Average daily turnover in domestic markets reached Rmb510bn in August (+10.2% MoM, 5.5%YoY), while the balance of margin financing and securities lending totalled Rmb946.4bn (+5.0%MoM, 4.7% YoY), representing the highest level seen in the year to date, accounting for 2.2% of Asharemarket capitalisation. The CSI 300 (SHSZ300:IND) increased 2.3% over the month. Equityfinancing significantly increased in August; IPOs hit Rmb16.9bn (+13.1% MoM), and follow-onrounds of financing amounted to Rmb85.1bn (+89.7% MoM). August bond financing reachedRmb238bn, down 6.8% YoY, but still much higher than the monthly average of Rmb135bn in theyear to date.    Margin financing ramps up. The balance of margin financing and securities lending reachedRmb946.4bn, up 5.0% MoM and 4.7% YoY. The main reason is a recovery in market sentiment inAugust. The CSI 300 Index increased 2.3% over the month, while A-share market average dailyturnover reached Rmb510.1bn, the highest point in 2017, up 10.2% MoM and 5.5% YoY. Weexpect the buoyant sentiment in the A-share market to continue while fundamentals in cyclicalindustries continue to improve and the government’s ownership reforms of state-ownedenterprises make progress.    Equity financing bounces back. The number of IPOs launched in the month reached 37 while thenumber of refinancing deals reached 53. IPO financing raised a total of Rmb16.9bn, (+13.1% MoM)while follow-on financing deals raised Rmb85.1bn, up 89.7% MoM. Against a backdrop of a revivedIPO and refinancing market, we expect the investment banking business to increase in importanceas a source of income for brokers in 2H17. We expect brokers with larger equity financing projectsreserves and stronger projects acquisition capability to outperform in this regard, increasing theirinvestment banking income.    New guidelines on stock pledges. Regulators released guideline amendments on the stockpledged business stressing that pledged amounts should not exceed 60% of holdings. The pledgedratio for a single A-share stock by a single broker now may not exceed 30%, or 15% for eachindividual asset management product. The overall pledged ratio for a single stock should notexceed 50%. This marks the first time that the regulator has included brokers’ own capital levels inparticipating stock pledged business in its broker classification evaluations. The upper limit ofbrokers’ own capital used in the balance of financing over net capital is 150% of type-A capital100% of type-B capital and 50% of type-C capital. According to our calculations, based on 1H17results, no Hong Kong-listed China broker exceeds the regulatory limit. We believe brokers withcomprehensive business structures will benefit the most from the new guidelines, as their netcapital levels will provide further room for business development.    Better outlook. With market sentiment ticking back up and business structures among brokeragesimproving, we expect the regulatory approach towards brokers to loosen, which we see aspotentially sparking a valuation rerating in the sector. In 2H17, we expect brokers to diversifybusiness structure away from traditional brokerage services, towards models more heavilyemphasising investment banking and proprietary businesses. The sector is currently trading at anaverage of 1.1x 17E PB and 1.0x 18E PB, representing an historical low. We remain Overweight thebrokerage sector and recommend investors to look at two types of brokers – those with attractivevaluations, such as China Galaxy (6881:HK), China Securities (6066:HK), CITIC (6030:HK); andindustry leaders such as Haitong Securities (6837:HK) and Guangfa Securities (1776:HK).

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