Chinese Brokerages to Merge, Creating a $228 Billion Entity — Update

By Sherry Qin

China's efforts to consolidate its financial-services sector took a big step forward as two of the country's largest state-backed brokerages agreed to combine to create a giant with about $228 billion in assets.

Guotai Junan Securities and smaller peer Haitong Securities will merge through a share swap, the companies said late Thursday.

The combination of the Shanghai-based firms will create a new entity with about 1.619 trillion yuan in assets as of June, equivalent to $228.28 billion, overtaking Citic Securities as China's largest brokerage.

The move comes as Chinese authorities have been pushing for consolidation in a sector that has witnessed sluggish deal activity and low business confidence since the pandemic.

Several smaller Chinese brokerages, including Guolian Securities and Minsheng Securities, have already revealed merger and acquisition plans this year.

The China Securities Regulatory Commission in March said it aimed to help 10 securities firms lead the industry within the next five years and hoped to build two to three brokerages that will have a global impact by 2035.

In April, China's State Council issued new national-level guidelines for capital markets supporting leading financial institutions to "enhance their core competitiveness through mergers, acquisitions, restructuring."

Guotai Junan on Thursday said it will issue A and H shares to Haitong stockholders in exchange for the shares they hold. It also plans a placement of new A shares for ancillary financing. The companies didn't disclose the financial details of the share conversion plan.

Last week, Haitong Securities reported a 75% decline in net profit for the first half of the year, weighed by its investment income and overseas business. Its unit Haitong International was delisted in Hong Kong in January after heavy losses in 2022 and 2023.

Guotai Junan Securities posted a 13% drop in net profit for the period, dragged by its investment-banking business, which was partially offset by its robust international business.

Dealogic data showed that in 2023, investment banks earned just about $744 million from deals in debt and equity capital markets, mergers and acquisitions, and loans involving companies from China in currencies other than the yuan--their lowest level in a decade.

The merger may be aimed at bailing out Haitong and consolidating resources to form "a new investment bank giant in China," Citi analysts said in a research note.

Guotai Junan and Haitong have a combined market capitalization of around 237.93 billion Hong Kong dollars in Hong Kong--equivalent to $30.53 billion-- and 216.69 billion yuan in Shanghai.

Both companies were halted from trading in Hong Kong and Shanghai from Friday. The trading halt in their A shares isn't expected to last more than 25 days, the companies said.

The mega deal fueled speculation of more consolidation in the industry, sending brokerage stocks higher in Shanghai and Shenzhen. Shenwan Hongyuan gained 2.3% and Huatai Securities rose 2.0%. Hong Kong's trading session was canceled due to a typhoon alert.

Yet analysts said the share-price gains could be short-lived.

The fundamentals of China's brokerage industry remain gloomy, with the average daily turnover of A shares falling below 600 billion yuan since August, DBS said in a note.

Write to Sherry Qin at sherry.qin@wsj.com

(END) Dow Jones Newswires

September 06, 2024 05:58 ET (09:58 GMT)

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