20140219-交银国际证券-Investment_banking_to_enter_a_golden_era__Favor_CITICS_37页_846kb

China Brokerage Sector Summary

Core Content

This report outlines the anticipated growth and transformation of China's investment banking (IB) sector over the next decade, emphasizing the potential of emerging business lines such as the Over-the-Counter (OTC) market, high-yield bond and Asset-Backed Securities (ABS) issuance, and M&A activities. It also highlights the competitive advantages of CITICS in these areas, making it a top recommendation for investment.

Main Points

• Investment Banking Growth: The IB sector is expected to enter a golden era, with new businesses driving a 334.5% growth in IB income over the next 7 years, representing a CAGR of 23.4%. The traditional IB businesses, such as investment grade corporate bond issuance, are also projected to grow, contributing to a total IB revenue CAGR of 28% from 2014 to 2020.

• OTC Market Expansion: The OTC market is expanding rapidly due to supportive government policies. By 2020, it is estimated that around 10,000 companies will be listed, contributing RMB29.56bn in revenue. Market-making is expected to account for 55% of this revenue. CITICS is anticipated to benefit significantly from this growth due to its strong capital and pricing capability.

• High-Yield Bonds and ABS: These products are expected to become the main fixed-income offerings, driven by government support for SMEs and capital circulation. By 2020, they are projected to contribute RMB21.16bn to brokers' revenue. CITICS, with 11% market share in fixed-income issuance and RMB35.9bn net capital, is expected to be a major beneficiary.

• M&A Growth: The M&A deal value is anticipated to increase significantly, reaching USD492bn in 2020, contributing RMB27.9bn in revenue. CITICS leads in M&A with a 23.28% market share in 2012 and has a strong international presence, including the first broker-owned M&A fund in China.

• CITICS as a Top Pick: Given its strong competitive advantages in all new business lines, CITICS is recommended as the biggest beneficiary of the IB sector's growth. The report suggests that the stock has corrected by over 15% YTD, making it a favorable entry point.

Key Information

• IB Revenue Contribution: In 2013, IB contributed only 11% of total revenue, significantly lower than the 15%-20% seen in mature markets like the US.

• Equity Underwriting Dominance: Equity underwriting remains the main source of IB income, contributing 75% of total IB revenue in 2013. However, the report expects a shift towards fixed-income underwriting in the future.

• OTC Market Revenue Estimates: By 2020, the OTC market is expected to contribute RMB29.56bn, equivalent to 18.6% of brokers' 2013 total revenue. Market-making will be the largest contributor, accounting for 55.43% of this revenue.

• CITICS' Competitive Edge: CITICS has a leading position in equity underwriting, with a 13.7% market share in equity refinancing. It is also expected to benefit the most from the OTC market due to its strong capital and pricing capability.

• Growth Potential of New Issuances and Private Placings: The report indicates that these activities have higher growth potential than IPOs, with CITICS expected to benefit more from this shift.

Emerging Trends and Recommendations

• Capital Market Structure Improvement: The report anticipates a pyramid-like structure for China's capital market, with more SMEs and high-tech companies listed, which would require a more diverse range of financing channels.

• Sector Correction Opportunity: With a 15% YTD correction, CITICS is viewed as a favorable investment at current levels due to its strong position in fixed-income issuance, M&A, and emerging IB businesses.

• Global Market Comparison: The US, Japan, and Korea have seen a decline in IPO contribution to total capital raised, with a rise in new issuances and private placings. China is expected to follow a similar trend, with new issuance and private placing becoming more important over time.

Conclusion

The report concludes that CITICS is the biggest beneficiary of the IB sector's growth, especially in the areas of OTC market making, high-yield bonds, and M&A. It emphasizes that the sector has significant growth potential, and CITICS is well-positioned to capitalize on this. The stock's correction is seen as an opportunity to revisit CITICS as an investment.