Guotai Junan Settles On Horizontal Competition Solution

On the evening of January 14, Guotai Junan announced that it would solve the problem of horizontal competition with its holding subsidiary Shanghai Securities by way of increasing capital through agreement. Specifically, Bailian Group and Shanghai Chengtou will increase the capital of Shanghai Securities in a private way. After completion, Bailian Group will become the controlling shareholder of Shanghai Securities (holding 50%). Five years later, Guotai Junan solved the problem of horizontal competition between the two securities companies by "changing owners" of Shanghai Securities.

10.5 billion capital increase

Guotai Junan announced that Bailian Group Co., Ltd. ("Bailian Group") and Shanghai Chengtou (Group) Co., Ltd. ("Shanghai Chengtou") have subscribed for the newly increased registered capital of Shanghai Securities by means of capital increase through non-public agreement, and the existing three shareholders of Shanghai Securities, including Guotai Junan, have given up the priority to subscribe for the newly added registered capital.

After the capital increase, Bailian Group's shareholding ratio in Shanghai Securities was 50%, and Guotai Junan's shareholding ratio in Shanghai Securities decreased from 51% before capital increase to 24.99%. Shanghai Securities will no longer be included in the scope of Guotai Junan consolidated statements, while Bailian Group will become the controlling shareholder of Shanghai Securities.

At present, the registered capital of Shanghai Securities is 2.61 billion, with 51%, 15.67% and 33.33% respectively held by Guotai Junan, Shanghai International Group Co., Ltd. (Shanghai International Group) and Shanghai shangguotou Asset Management Co., Ltd.

In the trading plan, Shanghai securities added 2.716 billion yuan of registered capital, of which Bailian Group and Shanghai Chengtou subscribed 2.663 billion yuan and 53 million yuan respectively. After the capital increase, Bailian Group, Shanghai Chengtou, Guotai Junan, Shanghai International Group and Shanghai shangguotou held 50%, 1%, 24.99%, 7.68% and 16.33% respectively. Shanghai Chengtou is a related party of Guotai Junan.

As the scheme was first put forward on August 16, 2019, the relevant assets appraisal takes August 31, 2019 as the base date, and the capital increase price is "385345 yuan / 1 yuan of newly added registered capital", and the total amount of capital increase is RMB 10.468 billion yuan.

The transaction has yet to be approved by the state owned assets supervision and Administration Commission of Shanghai Municipality and approved by the China Securities Regulatory Commission. There are still some uncertainties in the approval time and results.

Guotai Junan announced that the capital increase will be used to supplement the capital of Shanghai Securities and increase the working capital of Shanghai Securities. It is estimated that the directional capital increase of Shanghai Securities will generate income of RMB 1.276 billion for Guotai Junan. After considering the tax and fee factors, the expected net profit of this directional capital increase will exceed 10% of Guotai Junan's audited net profit in 2018. The above amount is based on the financial position of Shanghai Securities as of December 31, 2019.

Horizontal competition solved

Shanghai Securities was established in April 2001. The earliest shareholders were Shanghai International Group and Shanghai International Trust Co., Ltd. ("Shanghai International Trust"), with an initial registered capital of 1.5 billion yuan.

Since then, in July 2014, Guotai Junan priced 3.571 billion yuan and transferred 51% equity of Shanghai Securities held by Shanghai International Group and became its holding company; Shanghai International Group's shareholding decreased to 15.67%, and Shanghai shangguotou held 33.33%. In July 2016, the registered capital of Shanghai Securities increased to 2.61 billion yuan.

In 2014, China Securities Regulatory Commission (CSRC) required Guotai Junan to solve the problem of horizontal competition with Shanghai Securities and its subsidiary Haiji Dahe Securities Co., Ltd. (Haiji securities) within 5 years from the date of holding Shanghai Securities.

In terms of Haiji securities, in February 2016, Guotai Junan transferred 66.67% equity of Haiji securities held by Guotai Junan to Guiyang Financial Holding Co., Ltd., which solved the problem of competition with its peers. From the specific business point of view, Haiji securities used to be an investment bank subsidiary of Shanghai Securities. After this transaction, the investment banking business of Shanghai Securities was only bond underwriting and the new third board business, which solved the horizontal competition between Guotai Junan and Shanghai Securities in the investment bank recommendation business.

In terms of Shanghai Securities, until the five-year term is about to expire, Guotai Junan announced on July 30, 2019 that it has drawn up a preliminary solution, that is, Shanghai Securities will implement capital increase and share expansion, and after the completion of capital increase, the controlling shares will "change ownership".

At present, Shanghai Securities has 3 branches, 74 securities business departments and 8 futures business departments. In 2018, the operating income of Shanghai Securities was 906 million yuan, and the net profit was 70 million yuan; from January to August of 2019, the operating income was 1.037 billion yuan, and the net profit was 268 million yuan.

Previously, some insiders said that Guotai Junan's main competition with Shanghai Securities lies in their brokerage business and proprietary business.

People close to Shanghai Securities said that Guotai Junan has changed a lot in the Research Institute recently, but on the one hand, the business lines of Guotai Junan and Shanghai Securities did not cross much before. After the equity change, as far as Shanghai Securities is concerned, it will be conducive to the relocation of the company's business lines and develop in a favorable direction.

How to solve the competition among the same trade?

Domestic securities companies have gone through a lot of separation, separation and merger, and almost all of them have to solve the problem of competition in the same industry. At present, there are three main ways to solve the problem in China. One is to transfer the shares held by the controlling party securities companies completely; the other is to integrate the holding subsidiary securities companies. The two are differentiated development, making the subsidiary securities companies into institutions engaged in a certain special business; the third is to transfer the controlling shares to turn the controlled securities companies into their participating subsidiaries.

From the specific path, Guotai Junan chose the third way. Before that, domestic securities companies had more choice of the second way to solve the competition.

Typical examples are: in 2014, Founder Securities acquired 100% equity of national securities, and since then, national securities has reduced its registered capital. Founder Securities has reduced its net assets and integrated its business. It has taken national securities as an underwriting and sponsor subsidiary, and all other businesses have been transferred to Founder Securities. On October 30, 2019, national securities was approved to be renamed "founder securities underwriting and recommendation Co., Ltd.".

In 2017, CICC acquired CICC securities. In terms of solving horizontal competition, CICC said that CICC's positioning will be a unified platform for CICC retail brokerage and wealth management. On July 26, 2019, CIC securities was approved to be renamed "China CICC wealth Securities Co., Ltd.".

In 2019, CITIC Securities acquired Guangzhou securities. In terms of solving the problem of horizontal competition, CITIC Securities said that Guangzhou securities would be positioned as a subsidiary of CITIC Securities engaged in specific business in the future, and its business areas would be mainly concentrated in Guangdong Province (excluding Shenzhen), Guangxi Zhuang Autonomous Region, Hainan Province, Yunnan Province and Guizhou Province. Meanwhile, CITIC Securities will change its business scope to avoid horizontal competition Effective measures for the dispute. On January 8, 2020, Guangzhou securities has been approved to change its name to "CITIC Securities South China Co., Ltd.". (Editor: Zhang Xing)

?