‘Chinese brokers may set up shop in Pakistan’

Bank Alfalah Limited, the majority shareholder of brokerage Alfalah Securities, and Hong Kong based CLSA JV Holdings, have recently entered into a strategic partnership in Pakistan, at the completion of which the CLSA would acquire about 24.9% stake in Alfalah Securities. The transaction is expected to complete by November 2018, following which Alfalah Securities will be renamed ‘Alfalah CLSA Securities’.

Following the deal signing ceremony, BR Research met Donald Skinner who is responsible for CLSA’s corporate governance and oversees all board level matters across Asia. Skinner joined CLSA at its inception in 1986 and has held a wide range of leadership roles across the business, including Global COO from 2013 until January 2017. He has also managed CLSA’s offices in Singapore, Malaysia, Japan, India and Hong Kong. In this interview, Skinner sheds light on the deal and outlines Alfalah CLSA Securities’ future game plan. The transcript is edited for clarity.

BR Research: Tell us about the deal; its pricing, its motivation and the reason why CLSA chose Alfalah Securities.

Donald Skinner: CLSA is taking a 24.9 percent minority stake in Alfalah Securities, of which Bank Alfalah will remain the largest shareholder. Ali Ansari, the Chairman, and Atif Khan, the CEO, are also shareholders with a combined stake of 12.6 percent and will exercise management control.

We have had a long-term relationship with Pakistan. We were originally in Pakistan in 1992, and we were actually the first brokers to set up here. It was a great place for us to recruit talent and over the years we saw a lot of very good young Pakistani analysts. One of those was Ali Ansari, who went on to manage our European business and did a few other things before returning here to take on a role at Engro Corporation.

I have been with CLSA for 32 years; the CEO has been with the company for 30 years and our head of research for about 28years. There are a number of other senior people in the company who have a lot of institutional memory about Pakistan and Ali Ansari, who is not only a friend but has been a part of CLSA. So, when Ali came around and pitched his plan with Alfalah Securities, we got talking. He was the main driving force. CLSA will provide strategic input and direction but we are not going to be managing or driving this business.

BRR: Alfalah Securities is not the largest broker in this market. It’s not even the third largest, whereas CLSA is one of the top brokers in Asia. Should one expect Alfalah to be eyeing the top slot in the years ahead; what’s your target?

DS: CLSA is present everywhere in Asia, where our main competitors tend to be the “bulge brackets” (or the top multinational investment banks). We are the number one foreign broker in India, Thailand, Indonesia and so forth. We do a lot of business in Pakistan despite not having an on the ground presence here until this transaction

CLSA is very much the Asian broker; the Asian investment bank. And while Alfalah Securities is not the largest broker in Pakistan, given our platform, we aim to turn this into the largest broker in Pakistan over the next few years.

BRR: What is Alfalah’s new business model and how soon can we expect changes?

DS: Alfalah Securities doesn’t have a great deal of international reach at the moment. Our aim is to focus on institutional business, which is where CLSA can really drive value. That is our strength and it immediately increases the depth, breadth, and reach of Alfalah Securities.

We foresee Alfalah CLSA Securities becoming the largest broker for institutional business in Pakistan; foreign institutions will obviously be a large part of that but local institutions will also be a large part of it.

BRR: Can we expect Alfalah Securities to receive a bigger share of investment banking or corporate finance business?

DS: CLSA is an investment bank and securities broker and so is Alfalah Securities. So we will focus on both. CLSA brings to the partnership an international dimension. Any corporate client in Pakistan seeking international finance for equity or debt will benefit from talking to CLSA. We don’t only provide access to China; our customer base is very evenly split across the US, UK and Europe and Asia.  And we are strong in every location.

From the point of view of Alfalah CLSA Securities, we bring Asia and global reach to Pakistani corporates; whether it is equity capital markets, debt capital markets or merger & acquisition advisory.

BRR: In terms of broking, would you compete on price?

DS: You don’t compete on price in this industry; any broker can cut price to zero. It’s true here and true elsewhere. We compete for business on the excellence of the service that we deliver to our clients; part of that is the quality of research product. If you look at the Asiamoney Broker Pollawards, CLSA has been ranked at the top year in and year out. Why? Because we produce truly differentiated products compared to the rest of the market place

We are country driven, very thematic driven, and we hire very top talent. We allow our people absolute freedom in terms of what they say and deliver. The independence of thought and product brings our clients back to us year after year.

