Chinese brokerage firms to see profits rally in second half

China’s securities sector will see a modest recovery in the second half of the year after suffering significant profit slumps in early 2016, analysts say.

Mainland brokerages are expected to see profits rebound 7 per cent in the coming months on increased profitability of credit businesses, following a 57 per cent year-on-year drop in total profits in the first half, a Bank of China International (BOCI) report said last month.

“Market weakness weighed on broker sector earnings,” BOCI analysts Weicheng Tang and Lin Yuan said.

Brokerage companies, which are heavily dependent on the secondary market, have been tracking losses in thevolatile mainland A-share market and the depreciating renminbi. As a result, Hong Kong-listed brokerage stocks underperformed the Hang Seng Index by 9 per cent this year, with average trading volumes in the first half plunging 54 per cent year on year.

In the second half, the A-share market turnover is likely to see a mild recovery, with broker commission rates going down “amid eased price competition,” Tang and Yuan said.

While stock market returns will still be around 40 per cent less than last year, the market rebound will be positive for secondary markets. The mainland CSI 300 index is forecasted to have a 6.5 per cent return, a “noticeable improvement” from the past few months, the report said.

Brokers will also recover on higher net interest income and investment income, as well as lower operating expenses, the analysts added.

“[But] overall credit business volume growth should still be slow in 2H16,” Tang and Yuan said, pointing to tightening regulations.

Brokers have also seen increased competition as the number of China-affiliated Hong Kong brokers more than doubled over the past two years, a HSBC Global Research report said.

As Chinese investors increasingly pour money into Hong Kong through the southbound trading link of the Shanghai-Hong Kong Stock Connect, the share of Hong Kong market turnover from mainland investors has risen from 9 per cent last year to 12 per cent currently.

“The growing Stock Connect programme may cannibalise potential Hong Kong stock trading by Chinese investors through Hong Kong brokers and dilute the benefits from their growing participation,” HSBC analysts Alice Li and York Pun warned.

But Haitong International and Guotai Junan International will be beneficiaries of this trend in Hong Kong, given the company’s “natural advantages in serving Chinese investors”, they said.

Growth for Haitong International, the Hong Kong subsidiary of Haitong Securities, will help position its shares to gain in the latter half of the year, Tang and Yuan said.

GF Securities, the fifth largest broker in China, has maintained resilience amid the “choppy market conditions” in the first half, another HSBC report said. As a candidate for inclusion in the Shenzhen-Hong Kong Stock Connect, due to be launched in late November, the brokerage could be “well positioned for the future”, Li and Pun said.

While GF Securities saw profits drop 52 per cent year on year in the first half, this was “largely in line with the industry trend”, and the broker will follow trends for growth in asset management, an Agricultural Bank of China (ABC) International report said.

Huatai Securities, which has a dominant 8.4 per cent market share and a relatively low net commission fee, is BOCI’s “top pick” in the securities sector for its large earnings potential from its mergers and acquisitions fund operation, according to Tang and Yuan.

Despite battling market downturns, four mainland brokers will go public in Hong Kong this year, with China Securities Co (CSC) announcing its intention to do so early last week.