Sun Hung Kai & Co, the Hong Kong-based financial services group, is considering selling a stake in its brokerage and wealth management business, three people familiar with the matter said on Tuesday.

The company, run by Malaysian businessman Lee Seng Huang, has been approached by and held informal discussions with potential buyers from Asia and elsewhere for its SHK Financial unit, said the people, who asked not to be identified and declined to name any companies. No formal talks are currently being held, they said.

Sun Hung Kai is also considering seeking a partner to help it expand outside Hong Kong as competition from overseas and mainland securities firms in Asia's second-biggest financial hub squeezes margins, the people said. The median operating profit margin among 10 brokerages traded on Hong Kong's stock exchange slumped to 5.2 percent in 2010 from 10 percent five years earlier, data compiled by Bloomberg show.

"The traditional brokerage business in Hong Kong is getting more crowded with new entrants, such as deep-pocketed mainland banks, even as commissions continue to see compression," said Desmond Cheung, a Hong Kong-based analyst at Royal Bank of Scotland Group Plc.

Sun Hung Kai shares surged 13 percent to close at HK$5.99, the biggest gain since December 2008. The company isn't related to Sun Hung Kai Properties Ltd, the world's biggest real estate developer by market value.

"Management will continue to explore opportunities to expand our business operations for the benefits of the shareholders," Sun Hung Kai said in an e-mailed statement. The company "will make appropriate announcements if there is any key M&A activity".

SHK Financial has a net book value of about HK$4 billion to HK$4.5 billion, two people said. Using a valuation multiple of two times net assets would imply a price tag of as much as HK$9 billion for the entire unit, which also includes corporate finance and asset management advisory. The final book value may vary depending on which assets are included, one person said.

Hong Kong-listed brokers trade at a median of 1.31 times book value, Bloomberg data show. Haitong Securities Co, the mainland's second-biggest publicly traded brokerage, bought a controlling stake in Taifook Securities Co in late 2009 for HK$1.82 billion. Haitong paid 1.87 times book value for an initial stake of 53 percent.

Consumer finance accounted for 53 percent of Sun Hung Kai's revenue last year while its brokerage and wealth management operations contributed 36 percent, according to Bloomberg data. Sun Hung Kai has ruled out any sale of its consumer finance operations, the people said.

The company has been trying to expand beyond its home market by forging alliances overseas. Sun Hung Kai sold shares to Dubai Investment Group, a unit of Dubai Holding, in 2007 and issued HK$2.14 billion of mandatory convertible notes and warrants to CVC Capital last year. The London-based private equity firm will own 19 percent of the company if the notes are fully converted.

"Having a partner with experience and a network in China would appear to make more sense for Sun Hung Kai, as opposed to other regional players, given that the company is focusing on developing its consumer finance business in the country," RBS's Cheung said.

Bloomberg

(HK Edition 07/27/2011 page2)