Shenwan Hongyuan Group: Top securities firm merger and acquisition benchmark project landed. Suggested to grasp the main investment theme of merger and restructuring.

Shenwan Hongyuan Group released a research report stating that Guotai Junan and Haitong's merger and reorganization is speeding up. After the merger, the combined net assets surpass CITIC SEC to become the largest brokerage in the A-share market in terms of volume, comparable to international top investment banks. There is still room for improvement in profitability compared to CITIC SEC. The new surviving company is expected to greatly enhance its global resource allocation capabilities and control goodwill risks, benefiting from the complementary advantages brought by the merger. Event: On January 9th, Guotai Junan proposed to absorb and merge Haitong at a stock exchange ratio of 1:0.62 and issue A-share stocks to raise funds, which was approved by the merger and reorganization review committee of the Shanghai Stock Exchange. Shenwan Hongyuan Group's key points are as follows: Rapid progress demonstrates regulatory encouragement for "leading brokerages to expand through mergers and acquisitions" In response to the new "Nine National Policies" and Shanghai's "Twelve Mergers and Acquisitions," the merger and reorganization of Guotai Junan and Haitong is accelerating. Regarding the progress of the Guotai Junan and Haitong merger: On September 5, 2024, Guotai and Haitong officially announced the suspension of major asset restructuring; on October 9, 2024, Guotai released the merger transaction plan; on November 20, 2024, the transaction was approved by the Shanghai State-owned Assets Supervision and Administration Commission, and Guotai released the share swap merger transaction document; on December 13, 2024, the transaction was approved by the shareholders' meetings of Guotai and Haitong; on December 23, 2024, the transaction was accepted and approved by the Shanghai Stock Exchange; on December 26, 2024, the Shanghai Stock Exchange raised inquiries; on December 30, 2024, Guotai responded to regulatory inquiries; on January 9, 2025, Guotai absorbed and merged Haitong, which was reviewed by the merger and reorganization committee of the Shanghai Stock Exchange, and the approval was announced on the same day. The whole process took less than 3 months (trading days). After absorption and merger, the scale is comparable to international top investment banks, and there is still room for improvement in profitability compared to CITIC SEC. In terms of assets, as of the end of September 2024, the total assets of Guotai Junan and Haitong were 931.9 billion and 693.2 billion yuan respectively, and the net assets were 166.4 billion and 161.2 billion yuan respectively. After the merger, the net assets of the two surpass CITIC SEC to become the largest brokerage in the A-share market in terms of volume (the total asset gap narrowed to 6.6%). Compared to current international top investment banks, there is still a gap. Based on the data for the first nine months of 2024, the total asset and net asset sizes of Goldman Sachs are 7.5 and 2.6 times that of the merged entity of Guotai Junan and Haitong; the total asset and net asset sizes of Morgan Stanley Agriculture Group are 5.4 and 2.2 times that of the merged entity of Guotai Junan and Haitong. In terms of profitability, the revenue of Guotai Junan and Haitong for the first nine months of 2024 was 18 billion and 9.8 billion yuan respectively, and the net profit attributable to the parent company was 9.5 billion and -0.7 billion yuan respectively. The new entity after the merger still has a revenue and net profit gap compared to CITIC SEC of 24.8% and 89.5%. During the same period, the revenue and net profit of Goldman Sachs were 9.7 and 8.0 times that of the merged entity of Guotai Junan and Haitong; the revenue and net profit of Morgan Stanley were 11.4 and 7.6 times that of the merged entity of Guotai Junan and Haitong. Improving international layout, poised to become the Chinese brokerage with the widest coverage of countries along the "Belt and Road" Guotai Junan has overseas institutions in China, Hong Kong, Macau, the United States, the United Kingdom, Singapore, Vietnam, among others; Haitong has branches, subsidiaries, or representative offices in 15 countries and regions across 5 continents: Asia, Europe, North America, South America, and Oceania. After the merger, the business layouts of both parties will cover major capital markets globally, including Shanghai, China Hong Kong, China Macau, Singapore, New York, London, Tokyo, Mumbai, etc., providing financial services network in developed markets like North America, Europe, and emerging markets in Asia, Latin America, among others. Considering the current unclear trend of IPO recovery in mainland China and the three major reforms to the listing system by the Securities and Futures Commission and the Hong Kong Stock Exchange in 2024, facilitating mainland companies to list in Hong Kong, the Hong Kong IPO market will improve before the A-share market. The new surviving company after the merger of Guotai Junan and Haitong is expected to greatly enhance its global resource allocation capabilities, with a particular focus on the international business sector (especially overseas investment banking), contributing to the company's performance to be on par with leading overseas investment banks continuously (in 2023, the proportion of revenue from Goldman Sachs and CITIC International to their total revenue were 37% and 16%, respectively, while the merged entity of Guotai Junan and Haitong during the same period was 5%). Goodwill risks are controllable, focusing on the performance elasticity brought by complementary advantages after the merger As of the end of September 2024, Haitong's book goodwill value was 4.194 billion yuan, with impairment reserves for goodwill already set at 731 million yuan (mainly for Haitong Bank and HAITONG INT'L). Since Guotai and Haitong were merging under different controls, Haitong's existing goodwill was not considered in the transaction, therefore, the goodwill amount of the surviving company after the transaction was 4.071 billion yuan (mainly due to Guotai's acquisition of Hua An Fund's equity and Guotai Junan Vietnam), accounting for 1.25% of the merged net assets of the two companies at the end of September 2024, indicating controllable goodwill risks. Investment analysis: Positive outlook on the brokerage sector, grasp the investment trend of mergers and reorganizations It is recommended to pay attention to brokerages controlled by the same shareholders and brokerages with expectations of market-oriented mergers (increasing asset size and expanding business layout), including Guotai Junan (601211.SH), Zheshang (601878.SH), Guolian (01465,601456.SH), among others. AdditionallySuggestion: Pay attention to East Money Information (300059.SZ) benefiting from the revival of trading activity.Risk disclaimer: There is uncertainty whether the Guojun Haitong transaction can be completed (insider trading, abnormal stock prices, etc. may lead to the suspension, termination, or cancellation of the transaction); approval, approval, registration, or consent of the China Securities Regulatory Commission and other authorized regulatory agencies are still required for the transaction to be formally implemented, and the uncertainty of whether it can be implemented still exists; risks related to acquisition request rights and cash selection rights; risks of creditors requesting early repayment of debts; risks of asset delivery.