Incident: On 3/29, Zheshang Securities announced that it has signed an equity transfer agreement with shareholders of Guodu Securities such as Chongqing Trust to transfer 19.15% of Guodu Securities.
The transaction is worth about 3 billion dollars, with a valuation of 1.5x, and cost-effective. On 12/9 of last year, Zheshang Securities first announced the signing of a framework agreement to acquire 19.15% of Guodu Securities. The initial agreement period was before the end of 23, then the transaction was delayed 2 times due to audit and evaluation requirements; at the end of February, it was announced that the audit and evaluation work had been completed, and the transaction period was extended until the end of March. According to the announcement, the transfer price of this transaction is 2673 yuan/share, corresponding to the overall valuation of Guodu Securities of 15.58 billion yuan, a valuation of 1.50 xPb, and a total transaction consideration of 2.98 billion yuan. Similar cases in recent years, such as Guolian Securities's acquisition of part of Minsheng Securities's shares valued at 1.95xPb, and Huachuang Securities's bid for Pacific shares valued at 1.63xPb. The valuation is quite cost-effective.
The increase in equity, regional complementarity and comprehensive strength of the China-Europe Fund is expected to be the main gains. Guodu Securities is a brokerage firm listed on the New Third Board. Its comprehensive strength is in the industry's top 50 (see the previous report “Zheshang Securities:
“Proposed to transfer part of Guodu Securities's shares to promote growth”). We believe that the main benefits of the acquisition are: 1) Public offering strength: Guodu Securities is the second-largest shareholder and holds 20% of the shares in the China-Europe Fund. Currently, Zheshang Securities is only participating in 25% of the Zhejiang Fund, which is expected to make up for the shortcomings in the public offering layout; 2) Regional complementarity: the regional layout of Guodu Securities is mainly based in Beijing, Henan, Shanghai, etc.; 3) Comprehensive strength: if merged in the future, it is expected to push the capital strength to the next level, at the end of 1H23 Commercial Securities net assets of 26.2 billion yuan/ranking of 25 listed brokerage firms, China Capital Securities has net assets of 10.4 billion yuan. After merging the two, it will reach 36.6 billion yuan/ranking 18th among listed brokerage firms.
In the future, the main focus will be on regulatory approval and the progress of the remaining share acquisitions. 1) In addition to the 19.15% shares announced this time, Guodu Securities also has 7.42% of the shares in the public listing. If Zheshang Securities completes the acquisition at the same time, it will hold a total of 26.56% of the shares, making it the largest shareholder; 2) Since changes in the brokerage firm's major shareholders require approval by the Securities Regulatory Commission, the agreed acquisition still needs to complete the material receipt, acceptance, feedback (or any), and approval processes. In a recent similar case, Minsheng Securities's shareholder change approval took nearly September. Pacific shareholders changed to receive materials in June '22 and are still in the feedback stage.
Investment analysis opinion: The acquisition agreement was successfully signed, and the boat has passed Wanzhongshan and maintained a “Highly Recommended” rating. Zheshang Securities has had a strong desire to grow bigger and stronger in recent years (refinancing & industry position improvement). In the context of the securities industry's overall policy of encouraging mergers, acquisitions and restructuring, it is expected that they will collaborate to promote growth and significantly increase net capital and comprehensive strength in the future, preparing for long-term development. The estimated net profit of Zheshang Securities in 2023-2025E will be 1.75 billion yuan, 1.85 billion yuan, and 2.04 billion yuan, respectively, +6%, +5%, and +10% compared with the same period last year. The 3/29 closing price corresponds to the company's 23-25E dynamic PB of 1.64 times, 1.57 times, 1.49 times, and dynamic PE of 25 times, 24 times, and 22 times.
Risk warning: Regulatory approval progress falls short of expectations; capital markets fluctuate greatly; residents' asset allocation migration falls short of expectations