Securities Industry's Major Shift

On September 5th, two leading securities firms, Guotai Junan and Haitong Securities, officially announced their merger.

According to the data from the 2024 semi-annual report, the newly merged entity will rank second in the industry in terms of revenue and net profit, while its asset scale, number of employees, and income from various sub-businesses will all lead the industry.

This merger marks another significant move in the consolidation of the securities industry.

Unlike previous acquisitions, the protagonists of this merger are the top securities firms, Guotai Junan and Haitong Securities.

Such a powerful union has instantly attracted market attention.

On the evening of September 5th, Guotai Junan announced that it is planning to merge with Haitong Securities through a share swap and issue A-shares to raise supporting funds.

The merger is a symbolically significant event in China's securities industry.

On September 10th and 11th, Zhu Jian, Chairman of Guotai Junan, and Zhou Jie, Chairman of Haitong Securities, respectively responded at their semi-annual performance briefings, stating that "this reorganization is in response to the national strategy, promoting the creation of a first-class investment bank, and aligns with the strategic development direction of both companies.

It is conducive to the complementary advantages of both parties, enhancing core functions, improving the ability of financial services to serve the real economy, and contributing to the further optimization of Shanghai's financial state-owned capital layout and promoting the high-quality development of the securities industry."

Industry insiders believe that this merger and reorganization will help integrate the advantages of Shanghai's financial state-owned capital resources and create a first-class investment bank that matches the status of Shanghai as an international financial center.

He Qing, Secretary and Director of the Shanghai State-owned Assets Supervision and Administration Commission, stated on September 10th that a broader, deeper, and wider range of state-owned capital will be coordinated to promote strategic reorganizations across groups and levels, implementing "slimming and strengthening" for some enterprises, and creating a number of leading and chain-leading enterprises to enhance competitive advantages.

The merger also signifies that the integration of top securities firms has already begun.

In fact, in the past two years, there have been multiple mergers and acquisitions in the securities market, such as Zheshang Securities + Guodu Securities, Western Securities + Guorong Securities, Guolian Securities + Minsheng Securities, and Guoxin Securities + Wanhe Securities.

It is worth noting that many of the mergers have the same actual controller.

"An actual controller holding multiple securities licenses has, to some extent, led to a waste of resources.

Under the current circumstances, merger is a reasonable choice.

And the same actual controller is also conducive to the integration of resources," said a securities firm insider.

Previously, the protagonists of securities firm mergers were mostly medium and small securities firms.

However, the merger of Guotai Junan and Haitong Securities is a powerful union and is the first merger and reorganization of top securities firms since the implementation of the new "Nine Articles," as well as the largest A+H dual-market absorption and merger and the largest integration case of listed securities firms in China's capital market history, involving multiple business licenses and several domestic and foreign listed subsidiaries.

According to the data from the 2024 semi-annual report, the newly merged entity will rank second in the industry in terms of revenue and net profit, while its asset scale, number of employees, and income from various sub-businesses will all lead the industry.

"This integration of Guotai Junan and Haitong is the first merger and reorganization of top securities firms, which further opens up the imagination for the concentration of the securities industry, and the advantages of top securities firms may be accelerated.

In combination with relevant policy goals, mergers and reorganizations among top securities firms will be an important way to build a securities industry with international competitiveness," said Hu Xiang, a non-bank analyst at Dongwu Securities.

The merger of the two will inevitably form a new carrier-level securities firm, but the challenges faced are also not to be underestimated.

After the merger of two similar top securities firms, there will be a lot of overlap and redundancy in business and positions.

To improve efficiency and save costs, streamlining the organization and optimizing personnel may be an inevitable choice.

Several securities firm insiders revealed to "Finance and Economics" that there will definitely be personnel changes after the merger, it's just a matter of time.

Another major challenge faced after the merger is whether to achieve the effect of 1+1>2?

From the previous cases of securities firm mergers, it is difficult to achieve this effect.

