Citic/CLSA: Good while it lasted

Rick Gould and Youjun Zhang: overseeing the end of the road for Citic/CLSA’s dreams?

Once upon a time, CLSA was seriously fun. The Hong Kong brokerage, a disruptor long before the term was coined, was founded in 1986 by a trio of ex-journalists, led by former South China Morning Post reporter Jim Walker.

CLSA connected global investors with often obscure and undervalued stocks in emerging Asian markets, and saw value in going against the grain. It hired analysts who said what they really thought, and published reports that were lyrical and informative. An early example from 1987, titled ‘A peep across the border’, tipped China to continue to open up and reform. The annual CLSA investors’ forum became a hot event thanks to its star speakers (Bill Clinton and George Clooney to name just two) and entertainers (Elton John and Rihanna among others).

That free-wheeling spirit is what made its $1.3 billion takeover in 2013 by Beijing-based Citic Securities so shocking. Overnight, a son of anarchy found itself fostered by an arm of the Chinese state. Sure, the then-chairman of Citic Securities, Wang Dongming, was a Western-educated guy who idolized Goldman Sachs and wanted to build a Chinese version of the US investment bank.

A few believed this odd couple could find a way to make their forced marriage work. For a while it did, but only because Citic left its little Hong Kong brother to its own unruly devices. When Wang left under a cloud in 2015, after a mainland stock market crash, Citic’s leadership in Beijing began to turn the screw.

Several of CLSA’s top officials have left this year – chief executive Jonathan Slone, chairman Tang Zhenyi and chief operating officer Nigel Beattie. Chief strategist Christopher Wood, author of the popular weekly report Greed & Fear, also quit, following Slone and the straight-shooting analyst Brian Johnson to Jefferies. Given that so much of CLSA’s value was tied up in the creative brains of its top people, it is worth asking how much of the brokerage is left, if it can survive, and what it’s likely to become.

Just to be clear, the brokerage is very much around, overseen by CEO Rick Gould, who previously ran its Americas business, and Zhang Youjun, who also chairs Citic Securities. It offers the same services, from equities and fixed income to FX and asset management. Reports are still printed and delivered, or zipped up and emailed.

But it is apparent to those who remain that what made the firm different is fast disappearing. Seven years ago, Citic portrayed itself as a benevolent new owner keen to take a hands-off approach to management. It pledged that CLSA would retain its editorial independence, leaving it free to criticize the Chinese government and mainland corporate governance.

Each party had hoped the other would complement its skills and resources. Citic would access its junior partner’s global client list of 1,700 investors, while CLSA would benefit from its parent’s onshore strength in equities, asset management and private equity.

Those days are long gone, and this year’s arrival of a new CEO and chair was less a like-for-like replacement than evidence of a permanent changing of the guard.

Anyone keen to peek into the future of CLSA could do worse than to read Zhang’s message to investors, contained in Citic Securities’ latest annual report.

Many chairman’s letters are full of waffle and back-slapping. Zhang’s reads more like a mission statement. Citic Securities would, he promised, “vigorously support” Chinese firms’ global aspirations and provide “the best service to PRC companies” as they buy Asian assets and corporates. He kowtows plenty to Beijing (stating at one point that Citic’s survival “depends on national policies”) and stresses the value of its purchase in January 2019 of Guangzhou Securities, saying the smaller mainland brokerage will boost its “competitiveness, influence and leadership in South China”.

Zhang also turns his attention to a “rare opportunity in history… to build a world-class investment bank”. By which he means Citic Securities, not CLSA, who he does not even mention by name. “CLSA’s role now is to help Citic take Chinese companies to the world,” says an insider who has so far failed to scale the wall, and who has seen all the fun sucked out of the place.

“Zhang sees CLSA as an extension of the parent,” he adds. “We are going to be aligned with Beijing. Risk management, treasury, corporate governance, HR, it will all be run according to Beijing’s norms and on Beijing’s terms. The priority will be to take Chinese capital global, not to build the CLSA brand or write clever research about Asian equities. In fact, research isn’t going to be a focus at all.”