CMS: Reviewing history, what potential broker mergers are there?

Each round of mergers and acquisitions in the securities industry is basically aligned with the capital market support cycle; each round of capital market policy issuance aims to address the structural contradictions encountered in the development of the securities industry during the "old period" and to adapt to the new demands of the securities industry in the "new period." Under the catalysis of policy dividends, favorable reforms in the securities industry, and the sentiment driving mergers and acquisitions among brokerages, it is highly probable that brokerages will rebound and the market will enter a new round of major upward trends.

Core Viewpoints

Looking Back at History. From the "Six Suggestions" in the 1990s to invigorate the market, separate operations, and mitigate mixed operations risks, to the release of the first version of the "National Nine Articles" in 2004, which opened the curtain on "comprehensive governance" after industry violations led to crises, to the "One Participation and One Control" policy in 2008 to control intra-industry competition and reshape the industry structure, and then to the second version of the "National Nine Articles" in 2014, where innovation became the keyword for industry development, brokerages began to "take what they need," sparking a wave of market-oriented mergers and acquisitions. Now, under the goal of becoming a financial powerhouse, the third version of the "National Nine Articles" has been released, with "functional" roles being prioritized, and the industry once again stands at the starting point of a new round of mergers and acquisitions. It can be observed that each round of mergers and acquisitions in the securities industry is closely aligned with the capital market support cycle; each round of capital market policy issuance aims to solve the structural contradictions encountered in the development of the securities industry during the "old period" and to adapt to the new demands of the securities industry in the "new period."

Impact of Mergers and Acquisitions in the Securities Industry. In terms of industry structure, as the proportion of "market-oriented" motives in mergers and acquisitions increases, the industry is gradually moving from "a hundred flowers blooming" to "strengthening the leaders" and "differentiated development in the middle." In terms of business development, the beginning is often accompanied by the accumulation of business risks and the industry falling into operational difficulties, followed by clear regulatory business norms, entering a painful period of rectification, and the industry structure entering a reshuffling phase. Later, innovative businesses are nurtured in a soil of compliance and integrity. This upward spiral process is vividly reflected in the development of the margin arrangement system. Taking CITIC Securities as an example, during the bear market, it expanded low-cost mergers with Jintong, Wantong, and Guangzhou Securities, building a strong brokerage business network; during the global financial crisis, it acquired Lyon Securities and laid out overseas businesses. Multiple rounds of mergers have strengthened its business and efficiently integrated and developed, making CITIC Securities a king in the securities industry that has traversed cycles.

"Guotai Junan + Haitong" from a Micro Perspective. Regarding the necessity and feasibility of mergers and acquisitions, "cultivating first-class investment banks and investment institutions" and promoting the construction of an international financial center towards a higher level have become regulatory supports for Guotai Junan and Haitong to work together, while the weakening of industry prosperity reduces external expansion costs, which is a favorable integration for both being state-owned enterprises in Shanghai. Regarding the focus of the merger, the transaction plan has been announced, but there are still difficulties in personnel integration, license allocation, asset risk disposal, and the merger of Hong Kong subsidiaries, which not only involves the business quality of the new entity after the merger but will also provide samples and examples for subsequent mergers and acquisitions of leading brokerages. Regarding the financial situation of the new entity, the balance sheet is stronger and more balanced, continuing Guotai Junan's prudent and stable risk control philosophy, and the asset allocation space of the new entity is expected to be fully opened; in terms of individual businesses, brokerage, investment banking, and credit are expected to surpass CITIC, while asset management/proprietary trading rankings are expected to rise significantly and challenge CITIC Market Review. From the perspective of market performance, each wave of brokerage mergers and acquisitions has been accompanied by market rebounds/increases. In terms of style performance, small-cap stocks have significantly outperformed one month and three months after each round of mergers and acquisitions begins. From an industry performance standpoint, the non-bank financial sector has not always been dominant at the beginning of each merger and acquisition wave, only ranking among the top in the two waves of mergers and acquisitions in 2009 and 2014, with the highest increase in 2009. Taking the merger and acquisition of ShenYin & WanGuo and HongYuan Securities as an example, we find that at three key time points—after the announcement of the restructuring matters, when the trading party is about to delist, and when the newly established entity is listed—the trading party will achieve significant excess returns; during the trading party's suspension period, the non-bank financial sector has seen substantial increases.

Merger and Acquisition Outlook. Completed or ongoing brokerage merger cases show certain commonalities, namely that both parties to the transaction often belong to the same actual controller; state-owned capital divesting brokerage shares is often in response to regulatory requirements, concentrating resources on core businesses while divesting non-core holdings, whereas private enterprises divesting brokerage shares do so to alleviate operational pressure.

Explore potential merger and acquisition stocks around the following ideas: 1) Two or more brokerages under the same actual controller: the Huijin system's China International Capital Corporation and China Galaxy Securities, the Shanghai state-owned system's Dongfang Securities and Shanghai Securities, the Fujian system's Industrial Securities and Huafu Securities, and the Anhui system's Guoyuan Securities and Huaan Securities. 2) State-owned capital divesting non-core holdings, if the divested projects have relative advantages in asset management and investment banking, could significantly increase the probability of being acquired: Changcheng Securities, Kaiyuan Securities, etc.

I. Overview

Looking back at the turbulent development of the capital market over the past thirty years, the four rounds of reform in the securities industry and the five-year support cycle of the capital market are remarkably aligned. This outcome is not a surprising coincidence but rather an inevitable result. From the "six proposals" in the 1990s to invigorate the market, to the separation of operations and the resolution of mixed business risks, to the introduction of the first version of the "National Nine Articles" in 2004, which marked the beginning of "comprehensive governance" following industry violations, to the "one participation, one control" policy in 2008 to control competition among peers and reshape the industry landscape, and finally to the second version of the "National Nine Articles" in 2014, where innovation became the keyword for industry development, brokerages have engaged in market-oriented mergers and acquisitions to "each take what they need." It is not difficult to find that each round of capital market policy issuance aims to address the structural contradictions encountered in the development of the securities industry during the "old era" and to adapt to the new demands of the securities industry in the "new era." In other words, the history of mergers and acquisitions in the securities industry is not only the history of reform in China's capital market but also the history of the spiral advancement of the securities industry. Under the catalysis of policy dividends, the favorable reforms in the securities industry, and the sentiment driving brokerage mergers and acquisitions, the rebound of brokerages and the initiation of a new round of major market uptrends are highly probable events.

Based on the current situation, the launch of the third version of the "Nine National Policies" and the statement from the 926 Politburo meeting to "boost the capital market" clearly indicate that a new round of capital market support cycle has arrived. Under the goal of becoming a financial powerhouse, the "functional" role is prioritized, the requirements for "first-class investment banks and investment institutions" are clarified, and mergers and acquisitions are welcomed with clear regulatory support, placing the securities industry once again at the starting point of the merger and acquisition cycle. From Zhejiang Merchants Securities' acquisition of Guodu Securities and Guolian Securities' acquisition of Minsheng Securities, with small and medium-sized brokerages taking the lead, to Guoxin Securities' acquisition of Wanhua Securities and Guotai Junan's absorption and merger with Haitong Securities, leading brokerages have joined in to "add fuel to the fire" of this round of merger wave, and the supply-side reform of brokerages has already reached its climax.