BRR: CLSA is backed by a Chinese investment bank. Does that mean CLSA’s interest in Pakistan is motivated by OBOR and the CPEC? And whether CLSA would be connecting Chinese investors with Pakistani markets.

DS: CLSA is the international arm of CITIC Securities, which is headquartered in Beijing and is the largest investment bank and brokerage in China. The Chinese business is something that we look to secure because of our obvious connection to China. But while it is one of the reasons that we are here, it is not the only reason; nor is it the dominant reason.

That said, I think OBOR will be a major driver of the economy. OBOR is not a one-year project; it is a permanent state of affairs. China borders many countries including Pakistan and as China gets bigger, these countries will grow on the back of it.

BRR: If the CPEC isn’t the dominant reason then what is?

DS: The dominant reason is that we are an Asian broker and investment bank and Pakistan is relevant to that story. Over 30 years we have established offices across Asia in 13 key markets and we want to continue to expand our network. We had a presence here 17 years ago but exited because the security conditions were not good. Now that the situation has become more stable, and we hope that stability will continue to improve, the timing is better.

BRR: What is your assessment of the competitive landscape in Pakistan’s brokerage industry over the next 4-5 years; do you expect other Chinese players to enter this market?

DS: Chinese brokers are definitely expanding their footprint; there is a distinct possibility that Chinese brokers may set up shop in Pakistan. But CLSA and Alfalah are competing in the international sphere. Do I think any of the bulge brackets are coming to Pakistan? No, I don’t think so.

BRR: Does CLSA plan to increase its stake in Alfalah?

DS: No. We are happy with 24.9 percent and there is no intention of changing this up or down. We have not changed shareholding structures in Indonesia or Philippines for more than 15 years, or anywhere else. We do long term joint ventures. We are comfortable with that; the model works very well for us.

BRR: The size of Chinese retail investors is huge, and they reportedly play the markets like a casino. But you plan to focus on institutions rather than retail. Won’t you be losing out?

DS: We are not a retail broker. We are an institutional, wholesale broker and we trade wholesale end of the market wherever that may be. There is not a single major investment manager, asset manager or hedge fund in the world dealing in Asia that we do not talk to. China is part of that customer base.

BRR: What’s your take on Pakistan’s market, given its dull volumes?

DS: Pakistan is going through a pretty difficult period at the moment. The market has had a very difficult time since going into the MSCI emerging market index last year

We see Pakistan’s move from frontier to emerging market as a tactical mistake. Whether it is a strategic mistake or not – that can only be said after some time. But the move really hurt the market because Pakistan was a large part of the frontier markets indices and then it became a small part of the many larger emerging markets indexes. The move actually took foreign frontier markets investors out and didn’t bring foreign emerging markets investors in. And that coincided with economic and political headwinds faced by the country.

Where will Pakistan go from here? I can’t say. But I think it is closer to the bottom than to the top. CLSA’s Global Strategist, Christopher Wood, who has been voted Asia’s number one strategist for a very long time, put Pakistan into his recommended Asian portfolio for the first time just this month. He sees this market as cheap and a good play for long term investment.

BRR: What if volumes don’t pick up for a long time. Does that mean CLSA will exit the market? What are your projections for Pakistan’s volume? 

DS: I have been doing broking models for two decades and the one thing you can never get right is the average daily trading volumes.

I don’t know what Pakistan’s average daily trading volume will be in the next five years. It is very low at the moment but it has been as high as US$300 million at one point. The opportunity right now is greater than the risk.

This is not a short-term investment. We can gear up as we need resources, if the business is there; if the business is not there then we keep the cost base and the footprint small.

However, if there is an ECM (equity capital market) deal out here that has a foreign leg to it, we are going to be the most natural people to talk with. If the trading value goes back to $300 million a day, believe me, the ECM business will grow because companies will want to list and raise more money from the market. Alfalah CLSA Securities will be the logical partner to work with for broking, ECM, DCM and advisory mandates.