Dongwu Securities' Stock Price Plummets After Resumption of Trading, Dampening Mid-to-Small Brokers' "Group Huddle Dream"

Why does the upgrade of AI · Dongwu Securities’ merger trigger deep market concerns?

Source | Times Business Research Institute

Author | Sun Huaqiu

Editor | Han Xun

Amidst the encirclement by industry giants, how can small and medium-sized securities firms “band together for warmth”?

On the evening of March 13, after being suspended for ten trading days, Dongwu Securities (601555.SH) officially disclosed its asset restructuring plan, upgrading from a plan to acquire a 26.68% controlling stake in Donghai Securities to a combined approach of issuing shares and paying cash, quickly acquiring 83.77% of Donghai Securities to achieve absolute control.

As the first major securities industry merger case in 2026 and the first cross-city provincial state-owned securities integration within China, this deal was labeled from the start as “regional financial resource optimization” and “small and medium-sized firms banding together to break through,” once seen as a flagship example of the industry merger wave.

However, as details of the transaction were gradually revealed, market reactions remained unusually cold. On the day of resumption on March 16, Dongwu Securities’ stock price plummeted 7.10%, closing at 8.63 yuan per share, with a market value evaporating over 3 billion yuan in a single day. Since then, its stock price continued to stay weak, declining for five consecutive trading days, further confirming market caution and deep concerns about this merger.

Beyond the appealing narrative of regional financial resource integration, this seemingly logical domestic securities firm alliance actually harbors multiple hidden worries: compliance issues with the target company, deteriorating profitability fundamentals, internal merger integration conflicts, and strategic misalignment. For Dongwu Securities, this merger appears more like a risky gamble with heavy burdens.

Donghai Securities’ compliance blemishes cannot be concealed

From the details of this merger plan, the scale of Dongwu Securities’ acquisition upgrade far exceeds market expectations. When first announced on March 2, Dongwu Securities only disclosed an intention to acquire a 26.68% stake from Donghai Securities’ controlling shareholder, aiming for a relative controlling position. Just 11 days later, the plan evolved into a full acquisition of 83.77% of Donghai Securities held by 61 trading counterparties, achieving absolute control. As of now, the final transaction price has not been determined; the issuance price is set at 9.46 yuan per share, with a differentiated payment scheme of “92% shares + 8% cash” combined with pure share payment.

Regarding the consideration of controlling Donghai Securities, Dongwu Securities mentioned three points in the announcement: first, implementing national strategies and serving regional development; second, enhancing core competitiveness for sustainable growth; third, leveraging synergies to improve state capital operation efficiency.

However, these official statements cannot hide the market’s deep concerns about the transaction’s rationality. The ongoing industry Matthew effect intensifies, with core resources concentrating in leading firms, yet Dongwu Securities is investing heavily to acquire a troubled small and medium-sized firm during structural adjustment, raising questions about its strategic logic and commercial reasonableness.

The core bottom line of securities firm mergers and acquisitions is the compliance and profitability quality of the target assets, which is precisely the most prominent weakness in this deal.

In July 2025, the CSRC issued Administrative Penalty Decision [2025] No. 105, clearly stating that Donghai Securities, during its role as independent financial advisor for Jinzou Cihang’s (now delisted) major asset restructuring, failed to perform due diligence, with false records and major omissions in its documents, resulting in a confiscation of 15 million yuan of business income and a fine of 45 million yuan, totaling 60 million yuan in penalties. This penalty amount is 2.55 times Donghai Securities’ net profit attributable to shareholders in 2024, highlighting the severity of its violations.

In addition to the administrative penalties, Dongwu Securities will also assume all compliance risks hidden within Donghai Securities, most critically the potential collective investor lawsuits and compensation liabilities related to the Jinzou Cihang project, with amounts yet to be estimated. Donghai Securities also previously involved in false statements related to Huayi Electric (now delisted) and was penalized by the CSRC; over recent years, it has been repeatedly listed as a defendant in judicial disputes, revealing weak compliance governance.

