The Zhitong Finance App learned that CITIC Securities released a research report saying that in the current environment of capital recovery and policy changes, the securities sector is expected to achieve significant month-on-month and year-over-year improvements in fundamentals with the advantages of high turnover, high margin size, and low performance base. Combined with current valuation levels, there is still room for improvement in industry valuations. Around the securities industrymergers and acquisitionsThe long-term main line of restructuring and international business development is recommended. We recommend companies with long-term alpha attributes and companies with limited room for short-term withdrawal and stable fundamentals. At the short-term level, it is recommended to actively focus on companies that are expected to show flexible performance in 2024Q4 through brokerage business and proprietary business, and that currently have reasonable valuations.

The main views of CITIC Securities are as follows:

A new round of capital market reforms has been implemented, capital constraints have been relaxed, and market vitality has been strengthened.

Since September 2024, a new round of capital market reforms has been implemented one after another, represented by capital leverage reforms in the securities industry, new regulations on swap facilitation and refinancing, and the Securities Regulatory Commission's three major measures on mergers and acquisitions, market capitalization management, and medium- to long-term capital entry into the market. This round of capital market reforms has shown strong policy synergy. The capital leverage reform has opened up space for securities companies to expand their accounts and has laid the foundation for them to fully respond to the new exchange facilitation regulations. The refinancing policy provides liquidity support for the effective implementation of market value management measures such as increasing holdings and repurchases in the new market value management regulations. The new rules of mergers, acquisitions and restructuring have fully strengthened market vitality and provided alternative investment directions for exchanging and facilitating capital entry into the market. The implementation of a new round of financial support policies will better coordinate with current capital market reform policies and promote the stable and healthy development of the capital market over the long term.

Policy reforms solidified fundamental expectations, and three stages showed profit improvements.

In an environment where policy reforms continue to strengthen capital market stability mechanisms, the level of market activity has increased markedly, and securities companies are expected to achieve fundamental improvements at multiple levels. First, brokerage business and interest income benefit markets are active, and are expected to improve month-on-month in the short term. In an environment where the bull market continues, securities companies are expected to improve asset management income and investment income by increasing AUM in the asset management business and profits from equity proprietary businesses. Furthermore, Chairman Wu Qing of the Securities Regulatory Commission has successively proposed “strong supervision is not strict or excessive” and “coordinate financing-side and investment-side reforms to gradually normalize IPOs,” and the investment bank equity financing business is expected to gradually recover in the context of capital market recovery.

The year-on-year performance growth rate is expected to pick up sharply in 2024Q4, and the securities industry's ROE is expected to reach 5.2% in 2025.

Thanks to the rapid increase in market turnover since September 2024 and the expansion of the two financing and margin scales, the profit of listed brokerage firms is expected to reach 73.9 billion yuan in the second half of 2024, an increase of 15.6% over the first half of the year. The net profit growth rate of the securities industry for the full year of 2024 is expected to increase to 0.03% year-on-year from -22.08% in the first half of the year. Looking ahead to 2025, under the core assumption that the Shanghai Composite Index will reach 3,500 points, the average daily equity base turnover will reach 1.2 trillion yuan, and the equity financing scale will reach 1.8 trillion yuan, the net profit of the securities industry is expected to reach 161.2 billion yuan in 2025, an increase of 16.98% over the previous year. The ROE level of the industry is expected to reach 5.2%, and the profit scale and ROE average exceeds 2022.

Mergers, acquisitions and restructuring continue to advance, and market-based and administrative mergers and acquisitions can improve the efficiency of industry resource allocation through multiple channels.

With the joint help of multiple policies, mergers, acquisitions and restructuring in the securities industry are expected to accelerate. About 10 leading high-quality brokerage firms are expected to be formed in market-based mergers, acquisitions and restructuring. High-quality acquisition targets can be discovered from the level of basic customer resources and superior business, and high-quality acquisition targets can be discovered in terms of corporate governance capabilities and shareholder returns. However, 2-3 world-class investment banks need to be comparable to European and American investment banks such as Goldman Sachs and Morgan Stanley in terms of business scale and asset volume, so they need to be integrated into large institutions. On the one hand, it is necessary to promote mergers under the same control through top-down administrative measures; on the other hand, it is necessary to design complete restructuring plans for business line mergers, organizational restructuring, and personnel disposal. Furthermore, it is expected that after the official draft of the “Measures for the Administration of Business Qualifications of Securities Companies” is implemented, the industry pattern will move in the direction of “medium and large brokerage firms exhibit full licenses nationwide, and small brokerage firms operate with special characteristics within the region.”

Internationalization is developing steadily, and fundamental+policy aspects work together to open up room for incremental development of brokerage firms in the long term.

The international business of brokerage firms is developing at an accelerated pace and has become an important component of brokers' performance. Important meetings and policies such as the Central Financial Work Conference, the new “Nine Rules of the Nation”, and the Third Plenary Session of the 20th CPC Central Committee all clearly set the tone for the development of financial internationalization. In the Hong Kong market, the current market share of Chinese brokerage firms in the fields of wealth management, asset management, investment transactions, etc. has not reached the first tier. Actively cooperating with the RMB internationalization strategy and improving the supply of high-quality RMB-denominated financial assets is an important area for the development of Chinese brokerage firms. The implementation of the “Cross-border Wealth Management Connect” pilot project will bring opportunities to the cross-border wealth management business. For the wider overseas market, Chinese brokerage firms should seize the three major opportunities for overseas institutions to allocate RMB assets, overseas financial services for Chinese companies, and the Southeast Asian Internet brokerage business, further improve the international business layout, and accelerate the construction of world-class investment banks.

Risk factors: Risk of decline in A-share market turnover, risk of decline in the scale of equity financing in investment banking business, risk of loss in investment business, risk of exposure to credit business risks, capital market reforms falling short of expectations.