An insider expressed caution: "The overall strength will definitely be enhanced after the merger, but whether it can achieve the effect of 1+1>2, it still depends on the specific integration situation."

How strong is the "strong alliance"?

The former speculation is becoming a reality.

On the evening of September 5th, Guotai Junan and Haitong Securities both issued a suspension announcement, planning a major asset reorganization, and the stocks were suspended from September 6th.

Guotai Junan announced that the company and Haitong Securities are planning to merge Haitong Securities through the issuance of A-shares to all A-share shareholders of Haitong Securities and the issuance of H-shares to all H-share shareholders of Haitong Securities, and to issue A-shares to raise supporting funds.

Guotai Junan and Haitong Securities also announced at the same time that A-shares will be suspended from trading starting from the opening of the market on Friday, September 6, 2024, and according to the relevant regulations of the Shanghai Stock Exchange, the suspension period is expected not to exceed 25 trading days.

Guotai Junan stated that this reorganization is beneficial to create a first-class investment bank and promote the high-quality development of the industry.

The merger may not be without a trace.

In June this year, Chen Jining, Secretary of the Shanghai Municipal Party Committee, investigated Guotai Junan Securities and called for accelerating the progress towards an investment bank with international competitiveness and market influence.

Guotai Junan stated in the semi-annual report that the China Securities Regulatory Commission proposed "to form 2-3 investment banks and investment institutions with international competitiveness and market leadership by 2035," supporting top institutions to enhance core competitiveness through mergers and reorganizations, organizational innovation, and other means, pointing out the development direction for top securities firms to do well and strong, and to accelerate the construction of first-class investment banks.

What kind of scale will the new company become after the merger?

According to the semi-annual report data, as of the first half of 2024, Guotai Junan's total assets were 898.06 billion yuan, and Haitong Securities was 721.415 billion yuan.

After the merger, the total asset scale will reach 1.62 trillion yuan, ranking first in the industry.

In terms of net assets, according to the semi-annual report, as of the first half of the year, Guotai Junan's net assets were 145.955 billion yuan, and Haitong Securities was 155.446 billion yuan.

After the merger, the net asset scale will reach 301.401 billion yuan, ranking first in the industry.

In terms of revenue, Guotai Junan achieved a revenue of 17.07 billion yuan in the first half of the year, and Haitong Securities was 8.865 billion yuan.

A simple merger calculation shows that the revenue scale is 25.935 billion yuan, ranking second in the industry.

In terms of net profit, the two securities firms achieved a net profit of 5.016 billion yuan and 0.953 billion yuan respectively in the first half of this year, and the net profit scale after the merger is 5.969 billion yuan, ranking second in the industry.

In addition, after the integration of the two, many business data will jump to the first place in the industry.

According to the semi-annual report data, the brokerage business income after the merger of the two is 8.484 billion yuan, investment banking business income is 2.02 billion yuan, other business income is 11.991 billion yuan, all ranking first in the industry.

The asset management business income is 3.357 billion yuan, ranking second in the industry.

"From the perspective of revenue in 2023, Guotai Junan's revenue contribution ratio in brokerage, asset management, and proprietary business is relatively large.

Haitong Securities has performed well in investment banking and net interest income.

Moreover, after the merger, it will become the securities company with the most business outlets, reaching 656."

Luo Huizhu, a non-bank analyst at Huaxi Securities, said.

How the two top securities firms will integrate, whether the merger effect will achieve 1+1>2, and whether they will face the streamlining of institutions, business lines, and personnel, will all be huge tests.

"The reorganization and merger of Guotai Junan and Haitong Securities will definitely be much larger in scale than a single one, but this is not a simple direct addition.

The merger of the two does not belong to the complementary type, so integration is challenging.

Historically, most mergers of securities firms of the same scale have been less than 1+1

An insider said.

In 2013, the merger of Shenyin Wanguo Securities and Hongyuan Securities, which were relatively high-ranking, attracted market attention.

However, in the view of industry insiders, the merger effect did not meet the initial expectations and did not achieve the effect of 1+1>2.

