Guoxin Securities Suddenly Takes Over Control of Wanhe Securities

Due to the planning of issuing shares to purchase assets, Guoxin Securities (002736.SZ) has begun a trading halt.

According to the suspension announcement, the previously rumored "M&A expectations" for Guoxin Securities have officially been unveiled — Guoxin Securities is planning to acquire the corresponding equity of Wanhe Securities Co., Ltd. (hereinafter referred to as "Wanhe Securities"). Based on the progress of negotiations, the transaction has preliminarily identified the transaction counterparty, namely the controlling shareholder of Wanhe Securities, Shenzhen Capital Operations Group Co., Ltd. (hereinafter referred to as "Shenzhen Capital"), and has preliminarily confirmed the transaction plan to purchase 53.0892% of Wanhe Securities' shares held by Shenzhen Capital through the issuance of shares.

A person related to Guoxin Securities told the reporter: "The transaction is still in the planning stage, Shenzhen state-owned capital is the current preliminary confirmed transaction counterparty, and other shareholders are still in contact. Whether other shareholders of Wanhe Securities will join the transaction has not yet been reflected in the current announcement." This means that if the negotiations go smoothly, Guoxin Securities will not only be able to obtain an absolute controlling position in Wanhe Securities, but also it will be almost effortless to further seek actual control.

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Shenzhen state-owned capital plans and layouts

Looking at the target assets, Wanhe Securities is a state-owned holding company under Shenzhen City. In terms of equity structure, apart from small holdings by financial control platforms with state-owned capital backgrounds in Chengdu City and Haikou City, the proportion of shares held by shareholders with Shenzhen state-owned capital background is extremely high. Among them, in addition to Shenzhen Capital's absolute control, Shenzhen Kunpeng Equity Investment Co., Ltd. (hereinafter referred to as "Kunpeng Capital"), Shenzhen Enterprise Group Co., Ltd. (hereinafter referred to as "Shenzhen Enterprise Group"), Shenzhen State-owned Equity Operation Management Co., Ltd., Shenzhen Innovation Investment Group Co., Ltd., Shenzhen Yuanfu Rich Sea No. 10 Investment Enterprise, Chengdu Jiaozi Financial Holding Group Co., Ltd., and Haikou Financial Holding Group Co., Ltd. hold 24%, 7.58%, 3.92%, 3.44%, 3.30%, 3.22%, and 1.45% of Wanhe Securities' shares, respectively.

Looking only at the background of the top three shareholders, Shenzhen Capital is a state-owned capital auxiliary performance platform and a professional platform for state-owned capital operations established by the Shenzhen Municipal State-owned Assets Supervision and Administration Commission to promote the transformation of state-owned capital management from managing assets to managing capital, and to promote the overall capital operation strategy of Shenzhen state-owned capital; Kunpeng Capital is a strategic fund management platform established by the Shenzhen Municipal Party Committee and the municipal government to deepen the reform of state-owned enterprises, promote the strengthening, optimization, and expansion of state-owned enterprises, and help the city's industrial transformation and upgrading; Shenzhen Enterprise Group is a large-scale comprehensive enterprise group wholly owned by the Shenzhen Municipal People's Government and directly managed by the Shenzhen Municipal State-owned Assets Supervision and Administration Commission.

The actual controller of Guoxin Securities is also the Shenzhen Municipal State-owned Assets Supervision and Administration Commission. In terms of equity structure, the Shenzhen Municipal State-owned Assets Supervision and Administration Commission holds 33.53% of Guoxin Securities' shares through Shenzhen Investment Holdings Co., Ltd. (the largest shareholder of Guoxin Securities, hereinafter referred to as "Shenzhen Investment Holdings"), and Shenzhen Investment Holdings holds 49% of the shares of China Resources Shenzhen International Trust Co., Ltd. (hereinafter referred to as "China Resources Trust"), and China Resources Trust is the second-largest shareholder of Guoxin Securities, holding 22.23% of the shares.

Public information shows that Shenzhen Investment Holdings was established in 2004, merged and newly established by the original Shenzhen Municipal Investment Management Company, Shenzhen Municipal Trade Holding Company, and Shenzhen Municipal Construction Holding Company, and has now developed into a state-owned capital investment company with technology finance, technology parks, and technology industries as its main business.

The person related to Guoxin Securities mentioned above that the preliminary confirmed transaction counterparty in this transaction is a "brother unit" in relation to the largest shareholder of Guoxin Securities.

