Across The Border

Chinese brokerages bounce back as market rally dispels gloom on economic front

Analysts expect sector to post sustained gains on the back of continued stable performance by mainland Chinese stock markets

PUBLISHED : Sunday, 17 April, 2016, 3:11pm
UPDATED : Sunday, 17 April, 2016, 3:11pm

The dark clouds seem to be dissipating for most Chinese brokerages as the recent rally on bourses, strong earnings numbers in March and better economic indicators have eased concerns over economic growth and sustained market opportunities, analysts said.

Much of that optimism is reflected in the “overweight” rating that research firms such as China Merchants Securities (Hong Kong) have for Chinese brokerages, based largely on the continued stable performance of the stock exchanges for the rest of the year.

“A sustainable bull market for A shares and an earlier-than-expected launch of the Shenzhen-Hong Kong Stock Connect could boost share prices significantly,” Donger Wang, an analyst with the research firm, said in a recent report.

“A surge in the average daily turnover as well as margin financing and the securities lending balance will also act as positive triggers,” Wang said.

Last month, 22 listed brokerages turned in a strong performance with combined net profits of 12.91 billion yuan (HK$15.44 billion), up 298.7 per cent from February. Operating revenue jumped 25.05 per cent to 25.05 billion yuan, according to a report from China International Capital Corp (CICC). The investment bank based its calculations on the monthly data disclosed by brokerages such as Citic Securities, Haitong Securities and GF Securities.

Citic Securities, China’s largest securities broker, was one the biggest gainers in March, with net income jumping 1,164 per cent to 1.643 billion yuan from 130 million yuan in February. Haitong Securities’ profit grew 718 per cent in March 2016 to 1.166 billion yuan.

“The profit rebound in March was aided by the stock market recovery,” said Wang.

The benchmark Shanghai index posted its biggest monthly gain in almost a year in March, spurred by signs of state-fund buying during the National People’s Congress and data showing the nation’s economy and the currency may be stabilising.

Most of the other major market indicators also saw broad gains in March. The Shanghai Composite Index jumped 12 per cent and CSI 300, which tracks large companies listed in Shanghai and Shenzhen, was up by 11.84 per cent, while the Nasdaq style ChiNext rose 19 per cent.

“Brokerages and margin financing traders benefited from the recovery in the A-share market and the resultant high trading turnover,” Wang said.

The average daily turnover of the A-share market rose to 580 billion yuan in March, up 19 per cent from 487 billion yuan in February. After hitting a 15-month trough in mid-March, margin financing and securities lending rebounded to 881 billion yuan, up 3 per cent month on month.

Apart from the stable outlook for A-shares, Wang expects the valuation for Chinese brokerages to gain momentum as the price-to-book ratio and price-earnings ratio are at 1.37 times and 14.45 times respectively for the 2016 financial year, higher than the historical average of 1.45 times and 16.47 times.

Lijuan Du, an analyst with CICC, however, feels that the overall valuation of Chinese brokerages is not that reasonable.

“Prudent investors should watch Huatai Securities and Haitong Securities, while aggressive investors should track big names like Dongxing Securities and China Galaxy,” Du said.

The capital market recovery in March was largely a result of the aggressive buying by state-controlled funds. CICC estimates that the unrealised gains for the 22 publicly traded brokerages was about 5.3 billion yuan in March, accounting for 41 per cent of the month’s net profit.

Brokerages and margin financing traders benefited from the recovery in the A-share market and the resultant high trading turnover
Donger Wang, China Merchants Securities (Hong Kong)

Market intervention, known euphemistically as the “national team” entering the stock market, started in late 2015. During the third quarter of last year, the Shanghai Composite Index crashed by more than 40 per cent, following a 12-month period in which share prices had risen strongly, pushing the benchmark up 150 per cent.

In response, the government launched a plan in early July to buy up massive quantities of shares on China’s two main stock exchanges, in an attempt to appease retail investors that make up at least 80 per cent of the market, and by September 2016 the team owned 6 per cent of the market.

Despite the strong performance in March, the market has not been able to shake off the impact of the poor performance during the first two months of the year. Not surprisingly, the first quarter results of most Chinese brokerages remained negative, with listed brokers’ operating revenues falling by 39.5 per cent to 34.62 billion yuan and net profit by 48.5 per cent to 14.07 billion yuan.

CICC also warns of more downside risks for brokerages if Chinese equities continue to plunge, a view shared by several other analysts.

Patrick Shum Hing-hung, investment director at Tengard Fund Management, said the Chinese stock markets may see heavy swings as they are dominated by retail investors, who treat it like a casino.

“Policy changes which have a bearing on stock market performance will be another major risk for Chinese equities,” he said.