Across The Border

Traders shift attention to Chinese brokerages as crackdown continues on financial industry

Gauge of the 33 brokerages trading on the Shanghai and Shenzhen stock exchanges rises to four-month high last week

PUBLISHED : Tuesday, 25 July, 2017, 9:46am
UPDATED : Tuesday, 25 July, 2017, 10:15pm

Chinese stock traders have turned their attentions to brokerages, after President Xi Jinping’s recent call to rein in financial bubbles.

A gauge of the 33 brokerages trading on the Shanghai and Shenzhen stock exchanges rose to a four-month high last week, as investors rotated to the sector in their latest hunt for bargains on the back of a high-level financial work conference held early this month, at which Xi highlighted the need to tighten the industry regulations to lower risk.

While Guosen Securities and Shenwan Hongyuan Group predict mainland-listed brokerages may report an at least 10 per cent decline in first-half profits due to a drop in stock turnovers, investors including Hengsheng Asset Management consider the sector a safe buy as the shares are trading close to their lowest ever level against book values.

“You may say there’s probably no major catalyst for brokerage stocks because of the lackluster sentiment on the broader market,’’ said Dai Ming, a Shanghai-based fund manager at Hengsheng Asset.

“But they have pretty-high safety margins. In this market environment, cheap things will rise eventually.”

Dai holds shares in Guotai Junan Securities, China’s third-biggest listed brokerage by market value.

Chinese investors’ penchant for low-valuation stocks have already sent shares in companies ranging from liquor makers to home appliance manufacturers soaring to record highs this year, as the regulatory crackdown on financial leveraging deflates bubbles in small-cap shares, which are still more than three times as expensive as the CSI 300 Index of large-cap companies in valuation.

Among the industry leaders, Citic Securities, the nation’s biggest listed brokerage, has advanced 2.9 per cent this month, Guotai Junan 2 per cent and Huatai Securities 9.1 per cent. The benchmark Shanghai Composite Index has risen 1.8 per cent in the same period.

Citic now trades at 1.5 times its book value and the multiples for Guotai Junan and Huatai are 1.6 times, according to data compiled by Great Wisdom.

The record-low price-to-book-value ratios for big brokerages stood at between 1.2 times and 1.3 times during the stock rout of 2015.

President Xi’s emphasis on direct financing to support the economy at the once-in-five-year

the National Financial Work Conference has been interpreted by investors as a signal the regulator will increase the flow of initial public offering shares, which will bolster brokerages’ investment banking revenues.

Big brokerages are at record-low levels right now and their businesses are gradually improving. So they provide room for further upticks as well as safety margins
Zhang Jixiu, an analyst at Bohai Securities

IPO sales have already surged 192 per cent in the first half of 2017 from a year ago to 116.6 billion yuan (US$17.25 bullion), according to data from the China Securities Regulatory Commission.

“Big brokerages are at record-low levels right now and their businesses are gradually improving,” said Zhang Jixiu, an analyst at Bohai Securities. “So they provide room for further upticks as well as safety margins.”

First-half earnings, however, in the brokerage sector as a whole dropped around 10 per cent from a year ago, as stock turnovers decreased 17 per cent in the period, reducing commissions earned from buying and selling equities, according to the estimate by Guosen Securities.

Chinese traders’ interest in trading stocks has been waning of late, as the securities regulator intensified its clampdown on excessive speculation after the 2015 market crash.

The Shanghai Composite has seesawed within a 700-point range so far this year, with trading values down more than 80 per cent from the peak and volatility near historical lows. The index closed 0.4 per cent higher at 3,250.60 on Monday’s close.

Shenwan Hongyuan, which forecasts a 7 per cent first-half earnings decline for the brokerage industry, says leading securities firms’ profits are likely to exceed the sector as a whole, because of their business advantages in investment banking, asset management and proprietary trading.

Citic Securities said in a preliminary earnings statement this month that profits in the first six month dropped 6 per cent from a year earlier, while the earnings decrease for Guotai Junan was 5.3 per cent.

Hong Jinping, an analyst at Hua Chuang Securities, expects brokerages to rebound about 20 per cent by the middle of this year, as stocks recover from low valuations.

“The most important thing for stocks picks now is to look for yjose with enough safety margins,” said Hengsheng Asset’s Dai.

“If the bull market returns in future, brokerage stocks will definitely surge, given their low prices.”