Bull Market Flagbearers Rise Together

On November 29, 2023, a remarkable surge in the Chinese stock market was witnessed, marked by a collective upswing across various brokerage firms including heavyweights like Tonghuashun, Jinlong, Guosheng Jinkong, and Pacific Securities, among others. This bullish trend was not confined to the A-shares alone; it also permeated the Hong Kong market with companies like China Merchants Securities and CITIC Securities showcasing strong performances. This collective market movement has led many analysts to speculate that the year 2024 may be a pivotal moment for China’s securities industry.

While the brokerage sector has seen significant price increases over the past month, it is crucial to recognize that these gains do not yet align with the potential and expectations of the industry. Historically, the catalysts behind reversals in the brokerage sector have predominantly been tied to anticipated supportive policies for the capital markets, which typically arise when the market is at a low ebb. The sustained momentum of the sector often hinges on a positive feedback loop consisting of policies, market reactions, and company performance.

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Reflecting on past trends, the collective appearance of the leaders from three major financial sectors on September 24, 2023, coupled with a crucial policy meeting just days later, is viewed as the initiation of a new reversal phase. Underpinned by policy adjustments, the expectations surrounding the Chinese stock market underwent a significant transformation, leading to a resurgence in trading volume. The turnover in A-shares soared back to the trillion yuan mark, achieving all-time highs of 2.6 trillion yuan and then 3.4 trillion yuan on September 30 and October 8, respectively.

As the direct beneficiaries of this heightened market activity, brokerage companies have shown immediate improvements in their financial performance. Data reveals that among 43 publicly listed brokerages, over 30 reported growth in net profits for the third quarter of the year. Notably, CITIC Securities reported a net profit of 6.229 billion yuan for Q3, reflecting a year-on-year increase of nearly 22%. Similarly, Huatai Securities experienced an impressive growth of approximately 137% in net profit, with Guotai Junan and China Galaxy also showing significant year-on-year increases.

Smaller brokerage firms are exhibiting even more pronounced elasticity in their performance. For instance, Northeast Securities saw its Q3 net profit surge over tenfold, while Guohai Securities and First Capital Securities posted staggering growth rates nearing twenty times.

This establishes a clear trend: the interaction between policies, market dynamics, and corporate earnings is creating a solid trading logic; as long as the market continues to move in a favorable direction, brokerages are likely to flourish as well, making this prospect highly dependable.

During a press conference by the State Council Information Office, the People’s Bank of China (PBOC) officially announced the establishment of a special lending facility aimed at supporting publicly listed companies in executing share buybacks and enabling major shareholders to increase their stock holdings, initially set at a staggering 300 billion yuan. The central bank is also rolling out a mechanism to allow securities, mutual funds, and insurance companies to exchange their stock assets, enabling them to obtain liquidity from the central bank, with an initial operation scale proposed at 500 billion yuan.

PBOC Governor Pan Gongsheng elaborated that if the effects of these initiatives prove beneficial, the central bank could potentially implement additional phases of 300 billion and 500 billion yuan, amounting to a total of 2.4 trillion yuan in potential incremental capital. It’s noteworthy that this capital has not yet been deployed in the market, and its eventual introduction is expected to inject considerable new momentum into the financial markets.

Moreover, it is essential to consider the events following the announcement of new monetary policies on September 24. The consensus was that future fiscal policies would be calibrated based on the outcomes of these monetary measures. However, the subsequent political bureau meeting on September 26 startled many by promptly reinforcing fiscal policy intentions. Currently, debt resolution strategies are being formulated, and the highly anticipated Central Economic Work Conference in December is expected to unveil further significant initiatives.

The implementation of these fiscal policies is poised to fundamentally shift the profitability matrix of the entire market and serves as a principal driver for rising market trends.

From a broader perspective, the current landscape of the securities industry is ripe with unprecedented historical opportunities. The past focus in China on rapid industrialization and urbanization, primarily driven by infrastructure and real estate, has gradually transitioned toward a technological innovation-led growth model. This era demands breakthroughs against existing constraints and calls for businesses to take risks through trial and error, necessitating a shift from indirect financing through commercial banks to direct financing through capital markets.

On the investment side, between 2020 and January 2024, household savings saw an increase of 58.24 trillion yuan, of which 82% were time deposits. This recent four-year accumulation of deposits equals the total sum from 2009 to 2019, illustrating the shifting financial landscape. Post the real estate era, the stock market has emerged as a viable reservoir for new currency, and compared to developed countries, the allocation of financial assets among Chinese residents is still quite low, affirming that an increased allocation toward equities is virtually inevitable. In October alone, household deposits declined by 570 billion yuan, while non-banking financial institution deposits swelled by 1.08 trillion yuan, indicating a significant shift of capital.

The pressing demand for a robust capital market reverberates through both the financing and investment realms, elucidating high-level calls for enhancing the stock market. An unprecedented vision to build a financial powerhouse underscores the necessity of a securities industry that can sustain such ambitions.

International benchmarks reveal that the total assets of the securities industry in the United States represent 15%-30% of GDP, whereas China’s figures fall significantly lower at just 3%-6%, which is inconsistent with its status as the world’s second-largest economy.

In response, the China Securities Regulatory Commission (CSRC) has proposed accelerating the development of premier investment banks and institutions to bolster leading brokerage firms through business innovations, integration, mergers, and acquisitions. Following this, several firms like Zheshang Securities, Guolian Securities, and Guotai Junan have articulated plans for related mergers and acquisitions.

Mergers and acquisitions have historically proven to be the most effective means for financial entities to scale quickly. The synergistic and scale effects can uplift relevant enterprises in a relatively short period. The domestic securities industry has witnessed four notable rounds of mergers from 1995 to 2022, with the current landscape ushering in a fifth wave.

Without a doubt, whether driven by an invigorating capital market or the growth of brokerage firms, a reevaluation of brokerages is an eventual certainty—a pattern consistently echoed throughout history.

Another point of note is that in the last two decades, during every significant market rally in A-shares, the brokerage sector has consistently outperformed, without a single exception.

China stands at a crossroads, facing an unprecedented necessity for a powerful capital market and securities industry—this urgency suggests that brokerages have never held such vast opportunities. Viewed from this vantage point, prospects for the long-term development of brokerages today appear more promising than ever before.

Despite the drastic increases observed since late September, the brokerage sector remains undervalued, with a price-to-book ratio hovering around the 30th percentile since 2014, indicating substantial room for growth both in valuation and performance. For investors, the current landscape may still present a strategic opportunity for engagement.