We revised earnings forecasts for brokers under coverage and trimmed our TPs by 9% on average to reflect impact from macro uncertainty. Yet we remain constructive on the sector’s performance given that 1) earnings visibility is clear in 2H19E (we estimate 49% YoY NP growth for covered brokers), and 2) favorable policy environment remains intact, on both liquidity front and capital market reforms. The sector still trades at 9% below historical avg. P/B minus 1 SD after recent rally. Maintain Outperform.
- 1H19 results wrap: earnings powered by prop-trading gains; fee income trend diverged. Seven China brokers we cover reported overall 30%/40% YoY growth of adj. op. revenue/net profit in 1H19. Top-line growth was mainly boosted by prop-trading gains on stock market recovery, partly offset by weak net interest income on contracted margin financing and SPL balance. Fee incomes were moderately up 7% YoY, with great divergence among peers in each business lines.
- Three reasons to stay constructive on the sector. 1) On the macro front, government likely accelerates efforts to support economic growth, incl. further monetary easing, which will help rebuild investors’ confidence on stock market. 2) Capital market reform was pushed forward gradually, with more favorable policies to boost market activity (see details in Figure 28). Leading players will benefit more and industry consolidation will likely intensify. 3) Low-base effect in 2H18 and policies protecting market sentiments will bring higher earnings visibility to brokers. Eight H-share listed large brokers reported 30%/31% YoY growth of revenue/net profit (parent company level) in 8M19, showing the earnings recovery still on track.
- Trimmed TPs by 9% on avg., and resumed coverage on HTS with BUY rating. Maintain Outperform on sector. H-share China brokers now trade at 0.79x FY19E P/B, which is close to historical trough (0.73x) in Oct 2018, and 9% below historical avg. P/B minus 1 SD (0.87x). We still prefer market leaders with balanced revenue mix and strong franchise in investment banking and investment business. We believe they could stand out during China’s capital market reform, as favorable policies will likely skew towards them to foster domestic competitiveness amid deepened opening-up. Maintain CITICS and CICC as our top picks. Given recent quick restore of market sentiment, we believe brokers with absolute low valuation, e.g. GFS and HTS, are likely to gain more in short-term.
