Will a "national securities" with a market value of hundreds of billions come? Guolian Securities' acquisition of Minsheng Securities officially kicks off

A large-scale brokerage integration case that was expected is coming.

On the evening of April 25th, Guolian Securities (601456.SH) announced that it is planning to acquire the controlling stake of Minsheng Securities by issuing shares.

It is worth noting that Wuxi State-owned Assets, through its subsidiary Wuxi Guolian Development (Group) Co., Ltd. (hereinafter referred to as "Guolian Group"), successfully won the position of the largest shareholder of Minsheng Securities from the Fanhai Group just a year ago. This acquisition plan also signifies the imminent integration of the two brokerages under Wuxi State-owned Assets.

Guolian Securities stated that it has signed a "Letter of Intent" with 45 shareholders who collectively hold 95.48% of Minsheng Securities' shares. According to the arrangement, the planned issuance of shares will be used to acquire the controlling stake of Minsheng Securities from the aforementioned shareholders.

However, specific details such as pricing for this transaction are still subject to negotiation among the parties involved.

Considering the hundreds of billions in assets of the two brokerages, if the acquisition is successful in the future, a new institution with total assets exceeding one trillion is expected to emerge.

Integration Pace Exceeds Expectations

In fact, after Wuxi State-owned Assets took over Minsheng Securities, the market was not entirely unprepared for the merger of the two brokerages under Wuxi State-owned Assets. There were even speculations in the market that the merged brokerage might be named "Guomin Securities."

On December 15th last year, the China Securities Regulatory Commission clearly stated in the "Approval of the Change of Major Shareholders of Minsheng Securities Co., Ltd.": "Your company (Minsheng Securities) should, in conjunction with Guolian Securities and Guolian Group, proceed with the integration work of your company and Guolian Securities in a stable and orderly manner according to the preliminary integration plan submitted to the Commission."

Considering the substantial size of the two institutions, the rapid pace of integration is still faster than market expectations.

"This speed is still quite fast. It was only at the end of last year (2023) that they officially acquired the largest shareholder position, and a few months later they started the acquisition process," said an investment banker in Beijing who follows the developments of Minsheng Securities. "However, there may still be many integration tasks to be done in terms of business, culture, team, etc., and there are still many challenges ahead."

In fact, at the end of February this year, Minsheng Securities held its first capital market summit after the change of shareholders in Wuxi, Jiangsu. At that time, Minsheng Securities also signed cooperation agreements with the Huishan District and Xishan District of Wuxi, as well as local governments or enterprises, while Guolian Group also expressed its stance on the development of Minsheng Securities.

"Guolian Group will strengthen strategic leadership, empower shareholders, and integrate resources, coordinating various parties to jointly promote the development of Minsheng Securities. He hopes that Minsheng Securities will take advantage of this summit to play an active role in financial synergy and business linkage, further enhancing its distinctive advantages," said Xu Ke, Secretary of the Party Committee and Chairman of the Board of Directors of Guolian Group at that time.

On April 8th, Minsheng Securities also received a higher credit rating due to the change of its largest shareholder to Wuxi State-owned Assets.

"The change of the largest shareholder to Guolian Group, a comprehensive investment enterprise under the state-owned assets operation and capital operation of the Wuxi municipal government, has a clear strategic positioning and prominent status among state-owned enterprises in Wuxi," commented United Credit Ratings. "The company holds an important strategic position within Guolian Group and can receive significant support in management, business resources, and financing, significantly enhancing the external support received by Minsheng Securities In the context of overall credit contraction, there are not many entities that have received credit rating upgrades. According to reports from the Securities Association and the China Securities Association, out of a total of 4800 bond issuers in 2023, only 87 have received rating upgrades, accounting for less than 2%; and this upgrade by Minsheng Securities has made it the first brokerage firm to receive a credit rating upgrade in 2024.

