The Zhitong Finance app learned that Open Source Securities released a research report saying that on October 30, the Central Financial Work Conference first proposed “cultivating first-class investment banks,” and on November 3, the Securities Regulatory Commission said it encouraged mergers, acquisitions, and restructuring of brokerage firms. The bank believes that in the context of regulatory policy guidance (intensive development+promotion of mergers and disadvantages+encouragement of mergers and acquisitions) and increasing differentiation in industry profits, industry mergers and acquisitions integration is expected to enter a period of acceleration, and is optimistic about mergers and acquisitions theme opportunities in the brokerage sector. From an investment perspective, for acquirers, cases with undervaluation, no obvious runaway, reasonable purchase prices, and good expectations of integration results are more worth participating in. The acquieree often has a greater chance of winning because it enjoys logic such as scarcity premiums and reversal of difficulties.

Beneficiary targets: Fangzheng Securities (601901.SH), Caitong Securities (601108.SH), China Galaxy (), Zhejiang Securities (), Guolian Securities (), and Dongwu Securities (Forwarding). 601881.SH 601878.SH 601456.SH 601555.SH

The main views of Open Source Securities are as follows:

The merger and acquisition process in the securities industry may accelerate, focus on M&A theme opportunities

On October 30, the Central Financial Work Conference first proposed “cultivating first-class investment banks,” and on November 3, the Securities Regulatory Commission said it would encourage mergers, acquisitions, and restructuring of brokerage firms. Interbank mergers and acquisitions are progressing slowly due to real challenges such as shareholders' wishes, integration difficulties, and price competition, but the bank expects the current brokerage merger and acquisition process to accelerate. Regulatory orientation: Regulatory policies restrict refinancing, guide the intensive development of the securities industry, support the advantages and disadvantages, and encourage mergers and acquisitions. Market and business environment: As market competition intensifies, leading institutional investment banks and institutional businesses, scale effects, and fintech support advantages continue to stand out, and profit differentiation continues to grow. The bank has resumed interbank mergers and acquisitions at least once every year for the past 5 years. After the Securities Regulatory Commission has spoken on encouraging mergers and acquisitions three times in history, the number of mergers and acquisitions cases in that year and the following year has increased. 2024 may be an important window period, focusing on catalysts such as the progress of existing mergers and acquisitions cases, the occurrence of new M&A cases, and regulatory encouragement of mergers and acquisitions once again.

The investment win rate of the acquired party is high. The merger and acquisition party should pay attention to valuation, asset quality, pricing level, and integration expectations

The bank drew the following conclusions based on theoretical deduction and review of historical mergers and acquisitions cases: (1) Investors have a higher win rate, benefit from scarcity premiums, reversal of difficulties, and market value elasticity. The acquieree enjoys a scarce premium, and there are expectations for high-priced equity acquisitions. For example, in 2014, Shenyin Wanguo acquired Hongyuan Securities; after the acquirer holds the acquirer's ownership, new shareholder entry is expected to reverse the acquiree's plight. (2) Investment buyers should pay attention to the stock price increase and valuation level before the merger and acquisition announcement, as well as the quality, pricing rationality, and integration expectations of the acquired assets. If the purchaser has a reasonable or low valuation before the acquisition, and the quality of the acquired assets is good, forming a good business complementarity with the acquirer, and the purchase price is cost-effective, then the acquirer is expected to benefit from the merger and acquisition and achieve a certain amount of excess profit. For example, in early 2019, CITIC Securities acquired Guangzhou Securities, and in 2023, Guolian Securities acquired Minsheng Securities. Before the takeover announcement, the purchaser's stock price clearly had excess earnings or was already at a high valuation level. At the same time, when the complementarity of the acquired assets was weak and the purchase price was high, the market expected integration effect was average. There may be some excess profit in the short term, but it is difficult to continue to rise in the medium to long term.

The four types of brokerage firms have a high probability of mergers and acquisitions. Focus on brokerage mergers and acquisition-themed investment opportunities

The bank believes that the following types of mergers and acquisitions have a high probability of mergers and acquisition-themed investment opportunities: (1) the company has been publicly disclosed and approved by the Securities Regulatory Commission, and it is clear that there are expected targets for integration; (2) leading brokerage firms in developed economies benefit from policy support, have strong incentives to expand their business map and achieve financing through acquisitions, and have strong shareholder background and financial strength. (3) Considering shareholders' wishes, integration difficulties, and price competition issues in interbank mergers and acquisitions, it is less difficult to integrate targets with the same controller and registered in the same region, but it is necessary to face the problems of high degree of territorial business coincidence and license reduction. (4) Private holdings or equity fragmentation have no actual controller. In the context of regulatory policy guidance (intensive development+support for the good and weak, encouraging mergers and acquisitions) and increasing differentiation in industry profits, the integration of mergers and acquisitions in the industry is expected to enter a period of acceleration, and we are optimistic about mergers and acquisitions theme opportunities in the brokerage sector. From an investment perspective, for acquirers, cases with undervaluation, no obvious runaway, reasonable purchase prices, and good expectations of integration results are more worth participating in. The acquieree often has a greater chance of winning because it enjoys logic such as scarcity premiums and reversal of difficulties.

Risk warning: policy implementation and impact fall short of expectations; stock market fluctuations bring uncertainty to brokerage profits; acquisition matters are uncertain.