【Sector Research】China Brokerage Sector – Optimism & reform suggest more earnings upsides

China brokers’ Jun 2020 financial data doubled from May, while we now expect more upward surprise in coming quarter as growing optimism is driving market activity up close to post-2015 high, and we are just one step away from a more robust IPO and bond financing market. We therefore revise up China brokers’ TP by an average of 40% to reflect both earnings upsides and fading pandemic shock. We maintain OUTPERFORM on the sector and top picks CITICS (6030 HK), CSC (6066 HK) and CICC (3908 HK).

 

  • Est. 19% YoY earnings growth for covered brokers in 1H20E; focus on reviving market activity and reform implementations in 3Q20E. We would expect CSC, CGS and GFS to deliver positive QoQ earnings growth in 2Q20E. Soaring ADT in the past week likely set a more bullish tone for brokers’ 3Q20E earnings, which will also lift the valuation for the whole sector, while we see strength in investment banking could drive divergence among brokers as IPO demands unlocked by ChiNext reforms and STAR Market will favor leading underwriters more.

 

  • Raise earning forecast and TP on more promising market outlook. We revise up FY20E net profit forecasts by an avg. 8% mainly to incorporate higher assumption of A-share ADT, margin balance and IPO underwriting amount (+18%/15%/32% vs. prev. est.), and raise TPs by 40% on avg. to reflect earnings upside and eased market uncertainties.

 

  • Maintain OUTPERFORM. Sector-wise rally in the past week may heighten near-term volatility, but we believe correction could provide good entry point to accumulate key beneficiaries in capital market reforms that have higher earnings visibility. Our top picks are CITICS, CSC and CICC. Recent news like granting brokers’ investment banking license to commercial banks and potential merger of CITICS and CSC has again brought higher expectation for creating giant brokers in China. While we believe profitability should be first considered instead of size, market consolidation trend is likely to intensify going ahead. We think our top picks are in better position to survive fierce competition by enjoying current reform benefits.

 

  • Key downside risks: 1) a widespread second wave of COVID-19 batters economy and financial market, and 2) plunge in market ADT, margin balance and major indices.
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