Looking back to understand the future, sorting out the regulatory ideas and market-oriented rules behind the past four rounds of brokerage mergers and acquisitions is a sufficient condition for better understanding the progress of this round of mergers and acquisitions; analyzing the impact of mergers and acquisitions from three dimensions: industry pattern, business development, and company growth will provide guidance and ideas for observing and analyzing the potential impacts of this round of mergers and acquisitions. Additionally, this article uses "Guotai Junan + Haitong" as a sample to provide insights into the possibility and inevitability of mergers and acquisitions, sorting out the integration challenges such as personnel and licenses, and discussing the potential to surpass CITIC based on the financial situation of the new entities. Finally, this article dissects historical merger waves from the perspectives of market performance, style preferences, and industry fluctuations, hoping to provide some reference for the unfolding of this round of merger wave; at the same time, based on the commonalities of existing merger and acquisition cases, this article offers two potential target exploration ideas.

II. The History of Mergers and Acquisitions in the Securities Industry: A History of Capital Market Reform and the Spiral Advancement of the Securities Industry Since 1995, China has experienced four waves of mergers and acquisitions in the brokerage industry: from the "six proposals" in the 1990s to invigorate the market, separate operations, and mitigate mixed operations risks, to the introduction of the first version of the "National Nine Articles" in 2004, which marked the beginning of "comprehensive governance" due to industry violations, followed by the "one participation, one control" policy in 2008 to control intra-industry competition and reshape the industry landscape, and then the release of the second version of the "National Nine Articles" in 2014, where innovation became the keyword for industry development, leading to a wave of market-oriented mergers and acquisitions as brokerages sought their own needs. Now, under the goal of becoming a financial powerhouse, the third version of the "National Nine Articles" has been released, with a focus on "functional" roles, marking the start of a new round of mergers and acquisitions in the industry.

It is not difficult to see that each round of mergers and acquisitions in the securities industry is closely aligned with the capital market support cycle; each round of capital market policy issuance aims to resolve the structural contradictions encountered in the development of the brokerage industry during the "old period" and to adapt to the new demands of the securities industry in the "new period." In other words, the history of mergers and acquisitions in the securities industry is both a history of the reform of China's capital market and a history of the spiral development of the securities industry.

1. 1995-2003: The policy requirements for separated operations and the market demand for risk mitigation initiated the first round of capital market policy support cycle with the "six proposals." On May 16, 1999, the China Securities Regulatory Commission submitted a request to the State Council regarding "several policies to further standardize and promote the development of the securities market." Specifically, the policies included reforming the stock issuance system, gradually resolving the legal financing channels for securities companies, allowing certain qualified securities companies to issue financing bonds, expanding the pilot scale of securities investment funds, invigorating the B-share market, and allowing certain B-share and H-share companies to conduct stock repurchase trials.

Under the policy requirements for separated operations, the separation of business departments triggered mergers and integrations. The securities industry in China was born with the "amniotic fluid" of banks, as most were initially invested in or operated by banks. Due to the lack of professional regulations and mixed operations, some operating institutions did not separate proprietary and agency business accounts, leading to the misappropriation of client assets and even the misappropriation of public funds for stock trading. Amidst the chaos, financial risks continued to accumulate. Against this backdrop, the "Commercial Bank Law" was officially implemented in July 1995, followed by the "Securities Law" in 1999 and the "Trust Law" in 2001, establishing the policy of separated operations, gradually promoting the separation of banking and securities, and the separation of trust and securities. Taking advantage of the opportunity of the decoupling of banking and securities, some brokerages expanded their business scope and accumulated client resources through mergers and acquisitions of separated business departments, while some separated brokerages integrated into specialized brokerages. The securities industry welcomed its first wave of mergers and acquisitions In addition, during this phase, the "327 National Bond Futures Incident" caused WanGuo Securities to incur losses of 5.6 billion and nearly go bankrupt, leading to its takeover by ShenYin Securities. Subsequently, under multiple regulatory coordinations, the two jointly established ShenYin WanGuo Securities. The leadership of JunAn Securities faced a major upheaval due to allegations of "embezzling state assets," prompting Guotai to take over and establish Guotai JunAn. Thus, the once prominent WanGuo Securities and JunAn Securities faded into obscurity.

1. 2004-2007: The first version of the "Nine National Policies" was introduced, and the industry's illegal operations triggered a comprehensive governance initiative.

The first version of the "Nine National Policies" was introduced, marking the beginning of the first round of capital market reforms, with development and innovation as key themes. In 2004, the "Several Opinions on Promoting the Reform, Opening Up, and Stable Development of the Capital Market" (later referred to as the first version of the "Nine National Policies") was released, significantly enhancing the status of the securities industry. The first version of the "Nine National Policies" proposed that securities companies should be built into competitive modern financial enterprises, standardizing their operations, actively broadening their financing channels, and encouraging financial innovation. In the same year, the "Notice on Promoting Innovation Activities in the Securities Industry" and the "Notice on Issues Related to Securities Companies Conducting Collective Asset Management Business" were successively issued, marking the starting point of the business innovation cycle for brokerages.

Structural adjustments in the market triggered risks of "illegal operations," leading to severe industry losses. Between 2001 and 2004, macro policies tightened, consuming liquidity and causing market fluctuations. A lackluster trading environment and weak profitability directly impacted the nascent securities industry, exposing long-term risks of illegal operations such as misappropriation of client margin, misappropriation of client bonds, concentrated holdings, illegal guaranteed wealth management, and off-balance-sheet operations. Some brokerages faced a run due to the misappropriation of client assets and inability to meet clients' principal withdrawal demands, resulting in a broken internal funding chain and a credit crisis. In July 2002, a relevant official from the China Securities Regulatory Commission publicly stated that as of May 2002, the average non-performing asset ratio of 98 securities companies nationwide was 50%, with total non-performing assets reaching 46 billion, and 10 companies having non-performing assets exceeding 1 billion. Additionally, between 2003 and 2006, a total of 19 brokerages were ordered to close by the CSRC, with 17 securities companies ordered to close in 2005 alone.

To maintain the stability of the capital market, the industry initiated a comprehensive governance initiative, ushering in a second wave of mergers and acquisitions. Starting in August 2004, the CSRC, in conjunction with relevant departments, judicial authorities, and local governments, adopted a comprehensive approach combining prevention and treatment, focusing on prevention, addressing both symptoms and root causes, and forming mechanisms to carry out a three-pronged approach of risk disposal, daily supervision, and promoting industry development over a three-year comprehensive governance period for securities companies Within three years, the China Securities Regulatory Commission (CSRC) has taken measures such as custody, takeover, administrative restructuring, revocation or cancellation of business licenses, and orders for closure against several high-risk securities companies that have seriously violated laws and regulations, leading to a wave of risk disposal through mergers and acquisitions in the industry.

Specifically, the current round of mergers and acquisitions is significantly guided by regulatory directions, mainly divided into two routes:

Financial control platforms such as Huijin and Jianyin have stepped in to inject capital into problematic brokerages to resolve risks.

Southern Securities, Huaxia Securities, Southwest Securities, and Tiantong Securities are facing huge losses and even bankruptcy due to issues such as illegal entrusted wealth management and misappropriation of client margin/treasury bonds. Jianyin Investment is resolving risks and stabilizing the financial market through capital injection and restructuring. At the same time, large brokerages such as Guotai Junan, Galaxy Securities, and Shenwan Hongyuan are experiencing liquidity tightness and huge losses due to historical burdens and sluggish market conditions, and Huijin has also provided capital injection support to mitigate risks.

After the regulatory authority appointed brokerages to manage problematic brokerages, the appointed brokerages, driven by their own development needs, acquired the corresponding brokerages to achieve strategic objectives.

