Today, the brokerage sector in A-shares showed mixed results. By the close of trading in the afternoon, CITIC SEC, China Merchants, and HTSC saw slight gains, while East Money Information, China International Capital Corporation, and Orient experienced minor declines, with Guolian dropping by 2.56%.

In terms of news, Guolian successfully passed the approval for acquiring Minsheng Securities.

According to the Shanghai Stock Exchange, on December 17, Guolian's issuance of A-shares to purchase 99.26% of Minsheng Securities and to raise matching funds has been approved, marking the first successful merger and acquisition deal in the securities industry after the new "Guo Jiu Tiao" policy. Next, it's just waiting for the registration submission.

Merger and acquisition activities often have a significant impact on the stock prices of listed companies. For instance, companies like Hainan Shuangcheng Pharmaceuticals, H.B. Fuller, GTJA, and HAITONG SEC all saw their stock prices hit the limit up following acquisition announcements, but today, Guolian's stock price has turned negative.

In fact, year-to-date, the non-bank financial sector represented by brokerages and Insurance has seen the highest gains. Brokerage firms like CITIC SEC, East Money Information, and China Merchants have all increased by over 40%, far exceeding the Csi 300 Index. If the market heats up in the future, brokerages, as the "leaders of the bull market," are still worth paying attention to.

01

Minsheng Securities is valued at over 29.8 billion yuan, with a value-added rate exceeding 86%.

Public information shows that the acquirer Guolian Securities was established in 1999, registered in Wuxi, Jiangsu, and is effectively controlled by the Wuxi State-owned Assets Supervision and Administration Commission. Its predecessor was Wuxi Securities Company, which changed its name to Guolian Securities Co., Ltd. through reorganization in May 2008 and was listed on the Hong Kong Stock Exchange in 2015, and then successfully landed on the Main Board of Shanghai Stock Exchange in 2020.

The target company Minsheng Securities was established in 1997, with its registered office in Shanghai. As of the date of this report's signing, Minsheng Securities has no controlling shareholder or actual controller, among which Guolian Securities' controlling shareholder Guolian Group holds 30.52% of Minsheng Securities' shares, making it the largest shareholder.

The draft report shows that the listed company Guolian Securities intends to issue shares to Guolian Group, Fengquanyu, and 45 other trading parties to acquire 99.26% of Minsheng Securities' shares. At the same time, Guolian Securities plans to issue shares to no more than 35 specific investors to raise no more than 2 billion yuan of matching funds, and the number of A-share shares issued will not exceed 0.25 billion shares (including this number). This transaction constitutes a major asset reorganization and is an associated transaction, but does not constitute a reorganized listing.

This transaction shows a significant premium. The 'Asset Evaluation Report' indicates that under the market method, the valuation of Minsheng Securities is approximately 29.889 billion yuan, with a value-added rate of 86.23%; under the asset-based method, Minsheng Securities' valuation is approximately 16.359 billion yuan, with a value-added rate of 1.93%.

The valuation status of all shareholders' equity in the target company, image source from the draft report.

This assessment uses the market-based evaluation results as the final assessment conclusion, with the trading price of the target assets being approximately 29.492 billion yuan. If the market undergoes unfavorable changes that are different from expectations in the future, there may be a risk of valuation decline.

02

Guolian Securities and Minsheng Securities have complementary characteristics and can发挥协同效应.

Guolian Securities and Minsheng Securities have strong structural and regional complementary advantages in business.

In terms of business, Guolian Securities' main businesses are divided into five major sectors: Brokerage and Wealth Management, Asset Management and Investment, Securities Investment, Investment Banking, and Credit Trading. Among them, from January to September 2024, the revenue share of Guolian Securities' Brokerage and Wealth Management, and Asset Management and Investment exceeded 25%, indicating a large proportion.

Minsheng Securities' revenue mainly comes from Wealth Management, Investment Banking, Investment Trading, and Asset Management. Among them, in 2023, the revenue shares of Minsheng Securities' Wealth Management and Investment Banking were 39.3% and 58.35%, respectively.

Guolian Securities has distinct characteristics and advantages in Wealth Management, Fund Advisory, and Asset Securitization; whereas Minsheng Securities has prominent strengths in Investment Banking.

In recent years, Minsheng Securities has focused on Investment Banking, supported by research services, while vigorously developing fixed-income investment and private equity investment, achieving mutual promotion among Investment Banking, Institutional Research, and Private Equity, forming certain advantages.

Regionally, Guolian Securities has a high market share in Wuxi and the southern Jiangsu area, while Minsheng Securities' branch network focuses primarily on Henan. In the future, effective integration of the two brokerages' businesses will be beneficial for forming complementary strengths.

