China Securities Sector:Improved trading volume could boost Chinese broker valuations
Improving trading volume in Jan Daily trading volume and margin trading balancehave been impr...
Improving trading volume in Jan Daily trading volume and margin trading balancehave been improving in Jan. Average daily trading volume on the Shanghai andShenzhen stock exchanges totaled Rmb511bn in the first 11 trading days of 2018, up33% compared with Rmb383bn in Dec. Margin trading balance amounted toRmb1,058bn at the end of Jan 17th, up 3% since the beginning of 2018. We expecttrading to remain active amid a relative stable liquidity environment at the beginning ofthe year. Besides, margin business on the OTC market through trusts may shift back tobrokers’ statements to some extent as some trusts have stopped structured productsgiven strengthened regulation. We believe improved trading volume could lead to animprovement in valuations for Chinese brokers. Significant business opportunities in the long term 2018 is the fourth year since thestrengthening of regulation for Chinese brokers. Businesses have been adjusted and weexpect industry regulation pressure to ease marginally. Over the long term, China willcontinue to increase the direct financing mix to better serve the real economy, indicatingsubstantial business opportunities, especially for brokers with strong capabilities incomprehensive financial services. Besides, mutual market opening poses challenges forinternational competitiveness. Despite strengthened regulation, some financialinnovations still received policy support, such as the Shenzhen Stock Exchange whichhas proposed to carry out an ETF option pilot program in 2018, and the CSRC hasapproved a pilot program for cross-border business after two years of deliberations. Large brokers to gain more competitive strength over the long term Amiddevelopment of the derivative market and a push into global markets, we expectindustry leaders to become more competitive amid an increase in industryconcentration. According to the Chinese Securities Association, the revenue mix of thetop 10 brokers increased from 52% in 2012 to 62% in 1H17, roughly 2% each year. Thistrend will continue as 1) large brokers with better comprehensive services capabilitieshave a competitive advantage in dealing with an overall slowdown in market growth; 2)regulations favor large high-rating brokers. It is easier for large comprehensive brokersto have a high rating under the new rating system for Chinese brokers, which mayfurther link to business qualification approvals besides investor protection fundcontribution requirements. 3) Brokers which received pilot qualification gained a clearfirst-mover advantage in developing in the derivative market. CR5 accounted for over80% of monthly new trading in the OTC options market. Trading opportunity with Chinese brokers Through 2015-18, Chinese brokers arelikely to have rebounded by over 20% with average P/B ratio falling in the 1.6-1.7 range. They are currently trading around 1.7x P/B, based on the closing price on Jan 16th,2018. H-share prices of large Chinese brokers have also seen a strong correlation withthe broker index in the A-share market in the past three years. We believe improvedtrading volume could lead to an improvement in valuations for Chinese brokers. Withincreasing industry concentration and large brokers gaining more competitive strength,we recommend large comprehensive brokers with relatively low valuation such as CITICSecurities (600030 SH/6030 HK), HTSC (601688 SH/6886 HK) and CICC (3908 HK). Risks Regulations more stringent than expected; financial deleveraging sharper thanexpected; market liquidity tighter than expected; trading volume decline sharper thanexpected; bond market weaker than expected.
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