20180419-申万宏源研究_香港_-Brokerage__Sector_outlook__Brokerage__Sector_outlook_17页_1mb

2018 Brokerage Sector Outlook Summary

Core Content

This report outlines the outlook for the brokerage sector in 2018, emphasizing structural improvements, regulatory changes, and the shift in business focus from traditional brokerage services to more capital-intensive and investment banking activities.

Main Points

Market Performance and Trends

• A-share Market Activity: The average daily turnover in domestic markets declined from Rmb516bn in 2016 to Rmb456.9bn in 2017, but the CSI 300 index surged, breaking through 4,000 points in October and reaching 4,031 points by the end of 2017.
• Funding Trends:
  • IPOs: Total IPO financing in 2017 reached Rmb230.1bn, a 53.8% increase YoY.
  • Follow-on Financing: Follow-on financing amounted to Rmb1.3tn, a 24.9% decrease YoY.
  • Bond Financing: Bond financing declined to Rmb1.5tn in 2017, a 56.2% decrease YoY due to interest rate hikes.

Capital-Intensive Businesses

• Growth in Capital-Intensive Businesses: These businesses are expected to be a key growth area in 2018, with revenue contributions rising from 32.1% in 2016 to 44.3% in 1H17.
• Margin Financing and Securities Lending: The balance reached Rmb1.0tn by end-2017, up 9.3% YoY, representing 2.3% of A-share market capitalisation.
• Proprietary Trading: Proprietary trading income increased by 47% YoY in 1H17 and 19% YoY in 9M17, showing a trend of growth.
• Stock Pledge: The stock pledge business saw a significant increase in transactions and notional, and while a new regulation was introduced, its impact is expected to be limited due to low current levels of non-compliance.

Regulatory Impact

• Asset Management Regulation: New regulations in November 2017 are expected to reduce the size of channel services and capital pools, but their limited revenue contribution (around 1.4%) suggests minimal impact on overall performance.
• IFRS 9 Accounting Change: This new standard encourages A-H dual-listed brokers to book profits from equity investments before its implementation, which could boost 4Q17 earnings.

Business Structure and Valuation

• Shift in Business Structure: Brokers are expected to reduce reliance on traditional brokerage services and increase focus on investment banking and capital-intensive businesses.
• Valuation: The sector is currently trading at an average of 1.0x 18E PB, which is a six-year historical low, indicating potential for value recovery.
• Investment Recommendations: The analyst recommends maintaining an Overweight stance on the sector and suggests investors focus on brokers with attractive valuations, such as China Galaxy Securities (6881:HK), and industry leaders like Haitong Securities (6837:HK) and GF Securities (1776:HK).

Key Information

Financial Highlights

• Brokerage Income: Declined in 2017, with a 8% YoY decrease in both 1H17 and 9M17.
• Investment Income: Rose significantly in 3Q17, contributing 35.1% of total income, compared to 17% in 2016 and 25% in 1H17.
• Leverage: Brokers are increasing leverage through margin financing, stock-pledged repo, and proprietary trading, but regulatory pressure limits this trend.

Regulatory Developments

• New Stock Pledge Regulation: Effective from 12 March 2018, limits the percentage of shares that can be pledged to a single broker.
• Asset Management Changes: The shift towards in-house asset management products is expected to increase revenue from more stable management fees.

Outlook

• Market Sentiment: Improved in early 2018, supporting valuation recovery.
• Valuation Recovery: Expected due to structural improvements and regulatory changes, with the sector at a historical low valuation.
• Earnings Sensitivity: Everbright Securities (6178:HK) has the highest correlation with investment returns, with a 5% increase in investment yield leading to a 14% earnings growth.

Conclusion

The brokerage sector is poised for recovery in 2018, driven by improved market sentiment, structural improvements, and a strategic shift towards capital-intensive and investment banking activities. While traditional brokerage services are declining in importance, the growth in proprietary trading and investment banking is expected to boost profitability. The sector is currently undervalued, with several brokers showing attractive valuations and growth potential.