Wuhan Securities is severely insolvent due to misappropriation of client margin/treasury bond funds and false capital contributions by original shareholders, and has been assigned by the regulator to be managed by GF Securities; after the issues are cleared, GF Securities acquired all brokerage securities assets of the former for a total price of 25 million yuan, successfully entering the Central China region. Similarly, Haitong Securities managed Xing'an Securities and Gansu Securities, and after acquiring the latter's related assets, it was also for the purpose of expanding its brokerage territory and developing customer resources.

In addition, some quality brokerages seized the opportunity to carry out market-oriented expansion, laying the foundation for future entry into the industry's top tier. CITIC Securities successfully opened up the Shandong and Zhejiang markets and rapidly accumulated customer resources by acquiring the loss-making Wantong Securities and Jintong Securities; Huatai Securities achieved a leap in investment banking strength by acquiring United Securities.


1. 2008-2013: "One Participation, One Control," Reshaping the Landscape

The new round of capital market policy support cycle has provided a favorable environment for securities companies to further grow and strengthen. In 2008, the Central Economic Work Conference raised higher requirements for the capital market to "enhance investor confidence." In the overall requirements for economic work in 2009, it mentioned "promoting strategic adjustments in economic structure," placing greater emphasis on transforming the mode of economic development and adjusting the economic structure, thereby providing broader space for further concentrating quality resources on rising companies through the capital market, transforming and eliminating backward production capacity, and promoting capital formation, aggregation, and circulation. The IPO of new shares was restarted in June 2009, and the Growth Enterprise Market was launched in October.

"One Participation, One Control" initiated the third wave of mergers and acquisitions. After the comprehensive governance phase of the securities industry mergers and reorganizations, it became common for the same shareholder to control multiple securities firms. To avoid potential governance risks such as competition among peers and interest transfer, the State Council issued the "Regulations on the Supervision and Administration of Securities Companies" in April 2008, requiring that "if two or more securities companies are controlled by the same unit or individual, or have a controlling relationship with each other, they shall not operate the same securities business," which is referred to as "One Participation, One Control." Under the new regulations, financial control platforms such as Huijin and Jianyin, as well as quality securities firms like CITIC and GF Securities, began to reorganize the equity of their subsidiary securities firms.

Overall, various parties mainly achieved the "One Participation, One Control" requirement through three methods: transferring equity, mutual absorption and merger of subsidiaries, and converting specialized/regional subsidiaries.

The Jianyin and Huijin systems mainly adopted the method of transferring equity.

To meet the "One Participation, One Control" requirement, Jianyin Investment directly transferred equity to its parent company Huijin, which then uniformly handled the equity issues of the relevant parties. For example, in 2009, the Ministry of Finance officially approved Huijin to accept the equity transfer of five non-listed securities firms under Jianyin Investment. Since then, the equity of Zhongtou Securities, Qilu Securities, UBS Securities, CITIC Jianan, and CICC would all be taken over by Huijin.

However, considering the exceptionally complex situation of Huijin and Jianyin Investment, the China Securities Regulatory Commission set specific regulations for both when establishing the "One Participation, One Control" deadline: during the comprehensive governance period of securities companies, if the restructuring plan of Huijin and its subsidiary Jianyin Investment approved by the State Council has a clear deadline for equity exit, it will continue to be executed according to the restructuring plan; if the restructuring plan does not have a clear exit deadline, the "One Participation, One Control" requirement can be met within five years from the implementation date of the "Regulations on the Supervision and Administration of Securities Companies."

The "Tomorrow System," "Capital Airport System," and "Aviation System" mainly adopted the method of transferring subsidiary equity or mutual absorption and merger among subsidiaries.

For example, the New Era Securities under the "Tomorrow System" absorbed and merged with Shanghai Far East Securities, and Hengtai Securities absorbed and merged with Changcai Securities, while indirectly holding Pacific Securities was transferred to Shandong Jiuyang Group. The Capital Airport intended to facilitate the merger of Jinyuan Securities and Minzu Securities, and the Aviation Group intended to promote the merger of Jiangnan Securities and Aviation Securities, but both attempts failed, resulting in the transfer of Minzu Securities and Aviation Securities, respectively High-quality brokerages are transforming risk brokerages into regional/professional subsidiaries by dividing their business scope by region or retracting the majority of business licenses and divesting certain operations.

For example, CITIC Wanjun and CITIC Jintong have respectively changed to regional subsidiaries CITIC Securities (Shandong) Co., Ltd. and CITIC Securities (Zhejiang) Co., Ltd., with brokerage business areas limited to Shandong/Henan and Zhejiang/Fujian/Jiangxi, while CITIC Securities' brokerage business is prohibited from entering the aforementioned regions to avoid competition between the parent and subsidiary companies. Additionally, in 2011, Huatai Securities and United Securities completed a merger and integration, with Huatai United positioned as a professional investment banking subsidiary, while Huatai's investment banking business was divested to Huatai United, and all other businesses of Huatai United were integrated into the headquarters.

1. 2014-2022: The second version of the "National Nine Articles" opens an innovation cycle, calling for brokerages to "take what they need" under the slogan of "building modern investment banks."

The second version of the "National Nine Articles" initiated a new round of policy support for the capital market. On May 9, 2014, the "State Council's Several Opinions on Further Promoting the Healthy Development of the Capital Market" was released, which is the second version of the "National Nine Articles." This version proposed to "further promote the healthy development of the capital market, improve the multi-level capital market system, and is of great significance for accelerating the improvement of the modern market system, broadening the financing channels for enterprises and residents, optimizing resource allocation, and promoting economic transformation and upgrading." In addition, this version also made requirements for enhancing the competitiveness of the securities industry, especially in terms of innovation capability and internationalization, proposing requirements such as "promoting the innovative development of intermediary institutions" and "promoting the formation of several modern investment banks with international competitiveness, brand influence, and systemic importance."

"One document, one conference," the brokerage industry's innovation embarks on a new journey. On May 15, 2014, the China Securities Regulatory Commission issued "Opinions on Further Promoting the Innovative Development of Securities Operating Institutions," advancing the main tasks and specific measures for the innovative development of securities operating institutions from three aspects: "building modern investment banks," "supporting business product innovation," and "promoting regulatory transformation." The day after the document was issued, the high-profile 2014 Securities Innovation Conference was held, discussing the industry's development plans through six sub-forums on private equity markets, wealth management, internet securities, financing business, investment consulting, and risk management.

From the current revenue structure of brokerages, if the 2012 Securities Innovation Conference was the starting point for the development of capital intermediary business in the brokerage industry, then the 2014 "One document, one conference" is undoubtedly an important turning point for the "heavy assetization" of brokerage businesses: FICC and derivatives businesses are accelerating development, and margin financing and securities lending business is entering an upgrade phase; at the same time, the light asset business model is iterating and upgrading: the internet has become an important entry point for customer flow, asset management products are expanding, the quantitative private equity cooperation chain is lengthening, and cross-border business is developing initially In addition, regulators have further expanded financing channels for brokerages, supporting them in equity and bond financing, and launching pilot programs for brokerage income certificates to meet the growing demand for funds.

In response to the call for "building a modern investment bank," the securities industry is experiencing a fourth wave of mergers and acquisitions. Market-oriented and international expansion have become the keywords and new characteristics of this wave.

Expanding business territory and continuously growing stronger have become common demands among brokerages.

CITIC Securities' acquisition of Guangzhou Securities expands its brokerage business in South China, while Founder Securities' acquisition of Minzu Securities complements its branch locations to increase company scale. Huachuang Securities' acquisition of Pacific Securities deepens the interconnection of the capital market in Southwest China, all driven by the market-oriented choice under the demand for growth. Additionally, Dongfang Caifu's acquisition of Tibet Tongxin Securities explores the internet brokerage model, successfully entering the brokerage industry.

