The $230 billion brokerage powerhouse – Firstpost

The merger of two state-owned brokerages in China, which will create a sector leader with $230 billion in assets, is part of Beijing’s efforts to consolidate the $1.7 trillion industry amid a tough market, and analysts say the move will gain momentum.

Shanghai-based Guotai Junan Securities is set to acquire local rival Haitong Securities in a share swap, the two companies said on Thursday evening.

The transaction is subject to regulatory and shareholder approval.

The combined entity, with 1.6 trillion yuan ($226 billion) in total assets, will overtake Citic Securities as China’s largest brokerage. Trading in Guotai Junan and Haitong shares was suspended on Friday.

Both Haitong and Guotai Junan are controlled by state-owned assets management companies for the Shanghai government.

Under the agreement, 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 on the onshore market to raise funds for the deal, according to a stock exchange filing.

Consolidation in China’s brokerage sector is expected to accelerate, with a focus on firms backed by state shareholders, Huatai Securities said in a research note.

Beijing has stepped up rhetoric on reforming its brokerage sector, issuing new directives aimed at encouraging mergers, acquisitions and restructuring in an industry where more than 140 Chinese and foreign players compete.

China’s securities regulator said in March it aims to develop about 10 leading institutions within five years and aims to create two to three investment banks and internationally competitive institutions by 2035.

Since the end of last year, there have been reports of mergers and acquisitions between six pairs of smaller brokerages, including the merger of Ping An Securities and Founder Securities, according to the official Shanghai Securities News.

The latest statement comes three months after Shanghai Communist Party Secretary Chen Jining, during a visit to the brokerage, urged Guotai Junan to “move toward becoming a globally competitive and influential investment bank.”

The deal will also fuel market expectations for more mergers and acquisitions, including a potential deal between CICC and Galaxy Securities, said Xu Kang, an analyst at Hua Chuang Securities.

Xu said other possible mergers include a combination of Citic Securities and China Securities.

Spokespeople for CICC, Galaxy Securities, Citic Securities and China Securities did not immediately respond to Reuters’ request for comment.

Stocks are jumping

Shares of Chinese brokerages rose Friday on the merger news. An index tracking Chinese brokerages opened 2% higher, while the CSSW Securities index rose as much as 2.2%.

Shares of Shanghai-listed CICC rose 8 percent, while Galaxy Securities rose 10 percent to a two-month high.

Market volatility and a declining number of initial public offerings and other capital market transactions in the context of a slowing economy are weighing on the sector’s performance.

The latest merger could be a positive sign to the market that “supply-side reform” in the sector is on track to be implemented due to difficult market cycles and tighter regulations, Morgan Stanley said in a research note.

“We believe that in the near future the announced agreement may revive investor interest in brokerage stocks, especially those with merger and acquisition potential,” Morgan Stanley analysts wrote.

(1 dollar = 7.0921 Chinese yuan)