The performance of Brokerage firms is significantly affected by fluctuations in the Capital Markets. When the stock market is strong, the number of new retail investors increases, resulting in more users and active trading among individual investors, leading to a substantial increase in fees, a boom in Finance and Securities Lending business, and increased interest income. At the same time, the brokerage's proprietary business can profit significantly; however, when the stock market continues to decline, the performance of brokerages may also decline.

Over the past two years, against the backdrop of a weak A-share market, Guolian Securities' performance has been dragged down, showing a continuous downward trend.

In 2021, 2022, and 2023, Guolian Securities' revenue was approximately 2.967 billion yuan, 2.623 billion yuan, and 2.955 billion yuan respectively, with corresponding operating margins of 39.77%, 36.71%, and 27.47%. The corresponding net income was approximately 0.889 billion yuan, 0.767 billion yuan, and 0.675 billion yuan.

In the first three quarters of 2024, Guolian Securities' revenue was 2.005 billion yuan, a year-on-year decrease of 20.04%; net profit attributable to the parent was 0.396 billion yuan, a year-on-year decrease of 45.53%.

Net profit situation of Guolian Securities, image source and Choice.

In 2022 and 2023, the revenue of the targeted company Minsheng Securities was approximately 2.649 billion yuan and 3.757 billion yuan, with net profits of approximately 0.191 billion yuan and 0.642 billion yuan respectively.

03

Brokerages are initiating a wave of mergers and acquisitions, and the industry concentration is expected to further increase.

Since the release of the "Six Regulations on Mergers and Acquisitions" in September of this year, the activity in the mergers and acquisitions market has significantly increased, and the pace of mergers and acquisitions in the brokerage sector has notably accelerated.

Besides the "marriage" between Guolian Securities and Minsheng Securities, GTJA and HAITONG SEC disclosed the merger and restructuring report (draft), and the proposal for Western Securities to acquire the controlling rights of Guorong Securities was also approved at the shareholders' meeting, while the CSRC has approved Zheshang Securities to become the major shareholder of Guodu Securities.

The securities market plays an important role in improving the financing structure, optimizing resource allocation, and promoting economic development, but compared to major developed countries in the world, China's capital market is still in its infancy.

Currently, there are numerous securities companies in China, with an overall small scale, and fierce homogeneous competition among securities firms. As of the end of June 2024, China had 147 securities companies and 163 securities investment fund management companies, with the number of securities intermediaries and institutional investors continuing to increase.

At the same time, many securities companies have similar business scopes, with a relatively single variety of services, and their revenue mainly comes from traditional businesses such as securities brokerage, investment banking, and proprietary trading. Although in recent years the assets and capital scale of China's securities companies have grown rapidly, there remains a significant gap in scale compared to the average size of financial institutions such as banks and insurance companies.

In terms of total market capitalization, as of the market close on December 17 this year, only CITIC SEC and East Money Information had a market capitalization exceeding 400 billion in the A-share capital market service sector, while China Securities Co., Ltd., China International Capital Corporation, China Merchants, GTJA, China Galaxy, and HTSC all had market capitalizations above 150 billion.

In the same period in the U.S. stock market, Morgan Stanley's market capitalization reached 205.794 billion USD (approximately 1.5 trillion RMB), and the total market capitalization of Goldman Sachs and Blackrock was also in the trillions, far surpassing domestic brokerages.

Securities belong to a capital-intensive industry, and the size of net capital is an important factor determining the scale of a brokerage's business. Brokerage firms with capital advantages can further expand their business scale or enter new business areas through horizontal mergers and acquisitions, continuously growing and strengthening to enhance overall competitiveness and risk resistance.

From a competitive landscape perspective, in recent years, the net income growth rate of leading brokerages has significantly outpaced the industry average, with less volatility and greater profitability across cycles.

According to statistics from the China Securities Industry Association and reports from listed companies, as of the end of 2023, the total assets of the top five brokerages in China accounted for approximately 40.02% of the entire industry, while the operating income of the top five brokerages accounted for approximately 46.74% of the entire industry, indicating a significant head effect.

The mergers and reorganizations of domestic brokerages are beneficial to enhancing industry concentration, optimizing the market structure, strengthening capital strength, and reducing reckless price competition, creating investment banks and institutions with international competitiveness and market leadership.

For example, after the merger of GTJA and HAITONG SEC, total assets and net assets will surpass CITIC SEC to rank first in the industry; after Guolian acquires Minsheng Securities, the strength of each business line will be enhanced, and market rankings will rise accordingly.

However, mergers are also a complex process, and whether the two brokerages can effectively integrate in business, institutions, personnel, and other aspects after the merger to achieve the expected result of "1+1>2" still carries uncertainty.