Brokerage firms seek security in consolidation
Print Edition
THE merger of two state-owned brokers in China’s largest buyout in the industry underscores a new wave of consolidation set to reshuffle the size and scope of players.
Shenzhen-listed Hongyuan Securities Co said in a filing to the stock exchange on July 25 that it will be taken over by larger peer Shenyin & Wanguo Securities Co in a deal valued at 39.6 billion yuan (US$6.4 billion).
Shenyin & Wanguo ranked 10th in net profit among Chinese brokerage firms last year and Hongyuan was 12th, according to the Securities Association of China.
The deal is expected to create China’s third-largest broker after Haitong Securities Co and CITIC Securities Co.
Shares of Hongyuan surged nearly 41.5 percent last week after trading resumed from a suspension it announced last October 30, citing plans to restructure. A Hong Kong-listed subsidiary of Shenyin & Wanguo also surged more than 30 percent.
“Both companies bring their own advantages in difference areas,” Shenyin & Wanguo Chairman Li Jiange told a media briefing. “This alliance allows us to complement each other in business expansion and brand building.”
The deal was the latest move by Central Huijin Investment Ltd, parent of both Hong Yuan and Shenyin & Wanguo, to consolidate its brokerage businesses. Huijin is the domestic investment arm of China’s sovereign-wealth fund and currently holds stakes in nine securities firms, directly or via subsidiaries.
The deal came amid a string of mergers and acquisitions in the brokerage realm. Founder Securities Co is acquiring 100 percent of China Minzu Securities Co for 13.2 billion yuan, and Guotai Junan Securities Co has said it plans to acquire a 51 percent stake in Shanghai Securities Co.
“We are optimistic about the consolidation of large-scale brokerages,” said Zhao Shasha, an analyst with Huarong Securities.
Zhao said the merger of Hongyuan and Shenyin & Wanguo adds fuel to the current round of mergers and acquisitions, leading toward the existence of “systematically important” securities firms in three to five years.
Still, realignment is nothing new in China’s brokerage industry. In the 10 years beginning in 2003, the number of brokerages decreased from 132 to 115 through mergers and acquisitions.
Much of that consolidation was prompted by government-engineered bailouts for firms in trouble. In 1999, for example, Junan Securities was taken over by Guotai Securities after Junan’s president was jailed for misappropriation of state-owned assets.
The latest round of mergers and acquisitions dovetails with central government initiatives to overhaul state-owned enterprises and make them more vital, market-oriented and competitive.
The consolidation in the securities sector comes amid a backdrop of declining brokerage income and diminishing underwriting business — once the primary source of revenue for the industry. Mergers and acquisitions offer securities firms a quick way to tap into new businesses and achieve wider market presence.
“The merger of Hongyuan and Shenyin & Wanguo will enable an integration of business, resources and geographical advantage,” said Zhang Ying, an analyst at Industrial Securities.
Hongyuan has prowess in fixed-income investment and asset management, while Shenyin & Wanguo is adept at more traditional lines of business, such as brokerage, research and consulting services, Zhang said.
Hongyuan has widespread outlets in the Xinjiang Uygur Autonomous Region in northwestern China, where it is based. Shenyin & Wanguo has a strong customer base in Shanghai, Zhang noted.
After consolidation, the merged entity will rank first in brokerage and asset management, and fourth in margin trading and short selling. The new company will be managing 307 outlets, ranking it first in the nation, according to a Huarong Securities report.
Moreover, an innovative structural design will free the two brokerages from some regulatory restrictions on capital and business expansion, analysts said.
The merger involves a stock swap that will allow Hongyuan’s shareholders to swap one share for every 2.049 of Shenyin & Wanguo shares. Hongyuan will be delisted from the Shenzhen exchange on the completion of the deal, and the merged firm will apply for a listing on that southern exchange.
Hongyuan Chairman Feng Rong told a media briefing that the new entity will be an investment holding company, with more flexibility in pursuing diversified development in areas such as banking, insurance, trusts and leasing. It will keep building its strength in securities in order to create an integrated financial services chain, he said.
The new company will be registered in Xinjiang. Its subsidiary in Shanghai will manage the securities business.
Zhao with Huarong Securities said the new firm, as an investment holding company, will not be subject to regulatory capital requirements and current business restrictions on securities firms. Chinese securities firms are required to have capital-to-asset ratios of no less than 40 percent. They are also limited in investment activity in trusts and banking.
“The two-layer structure will allow the company to boost its leverage ratio, which has been a hurdle in the development of Chinese brokers,” said Zhao.
The leverage ratio of China’s securities industry is around 2.5. By comparison, the ratio is more than 10 among US investment banks.
Mergers and acquisitions have long played an important role in the development of financial institutions in advanced markets. In the late 20th century, a wave of mergers and acquisitions gave rise to financial giants such as Citigroup and Merrill Lynch.
In a report, analysts with Huatai Securities said Chinese brokerages will inevitably take the same path as the nation seeks to develop top investment banks with international influence.
Still, industry shakeouts produce losers as well as winners. “Only those with core competitive edge, bargaining power and capability to absorb others can be winners,” said Wang Mingfei, an analyst with Orient Securities.
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