The Zhitong Finance App learned that Shen Wan Hongyuan released a research report saying that Guojun Haitong's mergers, acquisitions and restructuring are speeding up. After the merger of the two parties, net assets surpassed CITIC Securities to become the largest brokerage firm in the A-share market. Compared with world-class investment banks, there is still room for improvement in profitability compared to CITIC Securities, etc. The newly surviving company is expected to rely on the advantages of both parties in terms of geographical layout, business advantages, sound compliance culture and improved risk control mechanisms, greatly improving global resource allocation capabilities, manageable goodwill risks, and focusing on performance flexibility brought about by complementary advantages after the merger. Optimistic about the brokerage sector, it is recommended to grasp the main line of investment in mergers, acquisitions, and restructuring.

Incident: On January 9, Guotai Junan's plan to absorb and merge Haitong Securities with a 1:0.62 share exchange ratio and issue A-shares to raise supporting capital was reviewed and approved by the merger, acquisition and restructuring review committee of the Shanghai Stock Exchange.

Shen Wan Hongyuan's main views are as follows:

Progress is rapid, demonstrating the clear attitude of regulation to encourage “leading brokerage firms to grow bigger and stronger through mergers, acquisitions and restructuring”

Following a positive response to the new “National Nine Rules” and Shanghai's “12 Mergers and Acquisitions” appeals, Guojun Haitong has accelerated its mergers, acquisitions and restructuring.

Looking back on the Guojun Haitong merger process: 2024/9/5, Guojun and Haitong officially issued a suspension notice to plan major asset restructuring; 2024/10/9, Guojun issued a merger transaction plan; 2024/11/20, the transaction was approved by the Shanghai State-owned Assets Administration Commission, and Guojun issued a merger transaction; 2024/12/13, the transaction was reviewed and approved by Guojun and Haitong shareholders' meetings; 2024/12/23, the Shanghai Stock Exchange responded to regulatory inquiries; 2024/12/26, the Shanghai Stock Exchange responded to regulatory inquiries; 2024/12/30; On 2025/1/9, Guojun's acquisition and merger of Haitong Securities was reviewed by the merger, acquisition and restructuring committee of the Shanghai Stock Exchange. The Shanghai Stock Exchange announced the review and approval on the same day. The overall usage time was less than 3 months (trading day, same below), and each node showed a clear acceleration trend (18-31-18-7-4-3-8 days).

After the absorption and merger, the size was compared to world-class investment banks, and there is still room for improvement in profitability compared to CITIC Securities, etc.

In terms of assets, as of the end of 9M24, the total assets of Guotai Junan and Haitong Securities were 931.9/693.2 billion yuan respectively, with net assets of 166.4 and 161.2 billion yuan respectively. After the merger of the two parties, the net assets surpassed CITIC Securities to become the largest brokerage firm in the A-share market (the total asset gap narrowed to 6.6%). Compared with current world-class investment banks, there is still a gap. Based on 9M24 data, Goldman Sachs's total assets and net assets were 7.5 and 2.6 times that of Guojun Haitong's new entity after the merger; Morgan Stanley's total assets and net assets were 5.4 and 2.2 times that of Guojun Haitong's new entity after the merger, respectively.

In terms of profitability, 9M24 Guojun and Haitong had revenue of 18 and 9.8 billion yuan, respectively, and net profit to mother of 9.5 and -0.7 billion yuan, respectively. After the merger of the two parties, the gap between the new entity's revenue and net profit to CITIC Securities was 24.8% and 89.5%, respectively.

Goldman Sachs's revenue and net profit to mother during the same period were 9.7 and 8.0 times that of the new entity after the merger of Guojun Haitong; Morgan Stanley's revenue and net profit to mother were 11.4 and 7.6 times that of the new entity after the merger of Guojun Haitong, respectively.

Improving the international layout, it is expected to become the widest range of Chinese brokerage firms covering countries along the “Belt and Road”

Cathay Pacific Junan has overseas offices in Hong Kong, China, Macau, the United States, the United Kingdom, Singapore, Vietnam, etc.; Haitong Securities has branches, subsidiaries or representative offices in 15 countries and regions on 5 continents in Asia, Europe, North America, South America, and Oceania. After the merger, the business layout of the two sides will cover financial service networks including major global capital markets such as Shanghai, Hong Kong, China, Macau, Singapore, New York, London, Tokyo, and Mumbai, covering developed markets including North America and Europe, as well as emerging markets including Asia and Latin America. Considering that the recovery trend of IPOs in mainland China is still unclear at this stage, the Hong Kong Securities Regulatory Commission and the Hong Kong Stock Exchange carried out 3 major listing system reforms in 24 to facilitate mainland companies' listing in Hong Kong, the Hong Kong stock IPO market will take the lead in improving the A-share market.

The newly surviving company after the merger of Guojun Haitong is expected to rely on the geographical layout, business advantages of both parties (Haitong Securities has 442 insurance companies, ranking second in the number of IPOs in the 2023-2023 Science Innovation Board), a robust compliance culture, and improved risk control mechanisms, and the contribution of international business (especially the overseas investment banking business side) to the company's performance will continue to rise (Goldman Sachs/CITIC International's business accounts for 37% and 16% of revenue in 2023, respectively, after the merger of Guojun Haitong).

Goodwill risk is manageable, focusing on performance flexibility brought about by complementary advantages after the merger

As of 9M24, the original book goodwill value of Haitong Securities was $4.194 billion, and the accrued goodwill impairment provision was $0.731 billion (mainly Haitong Bank and Haitong International). Since Guojun and Haitong merged without the same control, the original goodwill of Haitong Securities was not taken into account during the transaction, so the company's goodwill amount of 4.071 billion yuan (mainly formed by Guojun's acquisition of shares in Huaan Fund and the acquisition of Guotai Junan Vietnam), accounting for 1.25% of the net assets due to the merger between the two parties at the end of 9M24, and the goodwill risk is manageable.

Investment analysis opinions: Optimistic about the brokerage sector and grasp the main investment line of mergers, acquisitions and restructuring

It is recommended to focus on brokerage firms with the same actual controller and brokerage firms expecting market-based mergers and acquisitions (increasing asset size and broadening business layout), and recommend Guotai Junan (601211.SH), Zheshang Securities (601878.SH), and League of Nations Securities (01465,601456.SH). Furthermore, it is recommended to focus on Oriental Wealth (300059.SZ), which is benefiting from a recovery in trading activity.

Risk warning: There is uncertainty about whether the Guojun Haitong transaction can be completed (insider trading, stock price abnormalities, etc. may cause the transaction to be suspended, suspended, or cancelled); the transaction still requires approval, approval, registration or consent from the China Securities Regulatory Commission and other competent supervisory authorities before it can be officially implemented; there is still uncertainty about whether it can be implemented; risks related to acquisition requests and cash options; risk of creditors requiring early settlement of debts; risk of asset delivery.