"From the perspective of major shareholders, there will be a stronger securities firm in the market, and the comprehensive strength and overall efficiency will be improved, which is in line with the country's requirements to build a first-class investment bank.

However, the challenges after the merger of the two are also huge."

The above-mentioned securities firm believes that Guotai Junan and Haitong Securities, both top securities firms, have a wide range of business scope, complete organizational structure, and a large number of employees.

According to the semi-annual report, Guotai Junan has 14,762 employees, and Haitong Securities has 13,346 employees.

If simply added, the number of employees after the merger will reach 28,108, surpassing other securities firms.

However, the current market is sluggish, and the performance of securities firms is under pressure, and many securities firms are in a state of contraction in the first half of the year.

"After the merger, the management team and personnel of various departments need to be greatly adjusted.

Personnel reduction is expected."

Some securities firm insiders believe that "however, there have been cases where the number of employees increased after the merger of two securities firms."

Haitong Securities, which fell behind, Guotai Junan and Haitong Securities are both old top securities firms in Shanghai, long-term leaders in the securities industry, and are also large-scale comprehensive securities companies with a long history and large scale in China.

Guotai Junan Securities was established by the merger of Guotai Securities and Junan Securities, which were born in 1992, in 1999, and has long maintained its comprehensive strength in the top three of the industry.

It went public on the A-share market in 2015 and the H-share market in 2017.

Haitong Securities was established in 1988, went public on the A-share market in 2007, and the H-share market in 2012, and has not experienced reorganization and renaming before.

For a long time, the two securities firms have been competing for the second place in the industry.

Haitong Securities once developed better than Guotai Junan, and its various indicators ranked in the top three of the industry.

However, in recent years, Haitong Securities has obviously fallen behind and faces dual challenges of performance and compliance.

According to Haitong Securities' annual report, in 2023, the company achieved a revenue of about 22.953 billion yuan, a year-on-year decrease of 11.54%; the net profit attributable to the shareholders of the listed company was about 1.008 billion yuan, a year-on-year decrease of 84.59%.

In the fourth quarter, it lost more than 3 billion yuan, which was the first quarterly loss for Haitong Securities in nearly 20 years.The "culprit" that has dragged down performance is indeed Haitong International.

In fact, since the beginning of 2022, Haitong International has been incurring huge losses, which have significantly dragged down the group's performance, with losses exceeding 17.5 billion Hong Kong dollars (approximately 16 billion RMB) over the past two and a half years.

Looking at the annual figures, Haitong International's operating income was -1.197 billion Hong Kong dollars, and net profit was -6.541 billion Hong Kong dollars in 2022; in 2023, the operating income was -1.575 billion Hong Kong dollars, and net profit was -8.156 billion Hong Kong dollars; in the first half of 2024, the revenue was -1.697 billion Hong Kong dollars, and net profit was -2.873 billion Hong Kong dollars.

In contrast, in 2020 and 2021, Haitong International's revenue was 8.33 billion Hong Kong dollars and 5.252 billion Hong Kong dollars, respectively, with net profits of 1.933 billion Hong Kong dollars and 301 million Hong Kong dollars, respectively.

After a huge loss of 6.541 billion Hong Kong dollars in 2022, Zhang Xinjun, the CFO of Haitong Securities, summarized the reasons for Haitong International's losses at the performance meeting: firstly, the downturn in the Hong Kong IPO (Initial Public Offering) and the securities trading market; secondly, investment losses, including a loss of 3.44 billion Hong Kong dollars from stock and bond investments, and a loss of 1.65 billion Hong Kong dollars from private debt and equity, alternative investments valuation; and finally, asset shrinkage, and a loss of 1.59 billion Hong Kong dollars from collateral depreciation.

Clearly, this somewhat superficial explanation did not gain market recognition, and many industry insiders believe that the real reason for Haitong International's predicament is its deep involvement in Chinese real estate dollar bonds.

