Zhixin Finance learned from the APP that Open Source Securities issued a research report stating that on October 30, the Central Financial Work Conference proposed for the first time to "cultivate first-class investment banks", and on November 3, the CSRC stated its encouragement of securities firms' M&A and reorganization. The bank believes that under the background of regulatory guidance (intensive development + support for the better and limiting the inferior + encouraging mergers and acquisitions) and increased industry profit differentiation, the industry's M&A consolidation is expected to enter an accelerated phase. M&A opportunities in the sector are viewed optimistically. From an investment perspective, for the acquirer, cases with low valuations, no obvious preemptive acquisition, reasonable acquisition prices, and good integration expectations are the ones that are worth participating in, and the target companies being acquired tend to have a greater chance of success due to enjoying scarce premiums and logic of turning the situation around.

Benefiting targets: Founder Securities (601901.SH), Cai Tong Securities (601108.SH), Galaxy Securities (601881.SH), Zheshang Securities (601878.SH), National Securities (601456.SH), Dongwu Securities (601555.SH).

Open Source Securities' main views are as follows:

Due to the possibility of accelerating the M&A process in the securities industry, please pay attention to M&A theme investment opportunities.

On October 30, the Central Financial Work Conference proposed for the first time to "cultivate first-class investment banks", and on November 3, the CSRC expressed its encouragement of securities firms' mergers and acquisitions. Inter-industry M&A faces realistic challenges such as shareholder intentions, integration difficulties, and price competition, resulting in a relatively slow process. However, the bank expects that the current securities industry M&A process will speed up under the background of regulatory guidance (intensive development + support for the better and limiting the inferior + encouraging mergers and acquisitions) and increased industry profit differentiation. Regulatory guidance: restricting refinancing, guiding securities industry to develop intensively, supporting the better and limiting the inferior, and encouraging mergers and acquisitions. Market and business environment: under intensifying market competition, top-tier institutional investment banks and institutional businesses, scale effects, and advantages of financial technology continue to stand out, and profits are increasingly polarized. For at least the past five years, the bank has been reviewing inter-industry M&A cases at least once a year, and there were more M&A cases in the year and the following year after the three historical CSRC statements of encouraging mergers and acquisitions. 2024 may be an important window period, and attention should be paid to existing M&A case process promotion, new M&A case occurrence, regulatory re-encouragement of mergers and acquisitions, and other catalysts.

The acquired targets tend to have a higher success rate in investment, while the acquirer needs to pay attention to the valuation and asset quality, pricing level, and integration expectations.

The bank concludes based on theoretical deduction and historical M&A case review: (1) the success rate is higher when investing in the acquired target because the target enjoys scarce premiums, turning the situation around, and market value elasticity. The acquired targets enjoy scarce premiums, and the equity exists in the expectation of high-priced acquisitions, such as Haitong Securities' acquisition of Macroview Securities at a premium in 2014; after the acquirer holds the controlling stake in the acquired target, new shareholders are expected to bring about a turnaround in the target's situation. (2) Investors in the acquirer need to pay attention to the stock price rise and valuation level before the M&A announcement, as well as the quality of the acquired assets, reasonable pricing, and integration expectations. If the valuation of the acquirer before the acquisition is reasonable or low, and the acquired assets are of good quality, and there are good business complementarities with the acquirer, and the acquisition price has cost-effectiveness, the acquirer is expected to benefit from the expectation of M&A achieving certain excess returns. Such as the acquisition of Guangzhou Securities by CITIC Securities in early 2019, and National Securities' acquisition of Minsheng Securities in 2023. If the acquirer's stock price has obvious excess returns or valuation is already at a high level before the M&A announcement, and the business complementarities of the acquired assets are weak, and the acquisition price is relatively high, the market expects only average integration effect in the short term, and there could be some excess returns in the short term, but it is difficult to continue to rise in the medium and long term.

Four types of securities firms have a higher probability of M&A, and attention should be paid to securities firm M&A theme investment opportunities.

The bank believes that the following types of targets have a higher probability of M&A and have M&A-themed investment opportunities: (1) targets that have been publicly disclosed by the company and approved by the CSRC and for which integration expectations have been clearly established; (2) leading securities firms in developed economic regions that benefit from policy support, have strong incentives to expand their business layout and financing through acquisitions, and have strong shareholder backgrounds and financial strength; (3) targets of the same controlling shareholder and registered in the same region, which are easy to integrate, but face the problem of high overlap of local business and reduction of licenses; and (4) private holding or equity dispersion without actual controllers. Under the background of regulatory guidance (intensive development + support for the better and limiting the inferior + encouraging mergers and acquisitions) and increased industry profit differentiation, the industry's M&A consolidation is expected to enter an accelerated phase. M&A opportunities in the securities firm sector are viewed optimistically. From an investment perspective, for the acquirer, cases with low valuations, no obvious preemptive acquisition, reasonable acquisition prices, and good integration expectations are the ones that are worth participating in, and the target companies being acquired tend to have a greater chance of success due to enjoying scarce premiums and logic of turning the situation around.

Risk warning: policy landing and impact are not as expected; stock market volatility brings uncertainty to securities firm profitability; the acquisition matters have uncertainty.