Incident: 5/8-5/10, Zheshang Securities announced its intention to participate in the auction of Guodu Securities shares listed by Guohua Energy and Tongfang Venture Capital (and related party Jiarong Investment). Both proposals have been reviewed and passed by the board of directors; if the auction is successfully completed, Zheshang Securities's shares in Guodu Securities are expected to increase to 34.2546%.
The total consideration for the two transactions was approximately $2.14 billion, with valuations of 1.22 and 1.43xPb respectively, making them cost-effective.
1) Guohua Energy is the 3rd largest shareholder of Guodu Securities, with a shareholding ratio of 7.6933%, with a reserve price of 1.09 billion yuan, corresponding to Guodu Securities 1.22x PB in 23; 2) Tongfang Venture Capital is the 4th largest shareholder of Guodu Securities, with a holding ratio of 5.95%. The 1.46% shares held by Jia Rong Investment are sold in bundles. The total reserve price is 1,135 billion, corresponding to 1.43x PB of Guodu Securities in '23. 3) In terms of price, whether it is based on a recent similar case (Guolian Securities acquired a portion of Minsheng Securities's shares valued at 1.95xPb, Huachuang Securities bid for a share valuation of 1.63xPb), or compared to the company's previous agreement to transfer 19.15% of Guodu Securities's shares (corresponding to 1.45x PB in '23), it shows a clear cost performance ratio.
An important marginal change is that the shareholding ratio is expected to increase to 34%, or form a holding. 1) At the end of March, the company announced that it plans to transfer 19.15% of Guodu Securities's shares. If the auction is successful, it will hold 34.3% of Guodu Securities's shares; 2) Dismantle the board of directors of Guodu Securities. Currently, there are 10 directors+4 independent director structures, including 4 board seats for shareholders that have not been transferred or listed. If the auction of Zheshang Securities is successfully completed, it is expected to form a holding stock, clearing up barriers to subsequent matters. 3) The increase in equity, regional complementarity and comprehensive strength of the China-Europe Fund is expected to be the main gains.
In the future, the main focus will be on equity auctions and the progress of regulatory approval. 1) Public listing requires the disclosure period to be auctioned. According to public listing information, Guohua Energy's listing disclosure will expire on 5/23, and Tongfang Venture Capital and Jiarong Investment's listing disclosure expires (but needs to be reviewed by the Extraordinary Shareholders' Meeting on May 27); 2) Since changes in the brokerage firm's major shareholders require approval by the Securities Regulatory Commission, the agreed acquisition still requires the completion of materials 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 company's goal of acquiring part of Guodu Securities's shares is progressing in an orderly manner, and its comprehensive strength is expected to leap forward and maintain 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 2024-2026E will be 1.82 billion yuan, 1.95 billion yuan, and 2.13 billion yuan, respectively, +4%, +7%, and +10% compared with the same period last year. The 5/10 closing price corresponds to the company's 24-26E dynamic PB of 1.63 times, 1.55 times, 1.58 times, and dynamic PE of 25 times, 23 times, and 21 times.
Risk warning: Regulatory approval progress falls short of expectations; capital markets fluctuate greatly; residents' asset allocation migration falls short of expectations