Financial report data shows that from 2018 to 2021, the scale of real estate bonds underwritten by Haitong International reached 6 billion US dollars, 7.2 billion US dollars, 4.5 billion US dollars, and 3.3 billion US dollars, respectively, ranking at the forefront in the industry.

More importantly, industry insiders have revealed that Haitong International not only underwrites dollar bonds issued by Chinese real estate companies but also purchases these bonds through its proprietary trading department to complete underwriting tasks and obtain investment trading income.

As a subsidiary of Haitong Securities, Haitong International has been listed in Hong Kong for 14 years and was once regarded as a "pioneer" and "king of Hong Kong stock IPOs" for Chinese securities firms.

Haitong Securities once wanted to "turn the tide" by investing more than 2 billion Hong Kong dollars in Haitong International's bond issuance and "10 for 3" rights issue financing, but the factors causing losses did not fundamentally change, and in 2023 and the first half of 2024, Haitong International again suffered huge losses.

Under the huge losses, Haitong Securities' subsidiary, Haitong International Holdings, announced in 2023 the privatization of Haitong International, with the privatization funds coming from a $1 billion injection from Haitong Securities.

On January 11, 2024, Haitong International was delisted from the Hong Kong Stock Exchange.

This once-dominant Hong Kong Chinese securities firm and "big brother" of Hong Kong stock IPOs sadly withdrew from the Hong Kong market, and the Hong Kong stock market has no longer seen Haitong International.

The market has also continuously raised questions about Haitong International, whether its delisting funds have become a cost for Haitong Securities, and whether it will significantly reduce the profitability of Haitong Securities?

What will happen after the privatization of Haitong International?

When can the losses be stopped?

Can the glory of the past return?

On April 12, 2024, at the performance conference of Haitong Securities, General Manager Li Jun talked about the arrangements for Haitong International, stating that after completing the privatization, the group will continue to strengthen centralized control, promote the integrated operation and management of various business lines and back-office functions of the parent and subsidiary companies, and promote Haitong International to restore its own virtuous cycle development ability and improve profitability.

This statement was also interpreted as Haitong International possibly still needing continued blood transfusion from its parent company.

However, the above questions were answered on September 5, 2024, with an announcement from Guotai Junan.

Guotai Junan stated that it is planning to merge Haitong Securities through a share exchange and issue A shares to raise supporting funds.

The merger of the two means that there may be no Haitong Securities in the future, let alone Haitong International.

But before Guotai Junan took action, the market had been continuously discussing the future of Haitong International.

Some industry insiders believe that due to the impact of real estate dollar bonds and overseas loans, debts, interest costs, etc., Haitong International's "vitality" has been damaged, and if the market fundamentals do not fundamentally reverse, it is still difficult for Haitong International to turn losses into profits.

Under the drag of Haitong International, the performance of Haitong Securities has declined significantly.

In the first half of 2024, the net profit of Haitong Securities was less than 1 billion yuan, and it has been squeezed out of the top ten.

Under the merger wave, the major changes in securities firms, Guotai Junan and Haitong Securities, were unexpected in the market, but to some extent, they seem to be within expectations.

Powerful financial institutions and international financial centers are key elements of a financial powerhouse.

The "Implementation Plan of Shanghai City to Implement the Action Plan for Deepening and Enhancing the Reform of State-owned Enterprises (2023-2025)" clearly proposes to "support leading securities companies to strengthen business innovation, group operation, mergers and acquisitions, and reorganizations to create first-class investment banks"; the fifth plenary session of the 12th Shanghai Municipal Committee proposed to "deeply promote the action of deepening and enhancing the reform of state-owned enterprises" and "surround the construction of 'five centers' to increase the intensity of reform and opening up."

Industry insiders said that the merger of the two has three important meanings.

First, Shanghai urgently needs to create a world-class investment bank to help build Shanghai into an international financial center, and the merger and reorganization of leading securities firms will be an effective way.

Second, this merger will help both parties to complement each other's advantages, enhance core functions, and improve the level of financial services for the real economy.

Third, this merger will help to optimize the layout of Shanghai's financial state-owned capital and strengthen and optimize the state-owned capital.