International expansion is on the agenda, with "buy rather than build" becoming the preferred choice.

CITIC Securities' acquisition of Lyon Securities and Kunlun International Finance, Guojin Securities' acquisition of Hong Kong brokerage Yuehai Securities, Dongfang Caifu's acquisition of Baohua Century Securities, and Everbright Securities' acquisition of New World Development Financial Group are all laying out plans for the Hong Kong market and initiating overseas expansion. Meanwhile, Haitong Securities, after acquiring Da Fu Securities to enter the Hong Kong capital market, has again moved to acquire Portugal's Espírito Santo Investment Bank to expand cross-border business cooperation between China and Europe, as well as Latin America.

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1. From 2023 to present: The capital market has entered a stage of high-quality development, and creating high-quality securities firms is its inherent significance.

In the past year, high-level officials have frequently mentioned the capital market, from the Politburo meeting on July 24, 2023, stating "activate the capital market and boost investor confidence," to the Politburo meeting on September 26, 2024, emphasizing "efforts to boost the capital market," as well as the Central Financial Work Conference in 2023 calling for "accelerating the construction of a financial powerhouse" to the capital market welcoming the third version of the "National Nine Articles" on April 12, 2024, clearly stating "strong regulation, risk prevention, and promoting high-quality development" as the main line for the new cycle of the capital market. This indicates that the status of the capital market has risen to its highest historical level, the reform of the capital market has entered a new cycle, and the development of the capital market is moving towards high quality. Creating high-quality securities firms is an inherent significance for the high-quality development of the capital market.

"High-quality development" and playing a "functional" role have placed higher and more demands on the scale of securities firms' funds. Under the regulatory encouragement for capital-saving development of securities firms and support for mergers and acquisitions, the securities industry is ushering in the fifth wave of mergers and acquisitions: leading securities firms aim for "international first-class investment banks," while small and medium-sized institutions seek "differentiated development" as the main line.

3. The impact of mergers and acquisitions in the securities industry: Analysis from three dimensions: industry, business, and company

1. Analysis of the impact from the industry dimension: Moving from "a hundred flowers blooming" to "strengthening the leading firms" and "differentiated development in the middle tier."

(1) 2007-2013: Under the influence of the "one participation, one control" policy and a sluggish external environment, the securities industry was in a dormant period, with the industry development characterized by "a hundred flowers blooming," risk resolution, and the overall stability of the number of securities firms under the "one participation, one control" policy Between 2004 and 2006, due to self-operated positions collapsing, losses from entrusted wealth management, and a funding chain break after clients withdrew principal, many securities firms were administratively taken over and subsequently entered the liquidation and shutdown phase. By 2008, the "One Participation, One Control" policy was introduced, and financial control platforms such as Huijin, Jianyin, and Mingtian gradually met regulatory requirements through mergers and transfers. The number of securities firms decreased, but the overall stability was maintained during the peak period of industry equity integration.

With a sluggish equity market and intensified competition in channel businesses, the securities industry entered a dormant period. During this phase, influenced by the subprime mortgage crisis and a slowdown in economic growth, the annual index line was negative for 4 out of 7 years; during this period, IPOs were temporarily halted, and under regulatory reductions and fierce market competition, channel business rates continued to decline. Under multiple negative impacts, the overall performance of the securities industry declined, with operating income/net profit dropping from 284.7 billion/132.1 billion yuan in 2007 to 159.2 billion/44 billion yuan in 2013, a decrease of 44%/67%. ROE significantly declined from 38% in 2007 to 6% in 2013.

In this round of mergers and acquisitions, the concentration of total assets of securities firms increased, while the concentration of net assets and net capital decreased. This change is more pronounced for CR5. The concentration of operating income and net profit fluctuated significantly, with no obvious upward trend overall. We believe that the industry has entered a dormant period, with most securities firms entering a "bottleneck stage" in search of business breakthroughs. Some firms' business operations were imprudent and non-compliant, leading to a decline in rankings and erosion of market share, which to some extent lowered industry concentration. In other words, during this stage, the mixed influence of multiple risk factors means that the impact of administratively driven mergers and acquisitions on industry concentration may not be primary.

(2) 2014-2022: Policies open the market innovation cycle, with good prosperity, the securities industry develops rapidly, initially presenting a pattern of "strong leaders" and "differential development in the middle"

The innovation cycle begins, and the securities industry develops rapidly. Following the 2012 Securities Firms Innovation Conference, which initiated the transformation of the industry’s business model, the second version of the "National Nine Articles" in 2014 emphasized support for the "innovative development" of the securities industry, undoubtedly giving the industry a "wing" for rapid development. At the same time, benefiting from the rise of public offerings and the growth of private placements, securities firms gradually derived innovative businesses such as direct investment, market making, and over-the-counter derivatives from traditional businesses like brokerage and investment banking, entering a period of rapid development. In addition, in 2019, the China Securities Regulatory Commission issued the "Regulations on the Equity Management of Securities Companies" and its supporting regulations, announcing the resumption of the approval for the establishment of domestic securities companies. Ningbo State-owned Assets successfully took the lead in establishing Yongxing Securities, adding new members to the securities industry. According to data from the Securities Association, the number of securities firms reached 140 in 2022, an increase of 20 from 2014.

Performance steadily grows, overall volatility declines. During this period, although the equity market experienced two corrections in 2015-2016 and 2018, the overall prosperity was not low, and the profit-making effect remained, benefiting most of the securities firms' businesses. The industry’s operating income/net profit grew from 260.3 billion/96.6 billion yuan in 2014 to 395 billion/142.3 billion yuan in 2022, with increases of 52%/47%, respectively. The development of non-directional businesses such as over-the-counter derivatives and low-volatility fixed income investment businesses somewhat mitigated the impact of equity market fluctuations on industry profitability, leading to a decline in overall performance volatility. After 2016, the industry’s ROE stabilized, falling within the range of 6%-7%.

In this round of mergers and acquisitions, the concentration of total assets and net capital of securities firms slightly increased, while the concentration of operating income and net profit fluctuated upward. Compared to CR5, the changes in CR20 were more significant. This may be because, after 2014, the mergers and acquisitions in the securities industry exhibited clear "market-oriented" characteristics, with participants including traditional leaders, future rising stars, and small and medium-sized "catch-up" firms, seeking either business expansion or optimizing resource allocation and adjusting company assets However, regardless of the "original intention," participants have benefited from this round of mergers and acquisitions, such as the traditional leader CITIC Securities acquiring Guangzhou Securities, successfully laying out in the Guangdong-Hong Kong-Macao Greater Bay Area, and further increasing its brokerage market share; the future star East Money acquiring Tibet Tongxin Securities, taking a differentiated path as an internet brokerage, becoming a rising star in the securities industry. After this stage, the industry initially shows a pattern of strengthened head effect and differentiated development of small and medium-sized brokerages.

2. Analysis of impacts from a business dimension: Taking margin arrangements as an example

The development of the securities business is generally similar: it always begins with the accumulation of business risks, the industry falling into operational difficulties, followed by regulatory clarification of business norms, entering a period of rectification pain, and the industry pattern entering a reshuffling stage. Later, innovative businesses are nurtured in the soil of compliance and integrity. This process spirals upward, driving business iterations to better meet investor needs.

