China stock market

Chinese brokerages’ first-quarter earnings seen falling on light trading

Profits of mainland-listed brokerages probably fell 7 per cent from a year ago, Shenwan Hongyuan estimates

PUBLISHED : Friday, 14 April, 2017, 4:12pm
UPDATED : Friday, 14 April, 2017, 10:32pm

China’s listed securities firms may post falling profits in the first quarter as trading volumes fell amid the regulator’s heavy-handed crackdown on market misconduct.

Combined profits for the 24 brokerages trading on the Shanghai and Shenzhen stock exchanges probably slid 7 per cent from a year earlier, with sales estimated to have dropped 11 per cent, according to Shenwan Hongyuan Group, a Shanghai-based securities firm.

The firm downgraded its rating on China’s brokerage industry to neutral from overweight in a report released on Friday in which it said more stringent regulatory supervision will curb investors’ appetite for trading stocks.

“We believe that 2017 will be the year of regulatory oversight and that will weaken brokerages’ innovation businesses,” said analyst Wang Congyun in the report. “Brokerages’ share performances mainly rely on improvements in risk appetite.”

Volatility in the mainland’s stock market eased after Liu Shiyu, who was appointed chairman of the China Securities Regulatory Commission (CSRC) last year, initiated a campaign against market excesses. Since he took office, Liu has blasted some insurers as “barbarians” for their hostile attempts to take over big-name companies through stock purchases on the secondary market. He also lashed out at a scam conducted by some listed companies of issuing bonus stocks to ramp up their share prices.

We believe that 2017 will be the year of regulatory oversight and that will weaken brokerages’ innovation businesses
Wang Congyun, analyst, Shenwan Hongyuan

The average daily turnover on the Shanghai and Shenzhen bourses dropped 18 per cent to 482.6 billion yuan in the first three months of 2017 from a year earlier, as some speculators fled the market. Still, the benchmark Shanghai Composite Index posted a gain of 3.8 per cent in the period as investors limited their buying to a few sectors including consumer and military stocks.

About 40 per cent of the 3,000-plus companies listed on the mainland’s exchanges posted share-price increases in the period. All Chinese companies are required to release their first-quarter financial reports before the end of April.

Citic Securities, the country’s biggest brokerage by market value, has added 0.8 per cent this year in Shanghai, while Haitong Securities, the second largest, has fallen 8.1 per cent. The two firms, which both rely on the broking businesses for about a third of their total revenues, reported a slump in profits of almost 50 per cent.

Shenwan Hongyuan cut its 2017 projection for the combined profits of the brokerage industry by 6 per cent in the report.

The investment banking business may be the only bright spot for brokerages this year. Revenues from the sector may increase 10 per cent in 2017 on the prospects of a rising number of initial public offerings, according to Essence Securities.

The regulator may accelerate the pace of IPO approvals. The South China Morning Post reported this week that the CSRC is considering lowering the profitability threshold for companies applying to launch IPO sales. The reform – aimed at making it easier for companies in fledging industries to raise funds from the stock market – would allow companies that have posted two straight years of profits to list their shares, a reduction from the current requirement of three consecutive profitable years.

A total of 134 companies raised 70 billion yuan selling IPO shares in the first quarter, the highest on a quarterly basis since 2014, according to data from KPMG.