In fact, in the past two years, the securities industry has seen many mergers and acquisitions of securities firms, especially this year, the process of mergers and acquisitions of securities firms has obviously accelerated.

In March 2024, Zheshang Securities became the largest shareholder of Guodu Securities.

In June, Western Securities announced plans to acquire Guorong Securities.

In August, Guolian Securities disclosed new progress in acquiring 99.26% of the equity of Minsheng Securities.

In September, Guoxin Securities announced the acquisition of 96.08% of the equity of Wanhe Securities by issuing shares.

From the merger cases in the past two years, it can be seen that securities firms under the same controlling shareholder or actual controller have started internal integration.

Taking the integration of Guoxin Securities and Wanhe Securities as an example, Xu Kang, an analyst at Huachuang Securities, said that this equity merger is an integration and adjustment of financial entities under the Shenzhen State-owned Assets Supervision and Administration Commission, which helps to reduce the business risks of small and medium-sized securities firms.

"Local state-owned capital accelerates the internal integration of securities firms, and the merger of securities firms under the same local state-owned capital may become the current main direction."

Ma Tingting, a non-bank analyst at Guosheng Securities, said in a research report, "On the one hand, local state-owned capital accelerates the formation of group operation through the integration of internal securities firm resources, better serving the financing of industries in the region; on the other hand, the equity relationship of securities firms under the same state-owned capital is clearer, and the merger and reorganization process is simpler.

The model of listed securities firms acquiring non-listed enterprises does not involve delisting and other issues, saving time and communication costs."

"There are too many financial licenses, and the merger of securities firms under the same entity will be a major trend."

A securities person in Shanghai told "Finance" that "essentially, it can be understood as the supply-side reform of the financial industry, to reduce capacity."

Some analysts believe that the merger of securities firms under the same state-owned capital or actual controller, the merger of listed and non-listed securities firms within the same region, and some securities firms optimizing geographical layout and insufficient licenses through mergers and acquisitions have become the three main lines of current securities firm mergers and acquisitions.

In addition, compared with the investment bank pattern of developed countries, the number of securities licenses in China is numerous, and the concentration of the top is low.

Mergers and acquisitions are beneficial to improve the competitiveness of domestic securities firms.

With policy encouragement, the trend of increasing market concentration of securities firms in the future is inevitable.

In fact, the regulatory authorities have repeatedly stated that they support and encourage securities firms to do well and strong through mergers and reorganizations, and support the construction of first-class investment banks with international competitiveness.

In October 2023, the Central Financial Work Conference proposed to "cultivate first-class investment banks and investment institutions" "support state-owned large financial institutions to do well and strong" "enhance the competitiveness and influence of Shanghai as an international financial center."

In March 2024, the China Securities Regulatory Commission issued the "Opinions on Strengthening the Supervision of Securities Companies and Public Fund Management Companies and Accelerating the Construction of First-Class Investment Banks and Investment Institutions (Trial)", proposing the goal of "forming 2 to 3 investment banks and investment institutions with international competitiveness and market leadership by 2035."

In April 2024, the State Council issued the new "Nine Articles", proposing to securities and fund institutions, "support leading institutions to enhance core competitiveness through mergers and reorganizations, organizational innovation, and other means, and encourage small and medium-sized institutions to develop differently and operate with characteristics."

Luo Zuanhui, the chief analyst of non-bank research at Shenwan Hongyuan Research, said in a research report that at present, the internal and external environment for the merger and reorganization of the securities industry has basically been in place.

Under the dual action of internal driving and policy orientation, the merger and integration between securities firms have accelerated.

However, mergers and integration need to be guided by the overall strategy of the company, looking for complementary targets (business complementarity, regional complementarity, etc.

), seeking actual control rights, and achieving consolidation.

At present, both leading securities firms and small and medium-sized securities firms have encountered their own development bottlenecks.

The regulatory authorities actively express support for mergers and reorganizations, and the trend of internal mergers and integration in the securities industry continues.