In early September, following the announcement of the reorganization of Guotai Junan and Haitong Securities, the market's call for the merger of CITIC Construction Investment is also increasing. Previously, there have been multiple rumors of CITIC Construction Investment merging with CITIC Securities, all of which were later proven false.

In the view of many industry insiders, if Guotai Junan and Haitong Securities can successfully reorganize, it will provide a reference model for the merger of large securities firms.

For CITIC Construction Investment, whether it can merge or not, it cannot change the trend of the company's performance continuing to decline in the short term. After breaking through the 10 billion yuan mark in profits in 2021, the performance of CITIC Construction Investment has been declining continuously.

The impact of the current slowdown in IPO review on the company's performance has begun to emerge, and the frequent "failures" of its sponsored IPO projects have also put it in the spotlight.

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1. The IPO issuance has cooled down, and the performance has declined for two and a half years in a row.

On August 30, CITIC Construction Investment disclosed its semi-annual report for 2024. As expected, CITIC Construction Investment once again submitted a performance report with a decline in both revenue and profit.

The data shows that in the first half of 2024, CITIC Construction Investment achieved a revenue of 9.528 billion yuan, a year-on-year decrease of 29.24%, and a net profit attributable to the parent company of 2.858 billion yuan, a year-on-year decrease of 33.66%.

It is worth noting that since the profit broke through the 10 billion yuan mark in 2021, CITIC Construction Investment has seen a decline in both revenue and profit for two and a half years in a row.

Objectively speaking, the continuous decline in the performance of CITIC Construction Investment is very related to the sluggishness of several core businesses.

In terms of revenue, CITIC Construction Investment mainly has four major categories: investment banking, wealth management, trading and institutional customer services, and asset management. In the first half of 2024, the revenue of these four major categories all declined, with the decline rates being 61.81%, 5.45%, 28.51%, and 13.27%, respectively.Compared to the other three business segments, CITIC Construction Investment's investment banking business has experienced the most significant decline, exerting the deepest drag on the company's performance.

The so-called investment banking business primarily includes securities underwriting, securities trading, mergers and acquisitions, asset management, project financing, venture capital, and securitization of credit assets in China.

As a large domestic securities firm, CITIC Construction Investment's investment banking business has consistently ranked among the top in the securities industry and is known in the industry as "Three Zhongs and One Hua" (namely CITIC Securities, CITIC Construction Investment, CICC, and Huatai Securities). Especially in the area of IPO underwriting, CITIC Construction Investment has long been at the forefront of the industry.

In the first half of 2024, due to the cooling of domestic IPO issuances, equity financing across the market saw a significant decline compared to the same period last year. Wind data shows that in the first half of 2024, a total of 95 equity financing projects were issued across the market, a year-on-year decrease of 70.40%, raising RMB 87.917 billion, a year-on-year decrease of 81.10%.

Among them, there were 43 IPO projects, a year-on-year decrease of 76.63%, raising RMB 30.272 billion, a year-on-year decrease of 86.16%.

As a result, both the number of IPO underwritings and the underwriting amount of CITIC Construction Investment saw a significant decline compared to the same period in 2023.

In the first half of 2024, CITIC Construction Investment's IPO underwriting was 5, with a main underwriting amount of RMB 1.767 billion, ranking 1st and 7th in the industry, respectively. In the first half of 2023, the number of CITIC Construction Investment's IPO underwritings and the underwriting amount were 18 and RMB 29.284 billion, respectively.

In addition to the decline in the number of IPO underwritings, the amount and number of refinancing issuances underwritten by CITIC Construction Investment also experienced a "cliff-like decline" compared to the same period in 2023, with the underwriting amount and number of underwritings being RMB 2.563 billion and 7 in 2024, and RMB 38.207 billion and 22 in 2023.

The cooling of IPO issuances and refinancing issuances is the main reason for the significant decline in CITIC Construction Investment's investment banking business, which also directly led to a decline in both CITIC Construction Investment's revenue and net profit attributable to the parent company.

In addition, the decline in CITIC Construction Investment's trading and institutional services business is also directly related to the cooling of IPO issuances and refinancing issuances. It is reported that the main business of CITIC Construction Investment is to sell stocks for IPO companies and refinancing companies, and the company earns a commission from it.In the first half of 2024, CITIC Construction Investment's stock sales amounted to 4.329 billion yuan, a significant decrease from the 67.491 billion yuan in the same period of 2023. Due to the substantial decline in stock sales, CITIC Construction Investment's trading and institutional services business revenue saw a year-on-year decrease of 28.51%.

Focusing solely on the revenue from investment banking and trading and institutional services, the cooling of IPO and secondary financing issuances has had a significant impact on CITIC Construction Investment.

As of now, due to the sluggish trading in the Shanghai and Shenzhen markets, coupled with increased regulatory scrutiny on IPO on-site inspections, it is foreseeable that IPO issuances will remain sluggish for some time. This is not favorable for CITIC Construction Investment, which has a high proportion of investment banking business.

2. Frequent "derailments" in IPO sponsorship projects, once underwrote the bond issuance of China Evergrande

In the past period, CITIC Construction Investment's frequent "derailments" in underwriting projects have also affected its market image.

As a former star enterprise, China Evergrande had inflated its revenue by 564.1 billion yuan and its profits by 92.011 billion yuan in its 2019 and 2020 annual reports, making it the largest financial fraud case in China's history.

It is noteworthy that China Evergrande issued a total of 208 billion yuan in bonds across five issues, with CITIC Construction Investment being the sole underwriter for four of them.