According to regulations on securities industry supervision, once Donghai Securities’ serious violations are incorporated into Dongwu Securities’ regulatory framework as its future subsidiary, it will not only directly impact Dongwu Securities’ regulatory rating but also affect its qualifications for sponsorship, bond underwriting, and other core businesses. Under the tightening regulatory environment, Donghai Securities’ historical compliance issues could become a long-term burden, putting Dongwu Securities at a disadvantage in the increasingly fierce industry competition.

Mergers and acquisitions may lead to inefficient scale accumulation

Alongside compliance issues, Donghai Securities’ weak profitability fundamentals persist. Currently, a significant scale gap exists between Donghai Securities and Dongwu Securities, with limited business synergy effects, which could instead become a performance burden for Dongwu Securities.

Financial reports show that in 2015, Donghai Securities’ revenue was 4.841 billion yuan, with a net profit attributable to shareholders of 1.827 billion yuan. At that time, Dongwu Securities’ revenue was 6.83 billion yuan, with a net profit of 2.708 billion yuan, and their sizes were comparable.

However, their trajectories diverged sharply afterward. In 2023, Donghai Securities’ revenue shrank dramatically to 650 million yuan, with a net loss of 492 million yuan; in 2024, revenue rebounded to 1.469 billion yuan, but net profit was only 23.49 million yuan. In contrast, Dongwu Securities achieved 11.534 billion yuan in revenue and 2.366 billion yuan in net profit in 2024, creating a clear size gap.

Post-merger, Donghai Securities will be fully consolidated into Dongwu Securities’ financial statements. Its slim profits will have minimal impact on Dongwu Securities’ performance, but if the industry enters another downturn, Donghai Securities’ losses could directly erode Dongwu Securities’ net profits, causing performance drag and further weakening profitability and risk resilience.

Market generally believes that mergers should be based on “stronger and complementary” advantages, but the merger between Dongwu and Donghai Securities lacks such a foundation and space for “complementary advantages,” making it more like an inefficient scale expansion.

From a business structure perspective, both firms are highly homogeneous, rooted in Jiangsu South of the Yangtze River, heavily reliant on traditional brokerage and proprietary trading, with no prominent advantages in wealth management, asset management, or financial derivatives, and their investment banking businesses are both weak.

According to Wind data, in the first half of 2025, Dongwu Securities’ proprietary trading accounted for 39.57% of revenue, with brokerage and credit business combined at 49.55%, and investment banking only 7.5%. Donghai Securities’ proprietary trading was 21.16%, with brokerage and credit at 73.44%, and investment banking at 4.55%.

This high dependence on traditional businesses contradicts the current industry trend of “breaking free from dependence on market conditions and focusing on innovation,” and the merger is essentially a simple overlay of traditional businesses, unlikely to produce effective capability enhancement.

The weakness in investment banking further highlights the synergy shortfall of this merger. In 2023, Dongwu Securities had 11 IPO sponsorship and underwriting projects, which sharply declined to 3 in 2024, and only completed one IPO (Zhongcheng Consulting, 920003.BJ) in 2025, with continued decline in competitiveness; Donghai Securities fared worse, with a 56.58% drop in net income from investment banking in the first half of 2025, and zero IPO sponsorship projects for the entire year.

Core Asset Defense

A major core asset for securities firms is talent, and the potential loss of key personnel is a significant risk in this merger.

Looking at industry precedents, after Far East Securities (601901.SH) acquired Minzu Securities, internal conflicts and operational risks led to a significant loss of core investment banking teams, severely damaging its investment banking business. Similarly, after this merger, Donghai Securities will face management changes, department integrations, and restructuring of compensation and evaluation systems. If core personnel such as the Changzhou-based brokerage team, fixed income investment team, and research teams are not properly managed, they are highly likely to defect to competitors. Losing core teams would turn the acquired company into an empty shell, rendering the large initial payment meaningless and undermining the merger’s strategic value.

Additionally, regulatory constraints on “one participation, one control” will impose huge integration costs and business risks.

