China brokers’ Apr 2020 financial data showed meaningful MoM growth as market major indices rebounded, and we expect larger divergence among brokers driven by investment gains and investment banking fees ahead. Given sped-up capital market reforms and A-share market’s relative resilience, as well as a low-base in 2Q19, the sector’s near-trough valuation is attractive with visible earnings growth potential. All of our top picks (CITICS, CSC and CICC) are well positioned to capture policy-driven opportunities, while CICC may have better short-term performance. Maintain OUTPERFORM on sector.
- Major listed brokers posted 23%/17% MoM revenue/net profit growth in Apr 2020 (parent company level), largely on strong rebound of stock market after COVID-19’s hit (CSI 300/ChiNext Index +6%/+11% MoM), more than offsetting a 31% MoM shrinkage of A-share total turnover. CSC/CITICS recorded highest YoY growth in 4M20 (63%/43% YoY), which was likely attributable to their relatively smaller exposure to stock market volatility in investments and robust investment banking fees. We believe these two factors will drive further divergence of brokers’ top-line growth ahead, as 1) implementation of capital market reforms will boost investment banking demands, and 2) market volatility may sustain.
- Faster market reform still favors investment banking leaders. Market reform measures have come beyond market expectations as regulators are seeking to support real economy recovery. On 27 Apr, the long-awaited ChiNext reform plan piloted registration-base IPO system was revealed; later on 30 Apr, CSRC eased domestic listing requirements for oversea-listed red chips, and rolled out a pilot program on public-funded REITS backed by infrastructure projects. We believe these new measures still skew favorably towards brokers’ investment banking business through unleashing IPO and ABS issuance demands, and leaders are in better positions. Market is expecting listings under ChiNext new system to happen as early as in Aug; before that, we would expect STAR Market IPOs and relaxed follow-on offerings to continue to underpin a vigorous equity financing market in 2Q20E.
- Maintain OUTPERFORM. Top picks: CITICS, CSC and CICC. The sector currently trades at 0.68x 1-year forward P/B, still close to historical trough (0.60x). We continue to like leaders in investment banking for policy-driven incremental businesses and those with stable invt. gains. Meanwhile, we expect CICC to have higher short-term upside potential, due to its current distressed valuation (vs. historical avg. of 1.17x), and a stronger 1Q20E results could spur a share price rebound.
