Securities brokerage horizontal integration is on the rise again: Western Securities may be planning to acquire Guorong Securities

In the industry downturn, the integration actions among securities firms are quietly increasing.

TradeWind01, a source close to Western Securities, revealed that Western Securities is making more preparations for the acquisition of Guorong Securities.

The source pointed out that Western Securities initiated due diligence on Guorong Securities as early as April 2024, and the related research work has been ongoing for some time.

However, for the complex equity structure of Guorong Securities at present, Western Securities' current planning may also face many challenges.

Due to Guorong Securities' previous failure to IPO as planned, it triggered the listing put-back repurchase obligation of its controlling shareholder, Beijing Chang'an Investment Group Co., Ltd. (referred to as "Chang'an Investment").

Unable to pay the put-back debt, Chang'an Investment is currently facing lawsuits from some small and medium shareholders for recovery. Its equity in licensed institutions such as Guorong Securities, Shouchuang Futures, and Guorong Fund has also been frozen by judicial authorities.

Facing a more complex equity structure and shareholder relationships, the success of Western Securities' current plan may still have many uncertainties.

Guorong's "New Buyer"

Chang'an Investment has been trying to transfer the equity and even control of Guorong Securities to relieve its own debt pressure, which has long been an open secret in the market.

As early as April 2021, Chang'an Investment reached an intention with Qingdao Guoxin Development (Group) Co., Ltd. (referred to as "Qingdao Guoxin") under Qingdao State-owned Assets, to acquire the controlling rights of Guorong Securities for a total price of 6.842 billion yuan.

However, the high pricing of the acquisition, reaching 6.15 yuan/share, with a P/B ratio valuation of 2.68 times, led to the failure of the transaction to obtain approval from higher-level state-owned assets and ultimately fell through.

Now, Western Securities is becoming a potential buyer of Guorong Securities.

As a mid-sized institution in the industry, Western Securities has shown rapid growth in the past decade. As of the end of the first quarter of 2024, Western Securities' net assets were 28.326 billion yuan, total assets reached 98.533 billion yuan, which is 8.5 times that of the same period ten years ago, approaching the "one step away" from a trillion yuan in assets.

Compared with the data from Wind at the end of 2023, Western Securities ranked 27th in net assets and 30th in total assets in the industry.

In contrast, the target of the acquisition, Guorong Securities, has assets less than one-fifth of Western Securities.

As of the end of 2023, Guorong Securities had net assets of 4.216 billion yuan and total assets of 17.675 billion yuan, ranking 87th and 77th in the industry, respectively.

Based on the above data assumptions, if Western Securities completes this acquisition, its net assets are expected to exceed 30 billion yuan, and total assets are expected to approach 120 billion yuan, a scale comparable to Guojin Securities at the same time.

In the challenging year of 2023 for the industry, Western Securities defied the trend and showed a significant growth in performance - with operating income and net profit attributable to the parent company reaching 6.894 billion yuan and 1.166 billion yuan, respectively, representing a year-on-year growth of 29.87% and 170.76%. These growth rates ranked 9th and 4th among 50 listed securities firms In the first quarter of 2024, as market volatility risks intensified, Western Securities saw its operating income and net profit attributable to shareholders decrease by 12.01% and 45.24% to 1.595 billion yuan and 196 million yuan, respectively.

In the industry's view, carrying out acquisitions and integrations against the trend during the industry downturn is "the right time."

"During the downturn of the securities industry, it is suitable to promote integration and restructuring. In the short term, there will be more acquisition and integration opportunities. From a long-term perspective, it can also increase industry concentration and efficiency, which is also encouraged by regulators," said a non-bank financial analyst at a brokerage firm in Beijing.

For Western Securities, integrating industry resources through mergers and acquisitions may be its strategy. In its 2023 annual report, it repeatedly emphasized the trend of industry consolidation and mergers.

"The pressure and difficulty for small and medium-sized securities firms to overtake are increasing. The horizontal integration and mergers of securities companies have become a strategic trend in building strong financial institutions," Western Securities pointed out. "Accelerating the integration and mergers of existing resources, cultivating new competitive advantages, enhancing service efficiency for modern industrial systems based on intensive capital, etc., have become important propositions for domestic securities companies to move towards strong financial institutions in the next stage."

However, regarding the planned acquisition of Guorong Securities, relevant sources told Wall Street Horizon · TradeWind (ID: TradeWind01) that all matters should be subject to official announcements.

