China brokers’ valuation is at all-time low (~0.6x forward P/B). While the sector is likely to be swayed by fragile market sentiment in near term, here are three factors we should look at before we get too pessimistic on sector outlook: 1) A-share/China’s relative resilience, 2) reform implementations and 3) easier monetary policy. And brokers would be one of the best proxies to capture market recovery when the virus peaks. We cut TP by 3% on average mainly to reflect heightened uncertainty caused by COVID-19. Maintain OUTPERFORM on sector. We still favor major reform beneficiaries; top picks are CITICS and CICC.
- FY20E kicked off strong and resilience in onshore market may persist. Listed brokers reported 27% YoY net profit growth in 2M20 despite a high base. Onshore market held up relatively resiliently (CSI 300 Index -12% vs. 15-20% of oversea markets after CNY), which is crucial for brokers’ revenue (~40% from invt. gains). Looking ahead, China’s earlier work resumption and more room for policy maneuver could probably support a relatively stable economy and stock market.
- Capital market reform on track and may come beyond expectation. Recently released relaxation of follow-on offerings and registration-based issuance system of enterprise/corp. bonds surprised the market on the upside. This may suggest regulators’ intention to implement reforms as well as to provide countercyclical alternatives to help improve corporates’ liquidity in this hard time, and we may see more similar measures. As the evolving direct financing market is a main reform theme, we expect leaders to gain more market shares at this early stage of implementation; CITICS, CICC, CSC and HTSC are key beneficiaries.
- Raise earnings but cut TPs on heighted uncertainty. We revise up FY19E/20E net profit forecasts by 12%/10% on avg. on better market activity assumptions, while cut TPs by 3% on avg. to reflect heighted market volatility. Maintain OUTPERFORM. We favor industry leaders with long-term growth potential and are better positioned for capital market reforms (esp. regarding investment banking and institutionalization). Top picks are CITICS and CICC.
- Key downside risks: 1) coronavirus spread worsens worldwide, hurting economy and financial stability harder, and 2) slower-than-expected rollout of capital market reform.
