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

Under the siege of industry giants, how can small and medium-sized securities firms find their way?

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

As the first major M&A case in the securities industry in 2026 and the first domestic cross-city provincial state-owned securities integration, 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 by the market as a flagship example of industry consolidation waves.

However, as details of the deal were gradually revealed, market reactions remained unusually cold. On the day trading resumed 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 acquisition.

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

Donghai Securities’ compliance issues cannot be ignored

From the details of this acquisition plan, Dongwu Securities’ upgrade in the purchase scope far exceeded 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 stake. 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. The final valuation has not yet been determined; the issuance price is set at 9.46 yuan per share, with a payment mix of “92% shares + 8% cash” and pure share payment.

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

However, these official statements cannot hide the market’s deep concerns about the deal’s rationality. The ongoing industry Ma Ta effect is intensifying, with core resources increasingly concentrated among leading firms, squeezing smaller players. Dongwu Securities’ large investment in acquiring a troubled small and medium-sized firm during this structural adjustment period raises serious questions about its strategic logic and commercial rationale.

The core bottom line of securities M&A is the target’s compliance and profitability quality, which are the most prominent weaknesses in this transaction.

In July 2025, the CSRC issued Administrative Penalty Decision [2025] No. 105, clearly stating that Donghai Securities, during its role as an independent financial advisor for Jinzou Cihang’s (now delisted) major asset restructuring, failed to perform due diligence, and its documents contained false records and major omissions. It was fined 15 million yuan in business income confiscation and 45 million yuan in fines, totaling 60 million yuan. 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 administrative penalties, Dongwu Securities will also assume all compliance risks hidden in 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 the years, it has been involved in multiple judicial disputes, often listed as a party subject to enforcement, revealing weak compliance governance.

According to securities industry regulations, as Dongwu Securities’ future controlling subsidiary, Donghai Securities’ major violations, once incorporated into the parent’s regulatory framework, could not only lower Dongwu Securities’ regulatory rating but also impact its core business qualifications such as sponsorship and bond underwriting. Under tightening regulatory scrutiny, Donghai Securities’ historical compliance issues could become a long-term burden, putting Dongwu Securities at a disadvantage in fierce industry competition.

Mergers may lead to inefficient scale expansion

Alongside compliance issues, Donghai Securities’ weak profitability remains a concern. Currently, there is a significant scale gap between Donghai and Dongwu Securities. Business synergy effects are minimal and may even become a performance burden for Dongwu.

Financial reports show that in 2015, Donghai Securities’ revenue was 4.841 billion yuan, with a net profit 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—close in scale.

However, their trajectories diverged sharply afterward. In 2023, Donghai Securities’ revenue shrank 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, already a significant scale gap.

Post-merger, Donghai Securities will be fully consolidated into Dongwu Securities’ financial statements. Its slim profits will hardly boost Dongwu’s performance, and in a downturn industry cycle, losses from Donghai could directly erode Dongwu’s net profit, creating a clear performance drag and further weakening profitability and risk resilience.

Market generally believes that M&A should be based on “stronger combined, advantages complementing each other,” but the merger of Dongwu and Donghai Securities lacks this foundation and does not offer significant advantages. It appears more like a low-efficiency scale expansion.

From a business structure perspective, both firms are highly similar, rooted in Jiangsu’s southern Suzhou region, heavily reliant on traditional brokerage and proprietary trading, with no outstanding advantages in wealth management, asset management, or financial derivatives. Investment banking is also weak.

Data shows that 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 just 4.55%.

This heavy reliance on traditional businesses conflicts with the industry trend of “moving away from dependence on market conditions and focusing on innovation,” and the merger is essentially a simple addition of traditional businesses, unlikely to produce effective capability enhancement.

Weakness in investment banking further highlights the synergy shortfalls of this deal. In 2023, Dongwu Securities had 11 IPO sponsorship projects; in 2024, only 3; in 2025, just one IPO for Zhongcheng Consulting (920003.BJ). Its competitiveness in investment banking continues to decline. Donghai Securities fared worse, with a 56.58% drop in net income from investment banking in the first half of 2025, and no IPO sponsorship projects completed in 2025.

Core asset defense

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

Looking at industry precedents, after Far East Securities (601901.SH) acquired Minzu Securities, internal conflicts and hidden operational issues led to significant loss of core investment banking teams, severely damaging its investment banking business. Post-merger, Donghai Securities will face management changes, department integrations, and restructuring of compensation and evaluation systems. If core teams such as the Changzhou local brokerage, fixed income investment, and research teams are not properly managed, they are highly likely to defect to competitors. Losing core teams could turn Donghai Securities into a shell company, rendering the huge initial payment meaningless and undermining the strategic purpose of the acquisition.

Additionally, regulatory restrictions on “one shareholding, one controlling” will impose substantial costs and risks. According to the “Securities Company Equity Management Regulations,” 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 downgrades and restrictions on new business approvals.

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

Facing 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 divestment of Donghai Futures and Donghai Fund, which, in a declining industry cycle, could be undervalued, leading to financial losses, with uncertain approval for buyers.

Compounding the issue, Dongwu Securities launched a 6 billion yuan private placement plan in July 2025, mainly to fund subsidiary capital increases, IT, compliance, wealth management, and derivatives market-making—aimed at building differentiated competitiveness. At that time, its asset-liability ratio was already high, at 72.38% as of March 31, 2025, requiring capital infusion to reduce leverage and focus on core innovation.

The acquisition of Donghai Securities will heavily consume capital, impacting capital adequacy and risk resilience, especially in a sluggish industry cycle—effectively “leveraging against the trend,” increasing operational risks. Post-merger, management will need to devote significant resources to resolve compliance risks, fill performance gaps, and integrate internally. Mishandling could lead to a situation where the firm is caught in a passive, difficult position, hampering existing innovation efforts.

In response, Dongwu Securities stated that Donghai Securities, rooted in Changzhou and the Yangtze River Delta, has strengths in wealth management, fixed income, futures, derivatives, and large-asset investments. If the strategic integration proceeds smoothly, the two firms can complement each other in business layout, resource endowment, and service capacity, generating synergy and improving operational efficiency, creating greater value for shareholders.

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

The industry’s Ma Ta effect continues to intensify, with leading firms monopolizing core resources like licenses, capital, talent, and projects, squeezing out smaller players and increasing industry concentration. Under this trend, the only viable path for small and medium firms is not blind growth but focusing on core businesses, deepening niche specialization, and cultivating differentiated competitive advantages to survive and break through.

Currently, the audit and valuation work for Dongwu Securities’ transaction is ongoing, and final pricing and integration plans are yet to be finalized. For Dongwu, this merger not only determines its future trajectory with Donghai Securities but also reflects the broader industry anxiety—under the pressure of industry concentration, many small and medium firms are rushing to expand through acquisitions to survive, often falling into the trap of “big scale, weak quality.”

Donghai Securities’ weak profitability and compliance risks mean that if the industry remains sluggish, its performance gaps will widen, and operational risks will persist. Dongwu Securities may fail to achieve its goal of growth through acquisition and instead be dragged down by Donghai’s compliance and financial burdens, missing opportunities to innovate and build differentiation. Ultimately, it could be overtaken by other mid-sized firms focusing on core strengths, falling into a cycle of “scale expansion with declining competitiveness.”

The most pressing question for Dongwu Securities and investors remains: can M&A driven solely by scale truly translate into core competitiveness? Under the combined pressures of compliance risks, financial burdens, and internal conflicts, whether this regional securities integration becomes a breakthrough or a costly burden remains to be seen, likely revealing itself gradually through subsequent integration and performance.