China brokers Jan 2019 net profit increased YoY and 2MTD market data showed encouraging recovery from the COVID-19 hit, alleviating a major short-term threat over brokers’ profitability and stock performance. Going forward, we expect easier monetary policy and ramp-up of capital market reforms following the epidemic period to keep the industry upswing on track. Maintain OUTPERFORM on sector with CITICS and CICC as top picks.
- 1M20 major brokers’ net profit increased 23% YoY/dropped 49% MoM, due to sequential market correction in Jan and better market activity (see details in Fig.8). We saw market condition improved further since Feb, with even stronger ADT (+18% MoM), rising margin balance (~RMB 1.03tn) and indices regaining lost ground. The market seems to recover from the COVID-19 outbreak better and quicker than expected, betting on more countercyclical policies.
- COVID-19: limited direct impact and alleviated indirect impact as market confidence returned. 1) Brokers would be indirectly but most materially impacted by fear-triggered market plunge on COVID-19 as 10% decline of CSI 300 Index may reduce their revenue by 11% on average, based on our estimates; but this risk is easing. 2) Stabilizing market, together with regulators’ supporting measures, will help mitigate pressure on SPL/debt invt. impairment due to borrowers’/issuers’ deteriorating cash flows. 3) Brokerage saw limited direct impact as over 95% of the transactions could be done online according to CSRC. 4) Investment banking is the key business line exposed to direct pressure, where on-site works are delayed due to travel restrictions. But we estimate the financial impact to be mild as 10% decrease in equity financing amount will reduce brokers’ revenue by less than 1% (Fig.3). Lessons during SARS also show that the IPO pace would be ramped up after the epidemic period (Fig. 7).
- Two factors to back sector upswing: 1) Easier monetary policy, as the PBoC already lowered OMO rates by 10bps and suggested possible MLF rate/LPR cut in coming week. Ample liquidity and lower funding cost will favor stock market and brokers’ earnings. 2) Implementation of capital market reforms, which is still on track in our view, and could bring in incremental businesses in 2H20E.
- Short-term volatility may be inevitable; suggest to add leaders when there is a correction. The sector touches historical low again (0.72x 1yr fwd P/B), while leaders trade modestly above their historical avg. minus 1SD. undemanding to accumulate. We maintain CITICS (6030 HK) and CICC (3908 HK) as top picks for their strong franchises in investment banking and institutionalization to capture reform-related opportunities. Key risks: 1) prolonged COVID-19 spread that hits China’s economy harder; and 2) slower-than-expected implementation of reforms.