Challenges Remain

For Western Securities, although Guorong Securities is relatively small in scale, the final realization of this acquisition is not simple.

One major difficulty lies in the fact that the equity held by the controlling shareholder of Guorong Securities is currently frozen.

Tianyancha data shows that the equity held by Changan Investment in Guorong Securities and indirectly held in Guorong Fund, Guorong Huitong Capital Investment Co., Ltd., and other institutions is still under judicial freeze.

The reason for this equity status is precisely due to Changan Investment's previous failure in the bet with the minority shareholders of Guorong Securities.

In 2016, under the leadership of Changan Investment, Guorong Securities issued a total of 326 million shares to Hangzhou Purunxing Rong Equity Investment Partnership Enterprise (Limited Partnership) (referred to as "Hangzhou Purun"), Tianjin Jirui Enterprise Management Consulting Partnership Enterprise, Hengqin Xinhetai Dao Investment Management Center, Beijing Yonyou Technology Co., Ltd., and Ningxia Yuangao Industrial Group Co., Ltd. at a price of 4.98 yuan per share, with a total capital increase of 1.623 billion yuan.

As of the end of 2015, Guorong Securities' net asset value per share was only 1.43 yuan, which means that the price-to-book ratio valuation of the above capital increase was as high as 3.48 times, while the CSI Securities Company Index at the same period was only around 2 times.

Behind the high premium subscription is the implicit bet arrangement between the new shareholders and Changan Investment - according to the agreement, if Guorong Securities fails to go public, Changan Investment will repurchase the shares at the agreed interest rate.

However, in the following years, Guorong Securities not only failed to meet the listing requirements but also once exposed its own financial problems.

With the IPO hopes dim, it triggered Changan Investment's debt of over 2 billion yuan for the repurchase agreement At the end of 2023, Hangzhou Purun won the civil arbitration compensation lawsuit filed against Guorong Securities for the IPO gambling compensation, further enhancing the urgency for Chang'an Investment to transfer Guorong Securities to pay the repurchase funds.

"Besides securities, Chang'an Investment's other main business is real estate, which is mostly located in 5th and 6th tier cities, with almost no substantial operating cash flow," a source close to Chang'an Investment revealed. "The direct purpose of 'selling Guorong' is to alleviate the debt issues left over from the gambling agreement in previous years."

Chang'an Investment is facing more than just this dilemma at the moment.

In the failed Qingdao Guoxin acquisition of Guorong Securities, Qingdao Guoxin had previously paid a deposit of 400 million yuan to Chang'an Investment, but due to the latter's financial difficulties, the full amount has yet to be repaid.

On June 17th, under Qingdao Guoxin's application for compulsory enforcement, the Qingdao Intermediate People's Court took restrictive consumption measures against Chang'an Investment, its controlling shareholder, and legal representative Hou Shoufa.

In their view, the difficulty of this acquisition case lies in the willingness of Guorong Securities' minority shareholders and the transaction pricing agreed upon by both parties.

"At the time when minority shareholders entered, the valuation was relatively high, so they are likely to demand that Chang'an repurchase at the price plus interest at the time of their investment in Guorong," the aforementioned source close to Chang'an Investment pointed out. "The key is to see how the acquisition price is determined. If the offer from the Western side is too low, it may be difficult for Guorong's minority shareholders to accept it, unless Chang'an Investment finds a way to make up the difference."

According to sources close to the transaction, the agreed valuation for this transaction is approximately 1.5 times PB.

If calculated based on Guorong Securities' net asset value per share of 2.37 yuan at the end of 2023, a 1.5 times PB equivalent transaction price would reach around 3.56 yuan per share, which is still nearly 30% lower than the 4.98 yuan per share that Hangzhou Purun and other Guorong Securities institutional shareholders entered 8 years ago.

However, compared to the current situation in the securities industry, a 1.5 times PB pricing may not be cheap either.

Under the bear market impact since 2021, the valuation of the securities industry has been declining, with the CSI Securities Company Index valuation standing at only 1.16 times as of June 20, 2024.

Industry insiders believe that if the acquisition of Guorong Securities by Western Securities progresses substantially, it will still face certain uncertainties in the future.

"Acquiring a brokerage firm needs to consider the premium for control rights, but even so, this price is not cheap. Moreover, the acquirer is also a brokerage firm, and there is no obvious 'from 0 to 1' effect. Whether this price can gain more shareholders and approval from state-owned departments remains a challenge," the aforementioned non-bank analyst pointed out