Securities brokers certainly aren't having much fun these days, watching their profits shrivel as China's stock markets hover at 3-year lows. But the latest results from leading brokerage CITIC Securities (6030.HK , Shanghai: 600030) hint that a rebound could be coming towards the end of the year, as bargain hunters -- led by a growing number of foreign investors -- start to pour into the market. It's obviously too early to say whether this potential rally will be sustainable since it hasn't even begun yet. But the chances of a rally lasting at least a half year or longer seem realistic as China opens its doors wider to foreign investment in its stock markets and domestic firms make an effort to become more transparent and clean up some of their questionable accounting practices.
Let's take a look at the latest news from CITIC Securities, which made headlines earlier this year with its US$1.25 billion plan to buy Credit Agricole's (Paris: ACA) CLSA brokerage unit, making it China's first brokerage to make a major global acquisition. CITIC Securities reported its first-half profit fell 24 percent, due in large part to slowing revenue from its core stock trading business as Chinese stock markets languished. (results announcement )
While the profit drop certainly wasn't very pretty, it was still a big improvement over the 36 percent profit decline the company reported in the first quarter; and after doing some quick math myself, it looks like the company's profit declined a relatively benign 17 percent in the second quarter, or about half the rate of decline from the first quarter. More broadly, Chinese securities brokerages reported a 6 percent revenue decline in the first half of the year, according to an industry association, again reflecting the weak state of the stock market.
China's stock markets rallied early this year, but I predicted the rise would be short-lived because it appeared the surge was being largely fueled by speculative money provided by Chinese banks who were trying to boost their lending. So the question becomes: Now that the early-year bubble has burst, is it time for a more sustainable rally?
CITIC Securities results seem to indicate that investors are slowly starting to return to the market after fleeing earlier this year. Bargain hunters are certainly an important part of this equation, as domestic buyers eye valuations that are quite low.
But equally important is a new flood of foreign money coming into China's stock markets as Beijing opens the country's financial markets wider to overseas investment. The government has recently been approving a steady stream of new quotas for big foreign investors under the nation's Qualified Foreign Institutional Investor (QFII) scheme, providing an important new source of money to boost demand for Chinese stocks.
In a hint of what's happening, an investment arm of the Singapore government disclosed just yesterday that it has taken a 5 percent stake in Hong Kong-listed shares of Sinopec (0386.HK ; Shanghai: 600028; NYSE: SNP). If a relatively conservative investor like the Singapore government sees value in Chinese companies, then it's probable that many other foreigners may see some good value there too. Accordingly, China's stock markets -- and brokerages like CITIC Securities -- could see some nice improvement in their performance if and when a new uptick begins towards the end of the year.
Bottom line: CITIC Securities results hint that China's stock market downturn could be near an end, with a better than 50 percent chance of a sustained rally starting by year end.