Taking margin arrangements as an example:

(1) Strict prohibition of misappropriation of margin is the cornerstone of industry operational credit

In the mid-to-late 1990s, the continuous encroachment of industrial investment returns on client margins and the misappropriation of client margins by trust companies to repay financing became the norm. To prevent and resolve risks, the "Commercial Bank Law," "Securities Law," and "Trust Law" were successively introduced to clarify the separation of banking and securities, and the separation of trust and securities, which triggered the first wave of mergers and acquisitions in the industry. At the same time, the chaos of misappropriating margin was initially rectified.

After entering the new millennium, the equity market was sluggish, and brokerage proprietary positions faced explosive losses, with huge losses in entrusted wealth management. Concurrently, large-scale misappropriation of margin and other client assets for loan pledges, loan repayments, and private investments exposed industry violations, leading clients to rush to withdraw principal, forming a bank run, and many brokerages faced the risk of a broken capital chain, triggering the second wave of mergers and acquisitions in the industry. At that time, the "large-scale misappropriation of margin" had already become a death knell, and at the end of 2004, the "crime of misappropriating client assets" was proposed by the China Securities Regulatory Commission to the National People's Congress.

(2) Transitioning from brokerage custody to bank custody, building a "firewall" for funds

The occurrence of the 2004 securities credit crisis marked the failure of the client margin brokerage custody model. Subsequently, the commercial bank custody model (i.e., third-party custody system) took over. This model follows the principle of "brokerages manage securities, banks manage funds," strictly separating the management of investors' securities accounts and securities margin accounts, enhancing the safety of client funds and marginally improving the credibility of brokerages Facilitating comprehensive supervision is of great significance for enhancing the standardized operation of the market and protecting investors' rights and interests.

On September 26, Tesla announced that it will hold the "WE, ROBOT" launch event on October 10. According to various predictions, this event will focus on Tesla's autonomous ride-hailing vehicle, Cybercab, and the new Gen3 robot is also expected to make its debut at this event. Musk boldly claimed, "This launch event will go down in history."

(3) The emergence of margin money market funds

Margin money market funds have emerged as an irreplaceable product, leveraging their liquidity advantage of T+0 fund withdrawal, successfully connecting fund redemption and stock market investment, and catering to clients' all-time, more flexible wealth management needs. For brokerages, margin money market fund products help bridge the gap between asset management and brokerage services, extending the client service chain, increasing client stickiness, and enhancing the comprehensive competitiveness of brokerages.

1. Analysis of impacts from the company perspective: Taking CITIC Securities as an example, seizing opportunities during a bear market to expand through mergers and acquisitions, becoming the king of the brokerage industry across cycles.

In 2003, Wang Dongming, the "soul figure" of CITIC Securities, formulated the "Big Network Strategy," focusing on increasing business outlets along the southeastern coast. Through strategic low-cost expansion during the bear market, CITIC Securities built a strong business network, laying a solid foundation for its stable position in the capital market and subsequent industry leadership.

(1) From 2004 to 2006, controlling Wantong and Jintong Securities, achieving business network layout in Shandong and Zhejiang

In the early 20th century, the stock market entered an adjustment phase after the "519 market," with market trading sluggish, directly impacting the nascent securities industry. Wantong Securities and Jintong Securities also faced performance losses and urgently needed to attract investment from large brokerages or seek restructuring. The business outlets and rich client resources of Wantong Securities and Jintong Securities in Shandong and Zhejiang provinces were precisely what CITIC Securities valued for its low-cost expansion strategy.

Under the "right time, right place, right people," CITIC Securities successfully took control of Wantong and Jintong Securities, increasing its presence in the Shandong and Zhejiang markets.

For Wantong Securities, in 2003, CITIC Securities held a shareholders' meeting and changed the originally planned fundraising for capital increase to acquiring shares held by the Qingdao Municipal Finance Bureau and others. The following year, CITIC Wantong Securities was officially established in Qingdao. The number of CITIC Securities' branches in Shandong increased from 4 in 2003 to 18.

For Jintong Securities, in December 2005, CITIC Securities acquired all shares of Jintong Securities at zero consideration and paid off 780 million in debts on its behalf. By acquiring Jintong Securities, the largest brokerage in Zhejiang Province at the time, and relying on the economic level and wealth reserves of Zhejiang Province, CITIC Securities' brokerage strength was undoubtedly greatly enhanced.

(2) Acquisition of Lyon Securities at the perfect timing of the 2012 financial crisis, laying out overseas business

To accelerate the layout of overseas business and achieve global asset allocation, CITIC Securities established a strategic partnership with Oddo BHF in 2010. The two parties planned to jointly build a global stock brokerage and derivatives business platform by integrating CITIC International, Oddo BHF's Asia-Pacific subsidiary, and relevant subsidiaries and businesses of Lyon Securities, aiming to create a top-tier investment bank in the Asia-Pacific region and engage in international institutional sales Research and investment banking business. In 2012, CITIC Securities announced that its board of directors approved a proposal for its wholly-owned subsidiary CITIC Securities International to acquire 100% of the shares of Lyon Securities for a total consideration of USD 1.252 billion. Looking at the details publicly, CITIC Securities had been in contact with La Banque Postale for three years, experiencing setbacks such as the European debt crisis and changes in La Banque Postale's senior management. The proposal went through three revisions before the acquisition plan was finally established, which was not easy.

Due to the impact of the financial crisis, Lyon Securities' performance was unsatisfactory, with the company generating revenue of USD 740 million in 2011 and a net loss attributable to shareholders of USD 10 million, giving CITIC Securities a significant advantage in discussions regarding the arrangement of the acquisition process, transaction price, and payment methods. Additionally, the global asset price level had fallen from its peak to a reasonable range, providing CITIC Securities with certain opportunities to negotiate a relatively favorable price.

(3) In 2018, announced the acquisition of Guangzhou Securities, aiming at brokerage layout in the Guangdong-Hong Kong-Macao Greater Bay Area to strengthen regional competitiveness.

In 2018, the stock market began to decline from a high level amid the continuous deepening of financial deleveraging in China and ongoing Sino-U.S. trade frictions. The Shanghai Composite Index fell by 24.6% for the year, second only to the 65.4% decline in 2008. The sluggish market environment severely dragged down the performance of small and medium-sized brokerage firms like Guangzhou Securities. Data showed that in the first 11 months of 2018, Guangzhou Securities achieved operating income of CNY 2.3 billion, with a net loss attributable to shareholders of CNY 184 million.

The development of the story is always remarkably similar. In December of the same year, CITIC Securities took action again, announcing plans to acquire Guangzhou Securities, and in January of the following year, announced that the acquisition price would not exceed CNY 13.46 billion, acquiring 100% of Guangzhou Securities after stripping away 99.03% of Guangzhou Futures and 24.01% of Golden Eagle Fund's equity.

Incorporating Guangzhou Securities under its wing and "buying instead of building" achieved leapfrog development of business in Guangdong for CITIC Securities, which was akin to adding wings to a tiger. Guangzhou Securities has long been rooted in Guangdong, backed by the Guangzhou State-owned Assets Supervision and Administration Commission, possessing a certain level of regional brand recognition, a quality network layout, and rich customer resources. After the transaction is completed, CITIC Securities' business outlets in Guangdong Province (excluding Shenzhen), Guangxi, Hainan, Yunnan, and Guizhou will increase from 21 to 59, expected to enter the first tier of securities brokerage business in Guangdong and strengthen regional competitiveness.

(4) Aircraft carrier-level brokerages have already set sail, leading the market in scale and performance, with advantages expanding.