"When the Wuxi State-owned Assets entered Minsheng Securities, relevant plans for the integration of the two brokerage firms had already been submitted. However, from the current pace of planning, the progress is faster than expected," said a source close to Guolian Securities. "This may be related to smoother communication with the shareholders of Minsheng Securities, as many institutional shareholders are also waiting for exit opportunities."

Formation of a Billion-dollar New Brokerage on the Horizon

If Guolian Securities completes the consolidation with Minsheng Securities, this larger institution will also rank among the industry leaders.

From partial data in 2023, Guolian Securities, as the acquirer, had slightly lower revenue and profits than Minsheng Securities.

According to Wind data, Minsheng Securities achieved operating income of 2.321 billion yuan and net profit attributable to the parent company's shareholders of 903 million yuan in the first three quarters of 2023; while Guolian Securities achieved operating income and net profit attributable to the parent company's shareholders of 2.507 billion yuan and 727 million yuan respectively during the same period.

For the full year 2023, Guolian Securities' operating income and net profit attributable to the parent company's shareholders were 2.955 billion yuan and 671 million yuan respectively.

Investment banking has always been a strong business for Minsheng Securities.

In the full year of 2023, Minsheng Securities had 18 IPO projects approved, ranking third in the industry in terms of the number of IPO projects approved; listed 20 companies, ranking 4th in the industry; and had 18 companies listed on the GEM, ranking 3rd among lead underwriters.

"Investment banking is a strong business for Minsheng. If the two brokerage firms proceed with the restructuring, it is not ruled out that Minsheng Securities may become a subsidiary of the new brokerage in investment banking," said a non-bank financial analyst at a brokerage firm in Beijing. "Currently, some important shareholders of Minsheng Securities come from Shanghai State-owned Assets, and Minsheng's registration is also retained in Shanghai. Referring to the model of Huatai's acquisition of Union Securities in the past is possible, which is also a balanced option for multiple parties."

If the two brokerage firms move towards integration, the new brokerage formed by their combined efforts will also be closely watched.

In terms of regional distribution, Guolian Securities focuses on Wuxi and the Yangtze River Delta region, while the branches of Minsheng Securities are mainly concentrated in Henan and Shandong, with certain complementary resources in channels, customers, and funds between the two.

As of the latest financial data at the end of September 2023, Minsheng Securities had net assets and total assets of 16.012 billion yuan and 566.08 billion yuan respectively; while Guolian Securities had net assets and total assets of 18.124 billion yuan and 87.129 billion yuan respectively as of the end of 2023.

Roughly estimating the above data, a new brokerage with net assets of 34.136 billion yuan and total assets of 143.737 billion yuan will emerge after the merger of the two brokerage firms According to the data, the net assets of this new securities firm will exceed Guojin Securities (600109.SH), ranking 20th among listed securities firms, and its total assets will only be second to Zhongtai Securities, entering the top 18 in the industry.

As of the end of September 2023, Minsheng Securities' net asset per share is priced at 1.40 yuan/share. If this is used to estimate equivalently based on Guolian Securities' latest price-to-book ratio of 1.67 times, Minsheng Securities' estimated per share value could reach 2.34 yuan/share. If based on the average price-to-book ratio of 1.18 times for China Securities Corporation, then Minsheng Securities' estimated per share value would be around 1.65 yuan/share.

In the industry's view, the current securities industry consolidation aligns with the regulatory intent to increase industry concentration, and is also expected to further accelerate the clearing of the securities industry, with the possibility of more securities industry consolidation cases in the future.

"The current securities industry consolidation is supported by policy encouragement," said the above-mentioned non-bank financial analyst. "Due to the influence of the industry's past characteristics, the consolidation of the securities industry has been relatively slow, to some extent impeding the intensity of direct financing transformation and the improvement of industry efficiency. Guolian's acquisition of Minsheng may not be the end but the beginning of a new wave of industry consolidation, and in the current downward cycle of the capital market, it is indeed suitable for mergers and reorganizations among intermediary institutions."