China brokers within our coverage posted an avg. of 4% QoQ/-11% QoQ revenue/net profit growth in 3Q20. Fee incomes grew robustly on surged ADT, sped-up IPO flows and active mutual fund issuance, while volatility in invt. gains and provision charges were key negative factors. Looking into 4Q20E, we expect brokerage and IB will continue to lead brokers’ top-line YoY growth. On policy side, potential implementation of registration-based system to the whole market as well as relaxation on QFII/RQFII and stock options favor leaders in IB and institutionalization more, where the strength of our top picks CITICS (6030 HK), CICC (3908 HK) and CSC (6066 HK) lie in. Maintain OUTPERFORM.
- 3Q20 results recap: 1) Brokerage: retail-focused brokers won again amid soared ADT; CGS and GFS saw higher QoQ growth (80-90%) vs. CITICS and CICC (50-60%). Only CGS registered higher than market t/o income growth, so we believe the commission rate is still trending down. 2) Investment banking: all covered brokers recorded positive QoQ fee growth as reforms accelerated domestic IPO pace (+247% QoQ). CSC, HTS, CITICS and CICC are top players, while GFS lost shares due to regulatory ban on IB business. We see strong IPO flows in 4QTD and mega deals coming out could intensify market concentration. 3) Asset mgmt.: QoQ change is exposed to seasonality, while those (CITICS and GFS) with strong fund sub still posted positive growth thanks to heating mutual fund issuance. We expect this trend to continue in coming quarters. 4) NII: the growth mainly came from on margin balance expansion (+25% on avg.) and est. hike in yields, offsetting increased debt balances and pick-up in funding costs as monetary policy normalized. 5) Prop-trading: overall invt. yields declined QoQ, on weak bond market and volatile stock market in Aug and Sep. As stock market rallied towards year-end in FY19, brokers may pose YoY decrease in 4Q20E on high base. 6) Provision: CITICS’s and HTSC’s earnings were dragged by surged impairment losses (eroding 38%/23% of PPoP). We believe the charges were mostly written on SPLs and bond invt.
- Maintain OUTPERFORM. The sector now trades at 0.8x FY21E P/B (vs. historical avg. of 1.0x). The govt. has been calling to implement the registration-based system to the whole stock market registration recently, signaling the step-up of capital market reforms not far wary. We believe brokers will continue to play an important role in serving the 14th Five-Year Plan, and current valuation provides an attractive entry point for longer term investment.
