting, mergers, acquisitions and restructuring, and equity transfer companies (Beijing Stock Exchange) in the scope of evaluation, basically achieving full coverage of investment banking business.

Net revenue and profit both increased in the first three quarters

In fact, since the second half of this year, not only has CaiTong Securities had problems with its bond underwriting business, but the research report business has also been punished by the regulatory authorities for irregularities.

In August of this year, the Zhejiang Securities Regulatory Bureau issued an announcement stating that the business of CaiTong Securities published securities research reports had problems such as inadequate business management systems and inadequate implementation, insufficient internal control effectiveness, poor control of customer service activities, and inadequate personnel management. The Securities Regulatory Bureau decided to take supervisory and administrative measures to order corrections against the company.

At the same time, the Zhejiang Securities Regulatory Bureau requested Caitong Securities to take effective measures to further strengthen business management, internal control, and personnel management for publishing securities research reports, and submit written rectification reports.

Caitong Securities mentioned in its semi-annual report that it promotes corporate research institutes to become Zhejiang industry advisors and plays the role of think tanks; strengthen internal collaboration, provide research support for the company's asset management, investment, self-operation, and wealth; empower the entire upstream and downstream investment banks industry chain; and provide CaiTong suggestions for the transformation and upgrading of the regional industrial structure and financial support industry development paths.

Also, judging from the operating conditions of CaiTong Securities, the third quarter report shows that in the first three quarters, the company achieved revenue of 4.955 billion yuan, an increase of 39.78% over the previous year, and realized net profit of 1,501 billion yuan, an increase of 39.11% over the previous year.

Regarding the sharp increase in revenue and net profit, CaiTong Securities stated that it was mainly due to an increase in operating income such as profit and loss from changes in the fair value of financial assets, and net income from handling fees and commissions.

According to the third quarterly report of Caitong Securities, the company's investment income and fair value change income for the first three quarters was 1,799 billion yuan, an increase of 214.16% over the previous year. Specifically, the company's investment income for the first three quarters was 709 million yuan, down 30.88% from the previous year; income from changes in fair value changed from -453 million yuan last year to 1,090 million yuan. In response, the company stated that this was mainly due to an increase in net income from financial investments measured at fair value.

Since this year, CaiTong Securities's proprietary business has rebounded. Chairman Zhang Qicheng said at the third quarter results briefing that the company's self-operated business increased 9499.50% year-on-year in the first three quarters, which was the main factor driving performance growth.

Regarding the sharp increase in self-operated business, the company said that in terms of fixed income business, the company has seized favorable market opportunities and actively expanded the scale of investment. The neutral strategy of the derivatives business increased positions by a certain margin during the year, and the scale expansion contributed to a certain amount of profit. Furthermore, the OTC options business also appropriately increased its scale during the low mid-year volatility level, and there was also a certain positive contribution to the rebound in volatility in the third quarter.

At the institutional research conference held in early November, some institutions asked about the allocation and strategies of the equity, fixed income, and derivatives of CaiTong Securities's proprietary business. The company responded that the current equity allocation remains at a low position level. On the basis of controlling downside risks, position addition operations are carried out in a timely manner when the market shows more positive signals. The fixed income business reduces credit risk and liquidity risk and improves asset quality under the condition that relatively stable returns are maintained. Since 2023, the derivatives business has mainly been OTC options business, with a relatively low share of earnings swap business. In the future, we will vigorously develop earnings swap business to improve overall business balance.

In addition, CaiTong Securities's net revenue from fees and commissions for the first three quarters was $2,646 billion, up 13.51% year on year. Looking at specific business, the company's net income from brokerage fees for the first three quarters was 901 million yuan, down 1.21% year on year; net income from investment banking fees was 549 million yuan, up 62.13% year on year; and net income from asset management business fees was 1,180 billion yuan, up 11.85% year on year.