1911.HK
China Renaissance's revenue drops

The investment bank’s revenue fell in the first half as weak demand due to economic uncertainty caused its income from advisory services for private share sales to plunge

Key Takeaways:

  • China Renaissance’s revenue fell about 7% year-on-year in the first half, while its net loss narrowed slightly
  • The results highlight the company’s challenges as its founder remains absent and economic uncertainty leads to weak fundraising demand from Chinese companies

  

By Warren Yang

More than six months after its star founder vanished, China Renaissance Holdings Ltd. (1911.HK) is operating in emergency mode.

The investment bank’s first earnings report since founder and Chairman Bao Fan disappeared in February shows how dire things are for the company as it tries to get through difficult markets in the absence of its well-connected leader. Bao’s disappearance is believed to be linked to a government corruption-related investigation, though it’s unclear if Bao himself is suspected of wrongdoing or is just assisting in an investigation of one or more other people.

While the latter scenario would obviously be better, since Bao could eventually return to retake the helm at his company, China Renaissance is clearly suffering in his absence.

The company’s total revenue decreased about 7% to 563 million yuan ($77 million) in the first half of 2023 from the year-earlier period, as its core investment banking services took a sharp hit from a broader industry slump. Despite the hard times, China Renaissance got a boost from a net investment gain in its latest report, probably helped by higher global interest rates, reversing a loss for that income category in last year’s first half. 

China Renaissance also cut its operating expenses, including costs for employee compensation and benefits, which, combined with the net investment gain, enabled it to swing to an operating profit from a loss a year earlier. But the company booked a substantial loss to reflect a decline in the fair value of its call option for non-controlling shares in its CR Securities unit. All told, the company remained in the red for the first half of the year, although its net loss narrowed a bit.

“In the past six months, China Renaissance has experienced the most challenging period since its establishment,” China Renaissance said in its earnings report.

The elephant in the room is Bao’s absence, and any potential legal trouble he may be facing. The high-flying investment banker, sometimes called China’s “King of M&A,” with a career that includes stints at Morgan Stanley and Credit Suisse, was first reported missing in February. As mysterious as it may sound, such sudden disappearances of top executives aren’t uncommon in China.

In June, state media reported that Bao was in the custody of China’s anti-graft watchdog. China Renaissance confirmed it last month — sort of — by saying he was “cooperating” with authorities for an unspecified investigation. Although details of Bao’s case still remain sketchy, speculation has swirled that China’s financial sector has become the subject of the latest anti-corruption crackdown by Chinese authorities.

Trading of China Renaissance shares was suspended in April, and the company’s release of audited results for last year has been delayed due to the unavailability of Bao, who needs to sign off on the report as the company’s controlling shareholder. The stock can’t resume trading until that report is filed, which would bring the company back into compliance with Hong Kong Stock Exchange rules.

In its earnings release for the first half, which is unaudited, the investment bank said the top leadership void has put “pressure” on business development, although it quickly added that its business and development have been “stable.”

Hard times

With or without Bao’s disappearance, life has become hard for China Renaissance these days as economic uncertainty and China-U.S. tensions dampen demand for corporate fundraising services that are one of the company’s main revenue sources.

Highlighting those difficulties, the company’s investment banking revenue fell by more than half in the first six months of the year from an already depressed figure for the year-earlier period. Even worse, income from advisory services for private placements tanked. China Renaissance slashed costs for the segment by cutting personnel expenses.

One bright spot was revenue from equity underwriting, which increased 80%, but is still a fraction of where it was in 2021. And overall, the company’s operating loss for its investment banking services increased more than 15-fold.

The story is similar for other Chinese investment banks. China International Capital Corp. (3908.HK; 601995.SH), better known as CICC, also posted a 4% year-on-year revenue decrease and a 7% drop in net profit for the first half. CICC’s fee income also fell as the number of IPO deals it worked on shrank.

The outlook for the rest of this year is murky, to say the least, with red lights flashing for the Chinese economy left and right. While China is finally moving on from the Covid-19 pandemic, its exports are tumbling. At the same time, consumer prices are falling at a time the rest of the world battles raging inflation. And a prolonged slump in the nation’s property sector continues to cast a shadow over the world’s second-largest economy.

Chinese stocks got a brief boost last week, and the rally continued into the start of this week, after Beijing announced a series of major steps to support the economy, including measures to boost slumping domestic stock markets. Still, in the current climate, companies are more likely to focus on boosting their slowing revenue growth rather than racing to raise funds to fuel new growth. And even if they try to raise money, winning over skeptical investors at times like this would be anything but easy.

China Renaissance was founded in 2005, and quickly emerged as a major force in China’s investment banking scene after helping to broker multiple major M&A deals in the country’s internet sector. Now the company is shifting its focus to emerging areas of the so-called new economy, like new energy, materials and artificial intelligence (AI). Such sectors accounted for nearly half of the company’s revenue from private financing deals in the latest reporting period, compared to just 3% a year earlier.

Before the trading suspension in April, China Renaissance shares had lost nearly 80% of their value since the company went public in 2018. It’s anyone’s guess how the stock will react when trading finally resumes, though the benchmark Hang Seng Index is down 10% since the company’s trading suspension, and CICC shares are down about 5%. Much will depend on the resolution of Bao’s case. Until then, the company will have to find ways to get by and continue to sail through choppy waters without its captain.

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