Aircraft carrier-level brokerages have an asset scale that firmly ranks first in the industry. CITIC Securities is an industry-leading aircraft carrier-level brokerage, with total assets and net assets consistently ranking first in the industry while maintaining a state of continuous expansion. From 2018 to 2023, the company's total assets grew from CNY 653.1 billion to CNY 1.4534 trillion, with a CAGR of 17%, making it the only brokerage in the industry with total assets exceeding one trillion During the same period, net assets increased from 153.1 billion yuan to 268.8 billion yuan, with a CAGR of 12%.

Through bull and bear markets, the company's revenue and net profit maintain industry leadership, with a continuously expanding competitive advantage. The company's performance level has generally shown stable growth, firmly holding the top position in the industry. From 2018 to 2023, operating revenue increased from 37.2 billion yuan to 60.1 billion yuan, with a CAGR of 10%, and net profit attributable to the parent company rose from 9.4 billion yuan to 19.7 billion yuan, with a CAGR of 16%. The growth rate of the company's revenue and net profit exceeds the overall industry level, further expanding its competitive advantage.

Comprehensive leading capabilities, with ROE consistently at the forefront. From 2018 to 2023, the leverage ratio increased from 3.58 times to 4.43 times, and ROE rose from 6.20% to 7.81%. The company operates steadily with high capital utilization efficiency.

Overseas business is gradually rising and may become a new engine for performance growth. CITIC International achieved operating revenue of 976 million USD in 24H1, a year-on-year increase of 22%; net profit was 234 million USD, a year-on-year increase of 68%, showing impressive performance. The sales revenue and scale of overseas wealth management more than doubled year-on-year, with a significant increase in commission contributions from regions outside Hong Kong. In addition, in 24H1, approximately 6.532 billion yuan was invested in CITIC International, highlighting the company's high emphasis on cross-border business and international layout.


IV. Micro Analysis of This Round of Mergers and Acquisitions: Taking Haitong + Guotai Junan as an Example

1. Necessity and Feasibility Analysis

(1) Necessity: Responding to Regulatory Spirit, Building an International First-Class Investment Bank

Responding to regulations and building an international first-class investment bank. From the 2023 Central Financial Work Conference's first mention of "cultivating first-class investment banks and investment institutions," to the China Securities Regulatory Commission's statement of "supporting leading securities firms to optimize and strengthen through business innovation, group operations, mergers and acquisitions," and the release of the "Opinions on Strengthening the Supervision of Securities Companies and Public Funds to Accelerate the Construction of First-Class Investment Banks and Investment Institutions (Trial)," which outlines the roadmap for building first-class investment banks and investment institutions, under the actively promoted regulatory environment, Guotai Junan and Haitong are joining hands to strive towards the goal of "strong financial institutions" and "international first-class investment banks," which will accelerate China's pace in building a "financial powerhouse."

The merger and restructuring of leading securities firms and the consolidation of financial resources will effectively assist in advancing the construction of Shanghai as an international financial center to a higher level. Both the 2023 Central Financial Work Conference and the resolution of the Third Plenary Session of the 20th National Congress of the Communist Party of China in 2024 mentioned accelerating the construction of Shanghai as an international financial center. The merger and restructuring of Guotai Junan and Haitong is conducive to integrating the advantageous resources of Shanghai's state-owned financial assets, creating a first-class investment bank that matches the status of Shanghai as an international financial center, improving the financial institution system and infrastructure system in Shanghai, and further consolidating Shanghai's position as an international financial center.

(2) Feasibility: Weak Industry Prosperity Provides a Good Opportunity for Mergers and Acquisitions, Shared Shanghai State-Owned Assets Facilitate Integration

Weak industry prosperity provides a good opportunity for low-cost expansion. The market performance in the first half of 2024 was generally tepid, with low trading activity and the three major indices experiencing an average decline of 3.45%. As a strong beta sector, the brokerage sector's valuation has dropped to its lowest point in nearly a decade. According to merger rules, when a listed company issues shares to purchase assets, the issuance price must not be lower than 80% of the average price of the 20/60/120 trading days prior to the merger benchmark date. Therefore, during periods of industry downturn, it is also a peak period for mergers and acquisitions. According to the announcement on October 10, Guotai Junan and Haitong's transaction will adopt a share exchange merger, with the A-share exchange price determined based on the average price of the 60 trading days prior to the pricing benchmark date after ex-rights and ex-dividends, without any discount; the corresponding PB calculations show Guotai Junan at 0.83 times and Haitong at 0.69 times, which is within a reasonable range.

Guotai Junan and Haitong both belong to Shanghai state-owned assets, which is beneficial for advancing the transaction and subsequent integration. The main shareholders of Guotai Junan include Shanghai State-owned Assets Management Co., Ltd. and Shanghai International Group, while the main shareholders of Haitong Securities include Shanghai Guosheng and Shanghai Haiyan Both parties are ultimately controlled by Shanghai State-owned Assets, and the differences in corporate culture and values are relatively small, which is conducive to advancing the transaction and subsequent efficient integration. In addition, Guotai Junan and Haitong have a history of mergers and acquisitions: the former was formed through the merger of Guotai Securities and Junan Securities, along with capital increase and expansion, and had previously acquired part of Shanghai Securities' equity; the latter acquired the brokerage business assets of the former Gansu Securities and Xing'an Securities during the period from 2004 to 2006. These experiences in mergers, acquisitions, and integration will aid in the advancement of this transaction and subsequent integration.

1. Focus of the merger and acquisition: transaction plan, personnel integration, business integration

(1) The challenge lies in how to complete the integration of functions and personnel in business departments while ensuring smooth business operations.

The high homogeneity of brokerage business determines that there will be some overlap and redundancy in positions and operations after the merger of leading brokerages. As of October 15, 2024:

In terms of brokerage, "Guotai Junan + Haitong" has 10,574 general securities practitioners and 5,691 investment advisors, exceeding the 9,151 general securities practitioners and 4,326 investment advisors of CITIC Securities.

In terms of research, both Guotai Junan and Haitong rank in the first tier, with "Guotai Junan + Haitong" having 321 analysts, far exceeding CITIC Securities' 230 analysts.

In terms of investment banking, both Guotai Junan and Haitong are top players. Although the latter has faced regulatory corrections due to risk control and compliance issues in recent years, its corporate client base and industry exploration capabilities should not be underestimated, with "Guotai Junan + Haitong" having 790 sponsoring representatives, surpassing CITIC Securities' 621 sponsoring representatives.

In the face of a fiercely competitive capital market, how to integrate personnel from the same business departments while preventing the loss of employees—who are the core assets of the brokerage—to ensure stable market share will be a critical question for the merger and integration process of Guotai Junan and Haitong Securities.

(2) Under the requirement of "one participation, one control, one license," the disposal of four public fund licenses has attracted attention.

Currently, Guotai Junan controls Hu'an Fund (holding 51%) and its wholly-owned subsidiary Guotai Junan Asset Management holds a public fund license; Haitong Securities controls Haifutong Fund (holding 51%) and holds a stake in Fortune Fund (27.775%) In addition, Guojun plans to acquire a 49% stake in Guolianan Fund held by Allianz Group, and this transaction is pending approval from the China Securities Regulatory Commission and relevant authorities.

According to regulatory requirements, the same entity can apply for one public offering license in addition to holding a stake in one fund and controlling another fund, which is referred to as "one stake, one control, one license." Therefore, the subsequent handling of the four public offering licenses by "Guojun + Haitong," the integration between departments, and the future of the equity transaction of Guolianan Fund are all focal points of market attention.

(3) The integration of the Hong Kong subsidiary sets a precedent in the industry and will provide a demonstration case for industry mergers and acquisitions.

