Soochow: A new round of securities mergers and acquisitions is heating up, and there is still considerable room for industry consolidation.

Soochow released a research report stating that a new round of mergers and acquisitions is heating up, and there is still significant room for consolidation in the securities industry. With policy guidance and internal drivers, ongoing mergers such as Guolian + Minsheng, Zheshang + Guodu, Western + Guorong, Guoxin + Wanhe, Guojun + Haitong, etc., are continuously driving diverse integration paths. Looking at the potential for future mergers, mergers between securities firms with the same controlling shareholders face less resistance, and market expectations are high, especially with the integration of financial resources within the China Investment Corporation system and regional state-owned assets. Regulations encourage securities firms to merge and restructure to create "aircraft carrier-level" securities firms. The China Securities Regulatory Commission (CSRC) has made it clear that it will support leading securities firms in becoming stronger through business innovation, group operations, mergers, and restructurings to create top-tier investment banks. As early as 2019, the CSRC stated its intention to create "aircraft carrier-level securities firms" and actively undertook a series of initiatives, including the first one being: "Replenish the capital of securities firms through multiple channels, encourage market-oriented mergers and acquisitions, and support the industry in becoming stronger." In the past, domestic securities firms mainly expanded through internal growth. Under regulatory guidance in the future, there may be more mergers within the industry, and resource integration within the industry may become another important way for securities firms to quickly increase their size and comprehensive strength. Large securities firms can further fill gaps and consolidate advantages through mergers, while medium and small securities firms can potentially overtake through outward mergers, expanding rapidly to achieve economies of scale and business complementarity. Compared to major markets globally, the concentration of the securities industry is also relatively high. In Japan's securities firms, major securities companies such as Nomura Securities, Daiwa Securities, and Nikko Securities account for around 40% of profits; in American investment banks, the top ten trading houses have revenues accounting for over 50%. Multi-dimensional transformation leads to internal growth. 1) Demand for client-driven businesses remains strong: The directional investment of domestic securities firms fluctuates greatly and heavily depends on market conditions. Client-driven activities such as market-making, derivatives, etc., have lower fluctuations, which can enhance the overall stability and resilience of securities firms' performance. Referring to the structure of overseas investment banks, we believe that market-making business is an important direction for the transformation of China's securities firms' proprietary operations. 2) Huge space for wealth management advisory services: After years of rapid development and weathering multiple waves of reform storms such as asset management regulations, net wealth management products, digital transformation, China's wealth management industry has entered a golden development period. With the continuous deepening of wealth management transformation, securities advisory teams are expanding rapidly. From 2015 to 2022, the compound annual growth rate of advisory personnel reached 13%, increasing their share of employees from 11% to 20%. The development of AI large models is also accelerating the empowerment of advisory services, improving customer experience and increasing advisory efficiency effectively. In addition, the fund advisory business is now conditions have shifted from being experimental to regular, and is expected to accelerate its development in the future, greatly conducive to nurturing professional buyer intermediary forces. 3) Strengthening the layout of ETF wealth management: Passive fund scale in China is expanding rapidly and has become an important vehicle for investors to participate in the capital market. The characteristics of low-cost, convenient trading, and transparent investment of ETFs fully meet the allocation needs of advisory services, and are expected to become an important leverage for the transformation of securities advisory services and wealth management. Looking at overseas market experience, the development of ETFs and advisory services complement each other. 4) Accelerating digital transformation: Technology capabilities as a key factor in enhancing the core competitiveness of the industry have become a fiercely contested track among major securities firms. The recent popularity of Deepseek has also accelerated the pace of intelligent transformation of securities firms. Deepseek has the advantage of low research and development costs, allowing medium and small securities firms to access advanced technology at very low costs, mainly focusing on empowering internal operations to effectively improve work efficiency. 5) Optimizing asset allocation efficiency: Securities firms' proprietary operations are highly concentrated in fixed-income assets, but as the low-interest rate environment continues, the difficulty of allocating fixed-income assets for securities firms is increasing. In the future, securities firms need to pay more attention to opportunities in fixed income and increase their allocation of convertible bonds and perpetual bonds, while also complementing with low-volatility equity positions. Particularly in the equity direction, there is a need to focus on dividend asset allocation and the opportunities provided by the use of exchange facilitation tools (SFISF) to optimize asset allocation efficiency.