Incident Overview

On the evening of August 8, 2024, the company announced a major asset restructuring draft. It plans to issue A-shares to purchase 99.26% of the shares of Minsheng Securities held by 45 entities including the League of Nations Group and Shanghai Fengquanyu Enterprise Management Co., Ltd., and raise no more than 2 billion yuan (including capital) of supporting capital.

The specific content of the draft:

1. Reorganization plan adjustments: Compared with the plan (announced on May 15), there are two minor adjustments:

First, in accordance with the provisions of the “Employee Equity Incentive Plan”, Minsheng Securities repurchased and recovered the relevant shares withdrawn due to employee turnover, retirement, etc., and carried out capital reduction processing; second, Oceanwide Holdings (holding 0.74% of shares) withdrew from the transaction. After the transaction is completed, Guolian Securities will hold 99.26% of Minsheng Securities's shares and can still control the target company. There was no substantive impact on this programme adjustment.

2. Transaction price: Minsheng's valuation is 1.86 times PB; the payment method is to pay for 100% of Minsheng Securities's assessed share value of about 29.89 billion yuan. As of 24Q1, the consolidated net assets of Minsheng Securities were 16.05 billion yuan, and the valuation was 1.86 times PB.

3. Supporting financing: no more than 2 billion yuan, no more than 0.25 billion shares.

Analytical judgment:

1. The valuation of the League of Nations/Minsheng in this transaction was 1.79/1.86 times, respectively, and the Minsheng valuation was slightly higher by 4%

The payment method this time is the payment for additional A shares. Minsheng Securities's 100% equity valuation value is about 29.89 billion yuan. As of 24Q1, the consolidated net assets of Minsheng Securities were 16.05 billion yuan, and the valuation was 1.86 times PB. The price of Guolian Securities was 11.31 yuan (before interest). As of 24Q1, the company's net assets per share were 0.632 billion yuan, which is 1.79 times the corresponding PB. Minsheng Securities' PB valuation was slightly higher by 4%.

Minsheng Securities's current valuation of 1.86 times is slightly lower than the current valuation of 1.98 times the transfer of Minsheng Securities to the largest shareholder transferred by the League of Nations Group in 2023.

2. After the transaction was completed, the League of Nations Group remains the actual controller

After the transaction was completed, the League of Nations Group and co-actors held 48.6% of the shares before the merger (not considering supporting financing), and 39.99% after the merger, still maintained the status of actual controllers.

3. After the transaction is completed, the company's size, capital strength, regional layout, and brokerage and investment banks are expected to increase significantly

After the transaction is completed, the scale of people's livelihood and capital strength of the League of Nations increased dramatically, and the industry ranking is expected to reach the top 25 after the merger; in terms of regional layout, the merger will complement the League's layout in Henan; in terms of business, the investment banking business is expected to be greatly improved.

4. A sharp increase in net assets per share after the transaction was completed corresponds to a decline in PB, but at the same time, a significant increase in goodwill

The net assets of Guolian Securities were 6.32 yuan (24Q1) per share before the transaction. After completion, the net assets per share reached 8.66 yuan (47.363 billion yuan/ (28.32+26.40 billion) billion shares), an increase of 37%. The corresponding closing price of 9.83 yuan/share on August 8 decreased the corresponding PB valuation from 1.55 times to 1.14 times.

However, at the same time, according to the “Examination Preparation and Review Report” issued by Shinnaga Chung, the goodwill amount will reach 14.65 billion yuan after completion, accounting for 30.93% of net assets (1.14 billion yuan before completion, accounting for 6.38% of net assets). After the transaction is completed, attention must be paid to subsequent goodwill processing.

5. Supporting financing: If the financing amount is 2 billion yuan and 0.25 billion shares are issued, the corresponding share price is 8 yuan/share, and the corresponding PB is 1.29 times (compared to 24Q1 net assets, minus dividends). Compared with the closing price of 9.83 yuan/share on August 8, the discount is 19%. In terms of the use of capital, the investment in wealth management and information technology is not more than 1 billion yuan each. The company is currently in a stage of rapid growth. Supporting financing will help advance the company's wealth management, information technology and other businesses, as well as epitaxial expansion and integration, and help the company to further develop.

Investment advice

This merger and acquisition will significantly enhance the company's capital strength and company size, and is expected to achieve significant increases in regional layout and brokerage investment banks. We are optimistic about the company's connotation and epitaxial collaborative development. The transaction level is concerned about the sharp decline in net assets per share due to the merger transaction, but at the same time, it is necessary to pay attention to the subsequent disposal of huge amounts of goodwill. Without considering mergers and acquisitions transactions and subsequent financing, we maintained our previous profit forecast of 3.694/4.27/5.287 billion yuan for 2024-2026 and EPS of 0.28/0.34/0.41 yuan, corresponding to the closing price of 9.83 yuan/share on August 8, 2024. PB was 1.54/1.49/1.47 times, respectively, maintaining the company's “gain” rating.

Risk warning

The progress of the restructuring fell short of expectations; the equity and bond market fluctuated sharply and the income from proprietary investment declined; market transactions shrank; management rates were drastically raised due to competition for talent in the industry; in November '20, the company was issued a warning letter by the Securities Regulatory Commission due to problems in major asset restructuring.