Against this background, the market speculates that there may be "operation" by Shenzhen state-owned capital behind the above-mentioned M&A. Shen Meng, Executive Director of Xiangsong Capital, mentioned: "The M&A between Guoxin Securities and Wanhe Securities is not only an integration of the same business entities under the same ultimate controller, but also a trend phenomenon at the state-owned capital level to promote the strength of securities firms through M&A. This transaction can not only further create the advantages of securities firms with a background in Shenzhen state-owned capital, reduce internal competition, but also optimize the layout of state-owned financial resources."Currently, the merger and acquisition (M&A) of securities firms to strive for growth and strength has become an industry trend. This is not only an expansion strategy for leading securities firms to maintain their leading position but also an important measure for local state-owned assets holding multiple securities firms to improve quality and efficiency. In the aforementioned M&A cases, for Shenzhen state-owned capital, Wanhe Securities is an important issue whether to continue to develop independently or to be incorporated into Guoxin Securities, and whether the latter can achieve greater development efficiency.

Looking at the development of Wanhe Securities, the firm was established in 2002 by the reorganization of three financial bond intermediary institutions: the former Shenzhen Municipal Financial Service Center, Haikou Municipal Financial Office Supplies Service Company, and Chengdu Caisheng Asset Management Center. At that time, the shareholding ratios of the three parties were 48.52%, 15.96%, and 35.52%, respectively. In 2014, 2015, and 2017, Wanhe Securities continued to increase its capital and expand its shares, with institutions under Shenzhen state-owned capital actively participating, and the indirect shareholding ratio has been increasing.

The years 2014 and 2015 coincided with a climax period of refinancing for securities firms. From a timeline perspective, this was an important sprint in the competition among securities firms, which to some extent laid the foundation for the subsequent industry pattern. The consecutive capital increases by Shenzhen state-owned capital at that time provided Wanhe Securities, a medium and small-sized securities firm, with the "ammunition" to become a full-license, nationwide securities firm. However, in 2020, Wanhe Securities once again faced the development bottleneck of capital scale constraints, and the company planned to increase its capital and expand its shares. Although the relevant institutions under Shenzhen state-owned capital actively participated at that time and signed a capital increase agreement with a scale of up to 4 billion yuan, according to the subsequent announcements by Shenzhen Expressway (600548.SH), which participated and signed the capital increase agreement, the capital increase has not yet been approved by the China Securities Regulatory Commission (CSRC), and the capital increase funds were returned.

The reason why the capital increase was not approved is temporarily unknown, but by sorting out the annual reports and announcements of Wanhe Securities, it can be seen that around 2020, the capital increase plan that the securities firm intended to promote was shelved, and bond financing became an important channel for obtaining funds. It can be seen that if Wanhe Securities continues to "fight alone," it may still face the issue of "ammunition supply" in the future.

Can 1+1 be greater than 2?

"Fighting alone" may have "ammunition supply" pressure, so can M&A synergy achieve 1+1>2?

At present, Wanhe Securities has 27 branches and 25 business departments. The geographical layout of the outlets is centered on the Greater Bay Area, with the Pearl River Delta and the Yangtze River Delta as key areas, radiating nationwide. Strategically, Wanhe Securities' main business strategic goals are in the capital operation services of small and medium-sized science and technology innovation enterprises and the characteristic asset management services of the Greater Bay Area. In previous developments, Wanhe Securities mainly focused on differentiation and specialization, aiming to create a boutique securities firm for small and medium sizes.

In terms of its subsidiaries, Wanhe Securities wholly owns Wanhe Hongyuan Investment Co., Ltd. and Wanhe Securities Investment Co., Ltd. to carry out equity investment, equity investment fund management, mergers and acquisitions, equity investment consulting, and follow-investment in the Science and Technology Innovation Board and the ChiNext Board, and other equity investment businesses.

According to the 2023 annual report data of Wanhe Securities, as of the end of 2023, the total assets of Wanhe Securities were 13.162 billion yuan, with an operating income of 499 million yuan in 2023, a year-on-year increase of 175.54%; the net profit attributable to the parent company was 58.7494 million yuan, turning from a loss of 229 million yuan in the previous year to a profit. In terms of business performance, the net income from fees and commissions was 185 million yuan, a year-on-year increase of 12.73%; the net interest income of Wanhe Securities in 2023 was 28.1588 million yuan, a year-on-year decrease of 9.47%; the net investment income was 178 million yuan, a year-on-year increase of 16.15%.