In the bond prospectus, as the underwriter, CITIC Construction Investment stated that the lead underwriter had conducted a review of the prospectus to ensure there were no false records and would bear the corresponding legal responsibilities for the authenticity of the information.

Now, there has been new progress in the China Evergrande financial fraud case: On September 13th, the China Securities Regulatory Commission (CSRC) legally imposed administrative penalties on PricewaterhouseCoopers (PwC) for not fulfilling their due diligence in auditing the annual reports and bond issuance of Evergrande Real Estate. According to the provisions of the Securities Law of the People's Republic of China, PwC was fined a total of 327.5 million yuan, including the confiscation of all business income of 27.74 million yuan during the case period and a maximum fine of 297 million yuan.

In addition to this, the Ministry of Finance also imposed administrative penalties on PwC, including the confiscation of illegal income and a fine totaling 116 million yuan.As of now, CITIC Securities, as a bond underwriter, has not yet been penalized due to the Evergrande case in China. Whether regulatory authorities will impose penalties on CITIC Securities in the future remains to be seen.

In addition to the Evergrande bond issuance case, CITIC Securities' IPO sponsorship projects have also frequently encountered setbacks. In February 2022, Zijing Storage was investigated by the China Securities Regulatory Commission (CSRC) for suspected illegal and irregular information disclosure, and was later confirmed to have committed financial fraud during its IPO, leading to delisting.

As the sponsoring institution, CITIC Securities, along with other institutions, established a special compensation fund of 1 billion yuan. CITIC Securities and other intermediary institutions were also judged by the CSRC in the Zijing Storage fraud case. In addition to the previously compensated approximately 1.086 billion yuan in investor losses, they also need to pay approximately 189 million yuan in commitment funds to the commitment fund management institution.

In addition, the responsible persons of CITIC Securities were all penalized by regulatory authorities. It is worth mentioning that recently, the risk of CITIC Securities' investment banking business has frequently occurred. In the first half of 2024, CITIC Securities received a total of 11 penalty notices, 9 of which were directly related to investment banking business. Previously, CITIC Securities was also at the center of controversy due to the leakage of related IPO company documents by an intern.

According to Wind data, from 2019 to 2023, CITIC Securities sponsored and underwrote a total of 171 IPO projects, with 75 companies experiencing a decline in revenue or net profit in the first year after listing, accounting for 44%.

From the perspective of CITIC Securities' sponsorship projects and regulatory penalties, its investment banking compliance risks cannot be ignored. Whether it will affect the company's investment banking rating under the situation of multiple risks in sponsorship projects remains to be observed.

3. The gap with CITIC Securities widens, and the reorganization of large securities firms begins.

The continuous decline in CITIC Securities' investment banking revenue has become a fixed fact. Affected by this, CITIC Securities' net profit attributable to the parent company has been declining continuously since it broke through 10 billion yuan in 2021.Data indicates that in 2021, CITIC Construction Investment's net profit attributable to the parent company historically exceeded 10 billion yuan for the first time, reaching 10.24 billion yuan. Since then, its net profit attributable to the parent company has continued to decline—dropping by 26.56% in 2022 and 6.45% in 2023, with a further decline of 33.66% in the first half of 2024.

In 2021, CITIC Construction Investment's profit was equivalent to 43.91% of CITIC Securities' profit, but by the first half of 2024, it had fallen to 26.93%. This also implies that the gap between CITIC Construction Investment and CITIC Securities is widening.

In terms of revenue, CITIC Construction Investment's strong business is investment banking and stock sales relying on investment banking. Given the current pace of IPOs and additional offerings by listed companies, it is difficult to return to the level of 2021 in the near future. This also means that it will be challenging for CITIC Construction Investment's net profit attributable to the parent company to recover to the level of 2021.

Furthermore, due to the overall sluggish investment in A-shares, the revenue from CITIC Construction Investment's wealth management business (including brokerage business, fund distribution, etc.) is also not ideal. Data shows that in the first half of 2024, CITIC Construction Investment's wealth management business revenue was 2.851 billion yuan, a year-on-year decrease of 5.45%.

Faced with many difficulties, CITIC Construction Investment is also increasing its external financing efforts to have more funds available for wealth management. As of June 30, 2024, CITIC Construction Investment's tradable financial assets amounted to 207.9 billion yuan, compared to 141.5 billion yuan in the same period of 2021.

It should be noted that regulatory authorities have high requirements for risk control indicators such as capital leverage ratio and net stable funding ratio for large securities firms. Given CITIC Construction Investment's current leverage level, there is not much room for continued leverage increase, which also means that CITIC Construction Investment will find it difficult to increase revenue by expanding the scale of wealth management, a situation that applies to all large securities firms.

For CITIC Construction Investment, it is not easy for the company to regain its former glory under the influence of many unfavorable factors. Moreover, the serious homogenization in the operation of securities firms has led to an increase in operating costs for large securities firms.

To address the issue of homogenized operations, regulatory authorities have repeatedly proposed encouraging mergers and reorganizations of securities firms and also hope to create "aircraft carrier-level securities firms."

On September 6, the ultra-large securities firms Guotai Junan and Haitong Securities kicked off the reorganization of large securities firms. If the reorganization is successful, it will also provide valuable experience for the reorganization of large securities firms.

Previously, the merger of CITIC Securities and CITIC Construction Investment has been mentioned many times. In the view of many research institutions, the reorganization of Guotai Junan and Haitong Securities has opened up imagination space for the reorganization of CITIC Securities and CITIC Construction Investment. If it can be successfully implemented, it will undoubtedly be a significant benefit for CITIC Construction Investment at present.