China brokers released milder-than-expected net profit decline in Mar amid market turbulence, which could possibly support a better-than-expected growth of 1Q20E results on high base. As trading activity moderated since mid-Mar and IPO approval process resumed to normal, the growth driver may switch from brokerage/stock-driven prop-trading gains to investment banking. We add CSC to our top picks for its strong franchise in equity and corp. bond underwriting and higher sensitivity to IB volume changes. Maintain OUTPERFORM on sector.
- Leaders could see upbeat 1Q20E results despite high base. Large listed brokers’ revenue/net profit (parent company level) -12%/-7% MoM in Mar 2020, on coronavirus stock market slump (CSI 300 Index/ChiNext Index -6%/-10% MoM). With strong performance in 2M20 partly offsetting the weak Mar, most brokers still recorded positive YoY net profit growth in 3M20. We expect leaders less sensitive to stock market volatilities, with less burden from provision charges and strong franchise in investment banking to deliver upbeat 1Q20E results, e.g. CICC and CSC.
- Supportive policy stance reaffirmed; IB fees could drive divergence ahead. On 9 Apr, the State Council issued a guidance on improving market-oriented allocation of production factors, calling for further liberalisation of capital market (incl. optimizing stock market mechanism, stepping up bond market reforms and advancing the industry opening-up), which reaffirmed favorable policy support for brokers, esp. at this hard time. Bond issuance already saw surging growth in 1Q20E, and we expect a normalized IPO approval pace in 2Q20E with reform measures (e.g. follow-on offering relaxation) gradually materialize. Prop-trading gains is likely to remain the key revenue contributor though, brokers with smaller directional exposure to stock market or higher exposure in bonds are better protected from heightened market uncertainty. (See more details in Fig. 9-28 for covered brokers’ comparison charts by business lines).
- Maintain OUTPERFORM. Top picks: CITICS, CSC and CICC. The sector trades at 0.64x 1-year forward P/B, close to historical trough (0.60x). We remain constructive on the sector due to 1) operations being not directly affected by the COVID-19 outbreak, 2) further capital market reforms unleashing direct financing demands, and 3) govt’s supportive policies to shield economy growth and market liquidity. We continue to like leaders with strong franchise in investment banking as well as more stable prop-trading performance. We add CSC to our top picks as it would be a key beneficiary of equity and corp. bond underwriting vol. growth.