In contrast, Guoxin Securities has a total of 238 securities business outlets distributed in 117 cities and regions across the country, with Guangdong, Zhejiang, and Sichuan provinces ranking the top three in the number of outlets, with 67, 28, and 15 respectively. In terms of deep cultivation in the Guangdong-Hong Kong-Macao Greater Bay Area, as of the end of 2023, it has served a total of 92 enterprises in the Greater Bay Area for IPOs and 98 for refinancing, with a financing scale exceeding 120 billion yuan. The strategic vision is to create a world-class comprehensive investment bank with a global perspective, local advantages, innovation-driven, and technology-led.At the same time, in terms of performance, by the end of 2023, Guoxin Securities' total assets reached 462.96 billion yuan, with an operating income of approximately 17.317 billion yuan in 2023, a year-on-year increase of 9.08%; the net profit attributable to the shareholders of the listed company was about 6.427 billion yuan, a year-on-year increase of 5.57%. In terms of business performance, Guoxin Securities' net income from fees and commissions was 6.471 billion yuan in 2023, a year-on-year decrease of 14.6%; net interest income was 1.748 billion yuan, a year-on-year decrease of 4.47%; investment income was 5.327 billion yuan, a year-on-year decrease of 26.74%.

In comparison of this performance, solely considering the consolidation of Guoxin Securities and Wanhe Securities, the latter's contribution to performance enhancement is not very significant. However, industry insiders believe that simple "addition" is not applicable to explain the significance of this merger and acquisition case. "Shenzhen state-owned capital is promoting this merger and acquisition in response to the regulatory layer's strategy of strengthening securities firms, by integrating resources to enhance the competitiveness of city-owned financial institutions. Compared with mergers and acquisitions with other backgrounds, the advantage of mergers and acquisitions of securities firms with the same local state-owned capital background lies in stronger regional synergy, similar cultures that facilitate team integration, and strong support from local governments." Yu Fenghui, a specially invited researcher at the China Financial Think Tank, mentioned, "At present, the securities industry is entering a new round of integration climax. Behind this, there is a trend of regulatory encouragement for securities firms to enhance competitiveness through mergers and reorganizations, as well as an increase in market demand for high-quality financial services, and the ability of state-owned securities firms to use their own advantages for capital operations."

Regarding the above reorganization matters, the specific scope of target assets that Guoxin Securities will acquire is still under negotiation and discussion, and will be finalized based on the formal agreements signed by all parties.

As of the evening of August 21, Guoxin Securities has not yet hired independent financial advisors, legal advisors, auditing institutions, and appraisal institutions and other intermediary institutions for this transaction. However, since the suspension of trading, Guoxin Securities has stated that it will actively carry out various work in accordance with relevant regulations, fulfill the necessary approval and review procedures, hire relevant intermediary institutions as soon as possible, and urge each intermediary institution to speed up their work, submit and disclose documents that meet the requirements of relevant regulations to the exchange within the promised time limit.

When can the plan be disclosed? Guoxin Securities estimates that it will disclose within no more than 10 trading days. If it fails to hold a board of directors' meeting to review and disclose the transaction plan within the above-mentioned time limit, Guoxin Securities stated that it will resume trading at the opening on September 5, 2024, at the latest, and terminate the planning of related matters. At the same time, it will disclose the main work and progress of the planned matters during the suspension period, the impact on the company, and subsequent arrangements, fully highlighting the risks and uncertainties of related matters, and promise not to plan significant asset reorganization matters for at least one month from the date of disclosure of the relevant announcement.

In addition to Guoxin Securities' disclosure, a noteworthy detail is that as one of the parties that may be merged in this merger and acquisition case, the leadership team of Wanhe Securities has been adjusted recently and has not yet fully landed. Among them, in terms of the appointment of the chairman, Wanhe Securities experienced a market-focused "chairman was reported by middle management" incident in 2019, and the original president Feng Zhourang was appointed as the chairman in an emergency. After Feng Zhourang retired in 2022, the original director Zhou Yunfu acted as the duty, until Gan Weibin was elected as the chairman in 2023. Gan Weibin once served as the head of the Strategic Research Department (Board Office) of Shenzhen Investment Holdings. As mentioned above, Shenzhen Investment Holdings is the largest shareholder of Guoxin Securities. In terms of the president, in March of this year, the original president of Wanhe Securities, Yang Qi, completed his term and left office, and the vice president Wan Chunlan acted as the duty, until now the position of president is still vacant.