China creates $230 bln brokerage powerhouse as consolidation gathers pace (updated)

Guotai Haitong Securities Co

06/09/2024 05:54

* 
      Guotai Junan to acquire smaller rival Haitong via share
swap
    

        * 
      Combined entity to have $230 bln assets, to become sector
leader
    

        * 
      Beijing has dialled up rhetoric on domestic brokerage
mergers 
    

        * 
      Analysts say more brokerage mergers expected amid tough
markets 
    

  
 (Adds markets reaction, analyst comment in paragraphs 11-18)
    By Selena  Li, Samuel Shen and Julie Zhu
       HONG KONG, Sept 6 (Reuters) - The merger of two
state-backed brokerages in China to create a sector leader with
$230 billion in assets is part of Beijing's drive to consolidate
the $1.7-trillion industry amid challenging markets, and the
move is set to gather pace, analysts said.
    Shanghai-based Guotai Junan Securities  601211.SS  is set to
acquire its cross-town rival Haitong Securities  600837.SS  via
a share swap, the two companies said late on Thursday. The deal
is subject to regulatory and shareholder approval.
    The combined entity, with 1.6 trillion yuan ($226 billion)
in total assets, will overtake Citic Securities  600030.SS  as
China's largest brokerage. Trading in shares of Guotai Junan and
Haitong was suspended on Friday.
    Both Haitong and Guotai Junan are controlled by companies
running state assets for the Shanghai government.
    Under the deal, Guotai Junan plans to issue new shares to
investors in Haitong's mainland China and Hong Kong listed
shares. Guotai Junan will also issue new shares in the onshore
market to raise funds for the deal, exchange filings showed.
    The consolidation of China's brokerage industry is expected
to accelerate, with the focus on firms backed by the state
shareholders, Huatai Securities said in a research note.
    Beijing has dialled up rhetoric about the need for reform in
the brokerage sector, with new directives to encourage mergers
and acquisitions and restructuring in an industry in which more
than 140 Chinese and foreign players compete. 
    China's securities regulator said in March that it aimed to
develop about 10 leading institutions in about five years, with
two to three internationally competitive investment banks and
institutions by 2035.
    Since the end of last year, there have been announcements
about M&A between six pairs of smaller brokerages, including,
according to official Shanghai Securities News, the merger of
Ping An Securities  601318.SS  and Founder Securities
 601901.SS .
    The latest announcement comes three months after Shanghai
Communist Party Secretary Chen Jining urged Guotai Junan to
"march toward becoming a globally competitive and influential
investment bank" during a visit to the brokerage.
    The deal would also fuel market expectations of more mergers
and acquisitions, including potential deals between CICC
 601995.SS  and Galaxy Securities  601881.SS , according to Xu
Kang, an analyst at Hua Chuang securities. 
    Other possible mergers include a combination of Citic
Securities and China Securities  601066.SS , Xu said.
    Spokespersons for CICC, Galaxy Securities, Citic Securities,
and China Securities did not immediately respond to Reuters
requests for comment.
    
    SHARES JUMP
    Shares of Chinese brokerages jumped on Friday on the merger
news. An index tracking China-listed brokerages  .CSI399975 
opened 2% higher, while the CSSW Securities Index  .CSI399707 
rose as much as 2.2%.
    Shanghai-listed shares of CICC leapt as much as 8%, while
Galaxy Securities rose as much as 10% to a two-month high.
    Market volatility and dwindling initial public offerings and
other capital market deals in a slowing economy have been
weighing on the sector's earnings.
    The latest merger could send a positive signal to the market
that the "supply-side reform" in the sector was about to take
place due to challenging market cycles and a tightened
regulatory landscape, Morgan Stanley said in a research note.
    "In the near term, we believe the announced deal could
revive some investor interest in broker stocks generally,
especially those with potential M&A stories," analysts at Morgan
Stanley wrote.
    ($1 = 7.0921 Chinese yuan)

 (Reporting by Selena Li, Samuel Shen and Julie Zhu; additional
reporting by Xie Yu; Editing by Sumeet Chatterjee and Stephen
Coates)
 ((Selena.Li@thomsonreuters.com; +852 39525868;))