Soochow: The concentration of top securities firms is clear, and the acceleration of differentiation and clearance of the tail end.

Soochow released a research report stating that, benchmarking mature markets such as the United States and Japan, the long-term outlook for the domestic securities industry will continue to follow the trend of concentration among top players and the strong getting stronger. With continuous policy support driving the normalization of mergers and acquisitions under the backdrop of building first-class investment banks, business resources with high barriers will continue to focus on leading companies. The stability of performance and significant long-term growth potential of large top securities firms will be advantageous. Key points from Soochow's analysis: Looking back on the changes in the industry over the past forty years, policy cycles have driven the acceleration of concentration among top players: 1) 1986-1994: Securities firms were plentiful with no clear hierarchy. In the early years, domestic securities operating agencies were abundant, with generally small sizes and weak capital, leading to overall disorderly growth and high dispersion in the market. After 1995, China's securities industry regulatory framework gradually formed, leading to the first round of administrative consolidation in the industry. Some securities firms increased their scale through mergers, acquisitions, or capital increases. By 2003, a pattern of differentiation in the securities industry had started to emerge. 2) 2004-2011: Two rounds of industry restructuring driven by administrative forces. In 2004, due to long-standing irregularities in China's securities industry, the China Securities Regulatory Commission (CSRC) launched a 3-year comprehensive governance initiative. In 2008, the CSRC further released regulations controlling the equity of securities firms by requiring them to have a controlling shareholder from a financial holding company. During this period, some securities firms experienced either closure or integration, and by 2011, the concentration of net assets in the industry had significantly increased, with top firms like CITIC establishing a leading position. Market concentration in the brokerage and investment banking businesses remained relatively stable during this period, with the report predicting that industry reforms would eliminate lower-quality firms at the tail end rather than mid-level securities firms, hence limiting the room for growth for top firms. 3) 2012-2018: Policy cycles and the alternation of bull and bear markets led to significant fluctuations in industry concentration. From 2012 to 2015, securities firms were allowed to innovate and with the rise of internet finance, smaller securities firms saw a window for development, leading to a temporary decline in industry concentration. However, from 2016 onwards, stringent regulatory policies combined with the deleveraging background led to a rise in capital requirements, enabling top firms to gain market share through capital risk advantages, thereby quickly reversing the trend to increased industry concentration. The "Matthew Effect" continued to be evident in the industry. Market concentration in brokerage business marginally declined during this stage, while the evolution of concentration in investment banking and asset management businesses mostly aligned with the rhythm of regulatory cycles, with significant fluctuations in proprietary trading concentration. 4) 2019 - present: The gradual progression of building first-class investment banks has led to a steady increase in industry concentration. Since 2019, regulatory efforts have been continuously promoting the construction of first-class investment banks. Several cases of consolidation have been observed, such as the merger between Guotai Junan and Haitong Securities, encouraging high-quality securities firms while limiting weaker ones. Driven by policies, resources have been converging towards top players in the industry, with the total revenue and net profits of the top 5 and top 10 firms showing a clear increase from 2019 to 2025. The trend towards industry consolidation is strengthening. While the overall market concentration of primary businesses in securities firms is entering an upward cycle, the pace and magnitude of concentration growth still show differentiation. Looking at industry rules from mature markets, centralized stability is a long-term inevitable trend: 1) United States: After rounds of regulatory iterations and crises, a stable competitive landscape with differentiated competition was formed. The American securities industry went through several reforms to establish a layered competitive landscape. The liberalization of commissions in 1975 led to a decline in brokerage fees, and the business revenue from brokerage services significantly decreased. In the 1980s, the rise of derivatives and institutional business led to capital concentration among top players, with the top ten securities firms holding a much larger share of capital. The lifting of restrictions on diversified operations in 1999 allowed independent investment banks and bank financial conglomerates to run parallel. However, after the 2008 financial crisis, the model of independent investment banks came to an end, with several institutions being acquired or transforming into bank holding companies. Currently, the industry is clearly divided: universal investment banks dominate large investment financing and cross-border mergers and acquisitions markets; boutique investment banks focus on merger advisory; discount securities firms focus on retail wealth; specialized institutions and market makers focus on niche segments, each institution engaging in different business strategies with clear boundaries between sectors. 2) Japan: The industry has always been dominated by a few major players, with crises and reforms driving the revamping of the sector. Post-World War II, Nomura, Daiwa, Nikko, and Yamaichi formed a monopoly in the Japanese securities industry, with the four major firms controlling 90% of the industry's net profit by 1982. The opening of the 1980s combined with the asset bubble led to risks accumulating in securities firms, which collapsed after the bubble burst in the 1990s, leading to the dissolution of the oligopoly. The "Financial Big Bang" reforms in 1999 opened up the industry to diversified operations, lowered commissions, and eased market access restrictions, leading to the entry of bank financial conglomerates, foreign firms, and internet securities firms, causing a significant decline in industry concentration. After the 2008 financial crisis, the withdrawal of foreign players led to the five major domestic comprehensive securities firms taking on more market share, solidifying the oligopoly structure. By 2024, the top five securities firms held approximately 45% of the industry's revenue and 51% of the net profit. In general, the Japanese securities industry has experienced cycles of monopolization, liberalization, reshuffle, and return to concentration, with ongoing crises and financial reforms continuously reshaping the industry's competitive landscape. Outlook on the future competitive landscape of the securities industry: Concentration and differentiation in parallel: as mergers and acquisitions continue to progress among securities firms, high-quality firms will continue to attract resources, leading to an increasing profitability gap between top and lower-tier firms. This will further accelerate the clearing out of less competitive players from the industry. Drawing from the experiences of developed markets like the United States and Japan, the domestic securities industry in China is expected to form a stable three-tier structure: 1) top securities firms will leverage strong capital to expand heavy capital and cross-border businesses, creating versatile carrier securities firms; 2) regional medium-sized securities firms will focus on local markets or deepening into niche segments, pursuing a boutique approach; 3) lower-tier securities firms face profit pressure and may be subject to mergers or contraction to basic channel businesses. Risk warnings: 1) Unexpected macroeconomic conditions; 2) Policy tightening hindering industry innovation; 3) Increasing market competition risks.