The "Hua Chuang + Pacific" merger and acquisition case has made new progress, and regulatory feedback points to the rectification and improvement of the punishment of Hua Chuang Securities Investment Bank

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Pacific Securities (601099. SH) has ushered in new progress in the change of major shareholders.

Recently, the China Securities Regulatory Commission disclosed three major feedbacks on the change of major shareholders of Pacific Securities, all of which are related to Hua Chuang Securities, involving whether Hua Chuang Securities has fulfilled complete procedures for shareholding matters, the rectification and improvement of investment banking business, the sorting out and risk assessment of proprietary business, asset management business and subsidiary management, etc.

Hua Chuang Securities' willingness to acquire Pacific Securities can be traced back to 2019, and the progress of this securities acquisition case, which has lasted for many years, has attracted much attention from the market, and it has taken longer than other securities mergers and acquisitions.

In May last year, Huachuang Securities won 744 million shares of Pacific Securities held by Beijing Jiayu Investment Co., Ltd. (hereinafter referred to as "Jiayu Investment") through judicial auction, accounting for 10.92% of the company's total share capital. However, under the strict supervision of supervision, it is still unknown whether the road of "Huachuang + Pacific" mergers and acquisitions can be completed. Affected by the concept of mergers and acquisitions, Pacific Securities stocks have also risen sharply in the brokerage sector many times recently.

The feedback pointed to the risks of Hua Chuang Securities' proprietary and asset management business

Hua Chuang Securities' acquisition of Pacific Securities ushered in new progress.

On December 22, the China Securities Regulatory Commission announced three major feedbacks, requiring Pacific Securities to implement the questions one by one and provide written responses within 30 working days. The three questions all pointed to Hua Chuang Securities.

First, the shareholders to be shareholders are required to explain whether they have fulfilled complete resolution procedures for the shareholding of Pacific Pacific, including but not limited to the resolutions and information disclosure procedures of listed companies;

Second, in September this year, the proposed shareholder was issued a warning letter due to the failure to effectively implement the internal control opinions of the partially withdrawn project of the investment banking business, and the failure of the kernel committee to perform its duties, and it was necessary to explain whether the relevant problems had been rectified;

Third, the shareholders to be shareholders are required to sort out the situation of self-management, asset management and subsidiary management, and assess whether there are risks.

The CSRC also stated that after receiving the above reply, it will decide whether to issue feedback again according to the situation.

In September this year, Hua Chuang Securities was issued a warning letter by the China Securities Regulatory Commission (CSRC) because the investment banking business "the internal control opinions of the partially withdrawn project were not effectively implemented, the sponsor work report did not fully disclose the quality control and kernel concerns, the kernel members did not perform their duties properly, and the scope of salary deferred personnel was small", and Ye Haigang, then a senior executive in charge of investment banking business, and Gao Jinni, the head of the kernel department, were directly responsible for the relevant violations and were also issued a warning letter. The regulatory feedback required Huachuang Securities to explain the rectification.

In fact, Hua Chuang Securities promoted the acquisition of Pacific Securities as early as 2019. At that time, Jiayu Investment, the first shareholder of Pacific Securities, signed the "Share Transfer Intent Agreement" with Huachuang Securities, and Jiayu Investment planned to transfer no less than 4000000 shares of the company (accounting for 5.8683% of the company's total share capital) to Huachuang Securities. Hua Chuang Securities paid a deposit of 1.5 billion yuan to Jiayu Investment. In the end, the transaction failed due to the failure of the two parties to negotiate.

On June 3, 2020, Pacific Securities received a notice from Jiayu Investment that Jiayu Investment had signed the "Termination of Trading Agreement on the Share Transfer Agreement and Voting Rights Entrustment Agreement of Pacific Securities Co., Ltd." with Huachuang Securities. After negotiation, it was decided to terminate the equity transfer transaction. The parties will execute the deposit refund and release the pledge arrangement in accordance with the relevant provisions of the original agreement and the termination agreement.

