The landscape of Initial Public Offerings (IPOs) in China is undergoing significant transformation, propelled by new regulations that seek to reshape the operations of brokerage firmsThis shift occurs against the backdrop of increasingly stringent market controls, evolving rules, and heightened competition within the financial services sectorIn response, brokerage firms are adjusting their strategies to focus on self-operated and asset management businesses, looking to forge new paths for performance growth in these challenging times.

On January 15, a set of regulations comprising 19 specific articles was introduced to govern the conduct of brokerage firms and other intermediary institutions that assist companies in going publicThese new directives impose clear limitations on how and when service fees can be collected, establishing a framework that separates remuneration from the outcomes of stock issuanceFor brokerage firms engaged in underwriting, the rules demand adherence to established guidelines by regulatory bodies and necessitate comprehensive assessments of costs without linking fees to the scale of the stock issuance.

In light of these developments, analysts at CaiTong Securities have noted that smaller, less profitable companies may take a more cautious stance when considering IPOsThis could have a pronounced effect on the competitive landscape among brokerages, particularly for those that rely heavily on accommodating smaller firms' IPO processes at lower costsThe implication here is a potential consolidation within the industry, where larger brokerages may further strengthen their market position.

Brokerage firms are actively seeking alternative growth avenuesThe immediate focus has shifted towards mergers and acquisitions (M&A) along with enhancing their proprietary trading activities and pushing for internationalization

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This strategic pivot signifies a critical move in response to the changing dynamics of the IPO market.

The ongoing evolution within the IPO business can be traced back to the implementation of the sponsorship system in the A-share market starting in 2004. Over the years, brokers and intermediaries have held a pivotal role in facilitating IPO transactionsHowever, with the new rules now in play, the equilibrium of interests within the IPO sector is set for a significant recalibration.

The modifications to underwriting fees outlined in the recent regulations indicate a substantial tightening compared to earlier draftsNotably, the stipulation against escalating charges based on the issuance scale is expected to impact how brokerages price their services moving forwardAdditionally, the regulations clarify that the conditions for charging fees should not be linked to the results of audit assessments or public stock issuance outcomes.

These changes reflect broader trends in the IPO marketAfter the introduction of a registration-based system, there was a surge in IPO activityFor instance, in 2018, there were 105 companies that went public, raising a total of approximately 137.8 billion yuanThis figure grew to 202 IPOs in 2019 and further to 436 in 2020, before peaking at 523 in 2021. In 2022, the count dipped to 425 companies, but the total amount raised reached a record 586.9 billion yuan.

However, by 2023, the IPO market began to cool off significantly, with 313 enterprises going public, experiencing a downturn of over 26% from the previous year in terms of both quantity and capital raisedThe trend continued into 2024, where only 100 companies successfully listed, accumulating just 6.68 billion yuan.

As a direct outcome of this reduced IPO activity, revenues within the IPO segment for brokerages have seen marked declines

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Notably, key firms such as CITIC Securities and Huatai Securities reported significant decreases in their IPO-related earnings from the previous year, reflecting the pressures exerted by the evolving market conditions.

Interestingly, while the overall number of IPOs is on the decline, the costs associated with individual IPO projects are risingAnalysis from HanDing Consultancy highlights a trend where various fees related to IPOs are experiencing a steady increaseFor instance, the issuance fee rate rose from 9.84% in 2022 to 10.46% in 2023, with further increases projected for 2024.

The recent regulatory changes aim to redefine the relationship dynamics between brokerages and the companies seeking to go publicResearch from Shenwan Hongyuan suggests that the new stipulations might assist in reducing the entanglements of interest between intermediaries and issuers, thereby minimizing financial burdens during the IPO journey.

Navigating out of the current challenging IPO landscape has emerged as a primary focus for brokerage firmsThe resurgence of M&A activity has added a new layer of opportunity as policies increasingly favor these restructuring efforts, further spurred by favorable government initiatives.

Consequently, brokerage firms are actively announcing acquisition plansThe infusion of new policies has triggered a wave of announcements from listed companies regarding mergers and acquisitionsGiven the relationship between IPOs and M&A, with IPO activity tapering off, the re-energized M&A market may serve as a focal point for brokerage firms' investment banking endeavors moving forward.

Projected data for 2024 shows an estimated M&A transaction volume of about 2.02 trillion yuan, reflecting a year-on-year increaseThe data also reveals that the growth in M&A deals has notably accelerated from the second quarter of the preceding year.

Among notable players, CITIC Jiantou has emerged as a frontrunner, recording significant engagement in major asset restructuring events, to the extent that in 2024, it facilitated deals totaling about 1.37 billion yuan.

Moreover, proprietary trading is becoming an increasingly profitable venture for brokerages in 2024. With a bullish trend in both equities and debt markets, data indicate a substantial uptick in self-operated business revenues across the sector, supporting an overall surge in financial performance.

In a remarkable example, AVIC Securities reported a staggering increase in net profits for 2024, demonstrating the potential strength of proprietary trading as a key revenue stream for brokerages.

Simultaneously, as Chinese brokerages actively seek growth beyond domestic borders, their overseas operations are gradually becoming a core area of focus for expansion

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