The Evolution of Brokerages

On December 17, the brokerage sector stood out as one of the few industries experiencing a surge during afternoon tradingCompanies such as Huajin Securities, Guolian Securities, First Venture, and CITIC Securities were seen actively pulling their stock prices upward, a promising indicator in what could potentially become a historic turning point for China's securities industry.

As we look back from the perspective of several years ahead, 2024 is poised to signify an unprecedented watershed moment for this sectorOver the last few months, while the brokerage stocks have shown impressive growth, experts argue that this is only a glimpse of the industry’s true potential and what the future may hold.

Historically, the turning points in the brokerage sector have often hinged on expectations surrounding supportive policies from capital markets and the securities industry, usually emerging during periods of market downturn

The continued momentum of this sector is heavily reliant on a self-reinforcing feedback loop that connects policy announcements to market performance and ultimately to earnings reports.

Taking cues from the past, the collective appearance of the heads of three major financial departments on September 24, followed by a crucial decision-making meeting on September 26, could be seen as the beginning of a new turnaroundPrompted by policy initiatives, expectations for the Chinese stock market underwent a radical shiftTrading volumes in A-shares rocketed back to the trillion-yuan mark, breaking historical records on September 30 and October 8, hitting two extremes of 2.6 trillion and 3.4 trillion yuan respectively.

This uptick in market activity has been a direct windfall for brokerage firms, leading to a noticeable and immediate improvement in financial performanceData indicate that out of 43 listed brokerages, more than 30 reported net profit growth in the third quarter of this year

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For instance, CITIC Securities reported a net profit attributable to shareholders of 6.229 billion yuan, reflecting a year-on-year increase of 21.94%. Meanwhile, Huatai Securities soared with a staggering 137.98% increase in net profits.

In contrast to their larger counterparts, smaller firms exhibited remarkable agility, evident when Northeast Securities boasted an increase in net profit exceeding tenfold, and both Guohai Securities and First Venture showcased near twentyfold profit growth.

It is apparent that a cycle defined by favorable policies, flourishing market conditions, and solid performance has taken shapeAs long as the market continues to thrive, brokerage firms will invariably follow suit, and this seems highly probable.

At a briefing held by the State Council Information Office, the central bank announced plans for a special relending tool aimed at supporting stock buybacks by publicly traded companies and increasing stock purchases by major shareholders, with an initial allocation of 300 billion yuan

Additionally, the central bank will create liquidity swap facilities for securities, fund, and insurance companies, allowing eligible firms to use their holdings such as stock ETFs as collateral to access liquidity, with a starting operational scale of 500 billion yuan.

Governor Pan Gongsheng of the central bank noted that, should the initial outcomes prove favorable, further injections of 300 billion and 500 billion yuan could follow, potentially leading to a total influx of 2.4 trillion yuan into the marketThis funding has yet to be fully utilized, and its eventual deployment is expected to provide further momentum to the market.

Furthermore, after the announcement of new monetary policies on September 24, there was a general assumption that fiscal policy would closely monitor the impacts of these financial initiatives before deciding on subsequent measuresYet, contrary to expectations, just two days later, the government expressed clear intentions and demands regarding the implementation of fiscal policies

Current debt resolution strategies are already underway, and the upcoming Central Economic Work Conference in December, known for its high-profile agenda, is anticipated to unveil significant news.

The implementation of fiscal policy will fundamentally enhance the overall profit landscape of the market, serving as a genuine catalyst for an upward trend in stocks.

From a broader perspective, the current landscape of the securities industry is replete with unprecedented opportunitiesOn the financing front, China has historically relied on rapid industrialization and urbanization, primarily driven through infrastructure and real estate investment, pairing resident savings with bank credit as the most effective resource allocation method under government guidanceHowever, as China transitions into an era where technological innovation spearheads growth, critical breakthroughs and new productive forces are paramount

Firms will need to embrace experimentation and assume risks for success, which inevitably positions the direct financing through capital markets as a more viable alternative to the traditional indirect financing through commercial banks.

On the investment side, between 2020 and January 2024, household deposits rose by 58.24 trillion yuan, with a staggering 82% classified as time depositsThe influx of deposits over these four years was roughly equivalent to ten years of total new deposits from 2009 to 2019. With the real estate sector on the retreat, the stock market is now positioned to emerge as the new reservoir for monetary inflowCompared to developed nations, Chinese households still allocate a significantly smaller portion of financial assets towards stocks, making the shift towards equity assets practically unavoidableIn October of this year alone, household bank deposits decreased by 570 billion yuan, while deposits from non-bank institutions like securities increased by 1.08 trillion yuan, clearly marking the beginnings of this transition.

This dual demand for robust capital markets from both financing and investing sides underscores the significant efforts made by the government to rejuvenate the stock market and the unprecedented push towards constructing a financially strong nation

Achieving this objective inherently requires a securities sector that is commensurate with such ambitions.

Looking at international trends, the total asset share of the securities industry relative to GDP in the U.Sfluctuates between 15% and 30%, whereas China languishes at a mere 3% to 6%, a stark contrast to its standing as the world's second-largest economy.

Thus, in March 2024, the China Securities Regulatory Commission announced its intent to accelerate the establishment of first-class investment banks and institutions, encouraging leading securities firms to improve their operations through innovation, conglomeration, and mergersSubsequently, ZheShang Securities, Guolian Securities, Guoxin Securities, Guotai Junan, and Haitong Securities have all made announcements concerning potential acquisitions or mergers.

Mergers and acquisitions have long been the most effective strategy for financial firms seeking rapid expansion, creating synergy and scalability that can elevate companies in a short timeframe

The domestic securities industry has experienced four major waves of mergers and acquisitions from 1995 to 2022, and we are currently witnessing the fifth wave unfold.

It is an undeniable fact that both increased market activity and the strengthening of brokerage firms will inevitably lead to a reassessment of their value, something consistently observed throughout history.

Moreover, it is worth noting that in the past twenty years, every significant stock market rally in China has been accompanied by outsized returns from brokerage stocks, without exception.

There has never been a time when China needed a powerful capital market and securities industry more than today, which simultaneously implies that brokerages have never had such robust prospectsFrom this perspective, the long-term outlook for brokerages may be more promising than ever before.

Despite the aggressive uptrend since late September, the brokerage sector continues to trade at relatively low valuations, with a price-to-book ratio approximately at the 30th percentile since 2014, indicating that there remains considerable room for both valuation and performance growth upward

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