"Guojun + Haitong" is the first merger and integration case of A+H listed securities firms in the industry. The integration of multiple departments such as leasing, banking, securities, and asset management in Hong Kong will provide a demonstration case for subsequent integration in the securities industry. In addition, Haitong International has been affected by the explosion of real estate-related Chinese dollar bonds, which may drag down its proprietary and asset management businesses, with the quality of underlying assets remaining unclear. In the first half of 2023, Haitong International made an impairment provision of HKD 440 million, an increase of 81% year-on-year. Therefore, the disposal of risk assets after the merger will also be a focal point.

1. Business and Financial Outlook: The new entity's capital strength and segment businesses are expected to challenge CITIC.

(1) A stronger and more balanced balance sheet enhances capital allocation space.

The new entity's balance sheet is stronger and more balanced. After the merger, the total assets/net capital of the new entity will reach 1,680 billion/173.4 billion yuan, ranking first in the industry. The potential capital raising of 10 billion will further enhance capital strength. The proportions of financial assets, credit assets, customer assets, and other assets in the new entity are 44%, 18%, 19%, and 19%, respectively. Relying on a stronger balance sheet and a more balanced asset structure, the new entity is expected to better enhance its proactive allocation capability and space, as well as its risk-bearing capacity, with an overall development level expected to rise further.

In addition, the new entity will adhere to Guojun's prudent and stable risk control philosophy, prioritize benefiting from regulatory dividends, and further improve operational efficiency. Guotai Junan is the only brokerage in the industry to have received the highest regulatory rating of A Class AA for 17 consecutive years, consistently adhering to a prudent compliance and risk control philosophy. After the merger, the new entity is expected to continue a more robust compliance culture and establish a more complete compliance and risk control mechanism, prioritizing benefits from the optimization of risk control indicators, further opening up leverage space, and improving capital utilization efficiency.

(2) Segment businesses are expected to challenge CITIC Securities.

Overall, the new entity's operating income will remain second in the industry; brokerage/investment banking/credit income will reach 10.6 billion/7.1 billion/6.9 billion yuan, ranking first in the industry; asset management/proprietary income will reach 6 billion/9.6 billion yuan, with industry rankings rising to third/fourth levels, respectively

Specifically looking at the scale of various businesses:

Brokerage Business: Customer Reach and Institutional Service Capability Take a Step Up

The ability to reach online and offline customers has improved, with customer scale leading the industry. Online, in 2023, Guotai Junan's "Junhong APP" had an average monthly active user count of 7.96 million, while Haitong's "e Haitong Finance" had an average monthly active user count of 5.82 million; driven by technology, the digital transformation of the new entity is expected to continue deepening, with the boundaries of online customer service constantly expanding, and the challenges of managing long-tail customers expected to be resolved. Offline, in 2023, Guotai Junan has 37 branches and 344 securities business departments in China, while Haitong has 29 branches and 307 securities business departments; additionally, the number of outlets in provinces such as Guangdong, Shanghai, Hunan, Hubei, Anhui, and Heilongjiang shows significant differences and strong complementarity; the new entity is expected to optimize regional layout and expand the customer base. After the merger, the new entity's retail customer scale will reach 35.93 million, with a market share of 8.09% in stock funds, surpassing its peers.

The coverage of institutional clients has expanded, and scale effects have strengthened, which is expected to build a business moat. After the merger, the new entity is expected to leverage licensing advantages and consolidate customer resources, relying on comprehensive services to create a business ecosystem, extend the institutional business chain, enrich the variety of services, enhance service value, further increase customer stickiness, achieve stable operations, and build a business moat. Ideally, after the merger, the new entity's commission income market share will reach 7.09%, ranking first in the industry, with the scale of outsourced custody reaching 61 trillion.

Investment Banking Business: Strong Alliance, Creating First-Class Market Leadership

Strong alliances are expected to further elevate market share. Before the merger, Guotai Junan and Haitong were both in the first tier of investment banking, with customer bases, project excavation capabilities, and industry service capabilities far ahead; after the merger, the new entity's market share for IPOs, refinancing, and bond underwriting will reach 21.8%, 7.8%, and 11.4% respectively, with industry rankings rising to first/fifth/second, and the industry’s advantageous position is expected to be further consolidated and enhanced.

With multiple effects overlapping, creating first-class market leadership. Guotai Junan and Haitong have deeply engaged in industries related to new productive forces such as integrated circuits, biomedicine, and technology hardware and software; after the merger, the new entity is expected to consolidate its advantages in the technology innovation industry through the Matthew effect The corporate client base is large, and under the synergy effect, the new investment banking entity's corporate client scale has reached 26,000. Opportunities for mergers and acquisitions, financial advisory, and other business prospects are expected to increase, and the ability to facilitate transactions is likely to rise significantly. Additionally, under the "investment banking - investment - research" linkage effect, the new entity's project value discovery capability is expected to improve significantly, and its market-leading advantage is likely to expand further.

Asset management business: Complementary advantages, product service capabilities will achieve breakthroughs

Public fund business advantages are complementary. Haitong's HaiFuTong Fund has a "full license" for domestic pensions and leads the industry in bond ETF scale; FuGuo Fund is a well-established player with comprehensive balance and outstanding competitive advantages across various business lines. Guotai Junan's HuaAn Fund leads the industry in active equity product performance and has rapidly developed gold ETFs; its asset management subsidiary is one of the few brokerages with public fund licenses, outperforming its peers. The four entities have complementary characteristics, a large customer network, and outstanding research capabilities. Although integration is inevitable to meet the "one participation, one control, one license" regulatory requirements, the probability of the new entity's product service capabilities "fading" after integration is low.

Proprietary business: Expanding proprietary trading, customer demand business continues to strengthen

Proprietary trading is expanding. After the merger, the new entity's trading financial assets will reach 593.8 billion yuan, ranking second; total proprietary assets will reach 781.6 billion yuan, ranking first in the industry. After the merger, the new entity's derivative financial assets will reach 12 billion yuan, firmly ranking among the top five in the industry.

The qualifications and capabilities for trading investment are complementary. Haitong leads the industry in fund market-making, while Guotai Junan has qualifications for market-making in the Sci-Tech Innovation Board/Northern Exchange/government bond futures, foreign exchange settlement and sales, and carbon emission trading. After the merger, the new entity's resource endowments will complement each other, significantly enhancing comprehensive service capabilities. With outstanding research capabilities and a growing proprietary trading portfolio, the new entity is expected to create a comprehensive business system for product design, sales trading, and derivative investment services for retail, institutional, and corporate clients, thereby expanding customer demand business.

![](https://mmbiz-qpic.wallstcn.com/mmbiz_png/FY9uFxQjWMRfPHQ5icADbVQOp5R2AGcQULm67aeSacDaeGIkvYOqKDDW5Mre8giaJNvDYiaeKdMTfG7JQWjXFzdWw/640? Credit Business: Leading Market Share Advantage Continues to Expand

The leading market share advantage in the credit business is expected to continue to expand. After the merger, the new entity's margin financing and securities lending balance will reach 154.5 billion yuan and 52.7 billion yuan, respectively, with market shares of 9.36% and 25.91%, and the industry ranking is expected to rise to first place.

V. Market Review and M&A Outlook

1. Market Review

Historically, after broker mergers and reorganizations, the market has a high probability of rising/rebounding. In terms of style preference, small-cap stocks are likely to outperform in the future. From a timing perspective, after the announcement of the reorganization matters and resumption of trading, when the trading party is about to delist, and when the newly established entity goes public, the trading party will achieve significant excess returns; during the trading party's suspension, the non-bank financial sector has seen a large increase.