However, because Jiayu Investment failed to repay the deposit and interest of 1.5 billion yuan as agreed, Huachuang Securities filed a lawsuit against Jiayu Investment. In October 2021, the court made a judgment, and Hua Chuang Securities applied to the court for compulsory enforcement. In May 2022, Hua Chuang Securities acquired 744 million shares (accounting for 10.92% of the total share capital) held by Jiayu Investment at a consideration of 1.726 billion yuan through judicial auction.

The following month, Pacific Securities submitted to the CSRC the application materials for the change of major shareholders or the actual controller of the company, which were accepted by the CSRC. It was not until September this year that the application was accepted by the SFC. This "long-distance race" of the acquisition took up to one year and three months from the submission of materials to the acceptance.

Compared with its peers, it took only five months for Minsheng Securities to submit the materials for the change of major shareholders to the CSRC and be accepted.

The merger and acquisition has been going on for many years, but before obtaining regulatory approval, it is difficult for Huachuang Securities and Jiayu Investment to fulfill their shareholder duties. Although Huachuang Securities has acquired shares, it has not yet received regulatory approval, and although Jiayu Investment is still the largest shareholder in name, its equity has been frozen for a long time.

After the merger, the advantages are complementary, and it is more competitive in the southwest region

The securities acquisition case of "Huachuang + Pacific" has a long front and has also attracted much attention from the market.

Hua Chuang Securities previously said that the acquisition of Pacific Securities will help improve the influence and resource integration capabilities of both parties in the southwest region, achieve efficient business synergy, complement resources and advantages, and enhance market competitiveness and profitability.

Pacific Securities has 33 branches in Yunnan Province, and Huachuang Securities, as a Guizhou brokerage, has 48 branches in Guizhou Province, which also has obvious regional competitive advantages, and once the merger is successful, the effect of "1+1>2" is worth looking forward to.

Huachuang Securities and Pacific Securities are both at the bottom of the industry rankings. In terms of revenue scale, Huachuang Securities and Pacific Securities achieved revenue of 2.509 billion yuan and 1.172 billion yuan respectively last year, and 3.681 billion yuan after superposition, which can enter the top 30 in the industry.

According to Huachuang Yunxin (600155. SH) reported that in the first three quarters of 2023, Hua Chuang Securities' net brokerage business fee income was 744 million yuan, investment banking business fee income was 137 million yuan, and asset management business net fee income was 62 million yuan, and the asset management business was relatively weak.

In terms of asset management and net interest income, Pacific Securities is stronger than Hua Chuang Securities, which is 1.71 times and 5.81 times of the latter, respectively, and in terms of brokerage, investment banking and proprietary business, Hua Chuang Securities is stronger than Pacific Securities, with the former being 2.94 times, 1.80 times and 2.11 times of the latter, respectively.

In terms of performance, Pacific Securities achieved an operating income of 1.172 billion yuan in 2022, a year-on-year decrease of 28.1%, and a net loss attributable to the parent company of 459 million yuan, turning from profit to loss. As of the end of 2022, the total assets of Pacific Securities were 15.324 billion yuan, down 23.45% year-on-year, and the owner's equity attributable to shareholders of the parent company was 9.230 billion yuan, down 4.95% year-on-year. In the same period, Huachuang Securities achieved a net profit of 431 million yuan.

As for the reasons for the decline in performance, Pacific Securities said: first, due to the adverse impact of the overall market environment, the income of securities brokerage business declined; second, affected by the decline of major market indexes, equity investment losses; third, the progress of equity financing business and bond underwriting business did not meet expectations, resulting in a decline in investment banking business income.

There is a market view that the promotion of policy may be conducive to promoting the change of shareholders of Pacific Securities. In November this year, the China Securities Regulatory Commission pointed out that it would support leading securities companies to become better and stronger through business innovation, group operation, mergers and acquisitions, etc., and build a first-class investment bank.