According to the “Securities Company Shareholding Management Regulations” and related supervisory requirements, the “one participation, one control” principle states that a single entity cannot control more than one securities firm, and this applies to futures, funds, and related financial licenses. Failure to comply could lead to regulatory rating deductions, restrictions on new business approvals, and other penalties.

Currently, Dongwu Securities controls Dongwu Futures and Dongwu Fund, while Donghai Securities controls Donghai Futures and Donghai Fund. After the acquisition, Dongwu Securities will hold two futures companies and two fund companies, directly breaching regulatory limits.

Faced with this dilemma, Dongwu Securities has only two options, both risky: internal integration, which involves huge costs in client migration, system integration, and personnel placement, with risks of high-net-worth client loss and business interruption; or external transfer of Donghai Futures and Donghai Fund, which, in a down cycle, could lead to low valuation of licenses, resulting in financial losses from low-price disposals, with uncertain approval of the transferees’ qualifications, further complicating integration and increasing risks.

More paradoxically, Dongwu Securities launched a 6 billion yuan private placement plan in July 2025, mainly for subsidiary capital increases, IT and compliance investments, wealth management, and derivatives market-making, aiming to build differentiated competitiveness against top-tier firms.

At that time, Dongwu Securities’ asset-liability ratio was already high, reaching 72.38% as of March 31, 2025, on a consolidated basis (excluding agency securities trading and underwriting). It urgently needed to raise capital through private placement to reduce leverage and focus on core innovative businesses.

However, this acquisition of Donghai Securities will heavily consume the company’s capital, directly impacting capital adequacy and risk resilience, effectively “leveraging against the trend” in a sluggish industry cycle, significantly amplifying operational risks. Post-merger, management will need to devote substantial effort, capital, and time to resolve compliance risks, fill performance gaps, and integrate internally. Mishandling could lead to a passive situation that hampers existing innovation efforts.

Regarding this merger, Dongwu Securities responded to Times Business Research Institute that Donghai Securities, rooted in Changzhou and deeply engaged in the Yangtze River Delta, has distinctive advantages in wealth management, fixed income, futures and derivatives, and macro asset investment. If the strategic integration proceeds smoothly, Dongwu and Donghai Securities will complement each other in business layout, resource endowment, and service capacity, generating synergy, improving operational efficiency, and creating greater value for shareholders.

Key Point: The way out for small and medium-sized securities firms is not blind scale expansion

The ongoing industry Matthew effect continues to intensify, with leading firms leveraging licenses, capital, talent, and projects to form monopolies, squeezing out smaller firms, and increasing industry concentration. Under this context, the way for small and medium-sized firms to break through is not blind expansion but focusing on core businesses, deepening niche specialization, and cultivating differentiated core competitiveness to stand firm and achieve breakthroughs.

As of now, the audit and valuation work for Dongwu Securities’ current transaction is still underway, and final pricing and integration plans have not yet been fully implemented. For Dongwu Securities, this merger not only determines its future development path with Donghai Securities but also reflects the broader industry trend: under increasing industry concentration, many small and medium-sized firms face survival anxiety—some rush to expand through mergers to protect themselves, but fall into the trap of “scale over quality.”

Donghai Securities’ own profitability is weak, with prominent compliance risks. If the industry remains in a downturn, its performance gaps will widen, and operational risks will continue to propagate. At that point, Dongwu Securities may not realize its initial goal of “growing stronger through mergers” but instead be dragged down by Donghai Securities’ compliance and financial burdens, losing opportunities to deepen innovation and build differentiation, gradually falling behind other mid-sized firms focused on core businesses, and ending up in a dilemma of “scale expansion with declining competitiveness.”

For Dongwu Securities, the most pressing question for the market and investors remains: can mergers driven solely by scale expansion truly translate into core competitiveness? Under the triple pressures of compliance risks, financial burdens, and internal conflicts, whether this regional securities integration will be a breakthrough opportunity or a costly burden remains to be seen, likely gradually revealed through subsequent integration progress and performance.

(Full text 4058 words)

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