(1) Market Performance

From the market performance perspective, each wave of broker mergers has been accompanied by market rebounds/rises. As mentioned earlier, the initiation of broker merger waves is closely related to the capital market policy support cycle, from the "Six Suggestions" in 1999, to the "National Nine Articles" in 2004, to the Central Economic Work Conference at the end of 2008, and the new "National Nine Articles" and "Opinions on Further Promoting the Innovative Development of Securities Operating Institutions" in 2014, as well as the Central Economic Work Conference at the end of 2018 affirming the role of the capital market in driving the overall economy. These supportive policies have created favorable conditions for the rebound/rise of the capital market and the development of the securities industry. Coupled with the catalysis of regulatory policies in the securities industry, such as the "Securities Law" implemented in 1999, the "Comprehensive Governance" in 2005, the "One Participation and One Control" in 2008, and the encouragement to create large-scale brokers in 2019, these regulatory policies have either created low-cost expansion opportunities for securities firms or encouraged them to further supplement capital and enhance capital strength. Riding on the policy tailwind, many securities firms choose to start mergers and reorganizations around the capital market policy support cycle, either to grow stronger or to implement differentiated development. Therefore, under the combined effect of multiple favorable factors, the market is likely to rebound/rise before and after the wave of broker mergers and reorganizations.

(2) Style Preference

From the perspective of style preference, there was no obvious risk appetite at the beginning of each wave of mergers and acquisitions. One month and three months after the wave began, the small-cap style clearly dominated.

(3) Industry Performance

In terms of industry performance, the non-bank financial sector did not dominate at the beginning of every wave of mergers and acquisitions, only ranking among the top in the two waves of mergers and acquisitions in 2009 and 2014, with the highest increase in 2009. After the market has developed for a period of time, the leading industries are more closely related to the main line of the market at that time.

(4) Individual Stock Performance

In terms of individual stock performance, stocks that announce major asset restructuring or mergers and acquisitions and resume trading achieve relatively high excess returns three months later.

(5) Progress of Mergers and Acquisitions and Price Fluctuations of Parties Involved: Taking the Merger of ShenYin & Wanguo and Hongyuan Securities as an Example

Taking the merger and restructuring of ShenYin & Wanguo and Hongyuan Securities as an example, we found that after the announcement of restructuring matters and resumption of trading, the parties involved would achieve significant excess returns at three key time points: when the parties are about to delist, and when the newly established entity is listed; during the suspension period of the parties, the non-bank financial sector experienced significant increases. Disclosure of merger and restructuring to the market - On October 30, 2023, Hongyuan Securities announced that it intended to disclose major matters, and the company was suspended. On that day, the non-bank sector surged, with an increase of 1.2%, not achieving excess returns compared to the Wind All A index;

Resumption of trading by the parties involved - On July 25, 2014, the restructuring plan was announced, and on the 28th, Hongyuan Securities resumed trading. On that day, Hongyuan rose by about 10%, achieving excess returns of about 6% compared to the sector, while the non-bank sector rose by 4%, achieving excess returns of 2% compared to the Wind All A index After that, Hongyuan Securities rose for 9 consecutive days, with a cumulative increase of 58%; the duration of the continuous rise in the non-bank sector was shorter than that of the company, lasting 4 days, with a cumulative increase of 5.83%.

It is worth noting that in the following period, Hongyuan Securities showed relatively volatile performance until about half a month before the review, when it began to rise again.

The restructuring plan began review — On October 29, 2014, the China Securities Regulatory Commission (CSRC) notified that it would review the restructuring matters in the near future. On that day, Hongyuan rebounded slightly by 4%, driving the non-bank sector up by about 3%. Subsequently, Hongyuan was suspended from trading, and the non-bank sector continued to rise. By the time Hongyuan Securities resumed trading, it had accumulated an increase of about 11%, achieving an excess return of about 9% compared to the Wind All A index.

The restructuring plan was approved, leading to delisting — On November 4, the CSRC approved the restructuring matters; on the 5th, Hongyuan Securities resumed trading. On the day of resumption, Hongyuan rose by 5.72%, driving the sector up by 1%. Subsequently, until the last trading day before delisting, Hongyuan Securities continued to rise, with a cumulative increase of 116%, driving the non-bank financial sector up by 73%, achieving an excess return of 54% compared to the Wind All A index. Among them, in terms of single-day performance, the highest increase occurred in the last 5 trading days before delisting, with a cumulative increase of about 10% over 5 consecutive trading days.

New entity listed — On January 26, 2015, the merged new entity — Shenwan Hongyuan was listed. On that day, Shenwan Hongyuan rose by 304%, and based on the pre-merger ratio, the shares held in Hongyuan Securities rose by 32%.

1. M&A Outlook: Focus on integration opportunities for brokerage stocks under the same actual controller and the possibility of mergers and acquisitions of quality non-main business equity projects by state-owned assets.

From the CSRC's statement, future brokerage mergers and acquisitions may focus on the following two main lines: 1) Leading brokerages "enhancing and strengthening through business innovation, group operations, mergers and acquisitions, etc., to create first-class investment banks, playing an important role in serving the real economy and maintaining financial stability." 2) Small and medium-sized brokerages "refining and specializing based on shareholder backgrounds, regional advantages, and other resource endowments and professional capabilities to achieve differentiated development." Completed or ongoing merger and acquisition cases in the securities industry show certain commonalities in the equity structure of both parties and the reasons for equity transfer. 1) Both parties to the transaction often belong to the same actual controller, a characteristic that is particularly evident in the mergers and acquisitions of leading securities firms. For example, the "Shenwan Hongyuan + Hongyuan Securities" and "CICC + CITIC Securities" under the Huijin system, "Guotai Junan + Haitong Securities" under the Shanghai state-owned assets system, and "Guosen Securities + Wanhua Securities" under the Shenzhen state-owned assets system. 2) State-owned enterprises transferring securities firm equity often do so in response to regulatory requirements, concentrating resources to focus on their main business while divesting non-core holdings. For instance, Hubei Energy and Three Gorges Capital transferred Changjiang Securities, Guodian Power transferred Datong Securities, and Benxi Steel Group transferred Zhongtian Securities. 3) Private enterprises transferring securities firm equity often make this choice to alleviate operational pressure due to changes in the market environment. For example, Jinlong Co., Ltd. transferred Dongguan Securities and Zhongshan Securities to recover funds and improve the company's cash flow and operational status. Furthermore, from the results of equity transfers listed on various property rights exchanges, the overall market for small and medium-sized securities firms' equity is in a state of "oversupply," with some equity transactions failing to materialize; in other words, under the buyer's market, mergers and acquisitions in the securities industry are highly likely to promote the acquirer's enhancement and strengthening, improving the efficiency of industry resource utilization. Looking ahead, potential mergers and acquisitions can be discussed from the following perspectives to explore potential targets: 1) Two or more securities firms under the same actual controller: CICC and China Galaxy under the Huijin system, Dongfang Securities and Shanghai Securities under the Shanghai state-owned assets system, Xinyu Securities and Huafu Securities under the Fujian system, and Guoyuan Securities and Hu'an Securities under the Anhui system. 2) State-owned enterprises divesting non-core holdings, if the divested projects have relative advantages in asset management and investment banking, could significantly increase the probability of being acquired: Great Wall Securities, Kaiyuan Securities, etc.

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Author of this article: Zhang Xia S1090513080006, Zheng Jisha S1090516020001, Source: CMSC, Original title: "Review and Outlook on Mergers and Acquisitions in the Securities Industry - Non-Bank, Strategic Joint Report"