China Merchants Securities has released a research report stating that strong performance and low valuations offer certain returns, leading to a strong recommendation for the brokerage sector. Influenced by regulators' firm determination to maintain stable market operations and favorable supply-demand dynamics in capital markets, the equity market has a solid foundation with ample room for upward movement. Brokerage performance may potentially exceed expectations. However, there is currently a severe mismatch between the sector's valuation and its fundamentals, making its risk-reward profile particularly attractive. The report recommends high-performing stocks with low valuations. The main points from China Merchants Securities are as follows:
High transaction activity and an investment banking recovery establish the foundation for strong performance growth, with proprietary trading results potentially surpassing expectations. In the first quarter of 2026, the average daily stock trading volume for all A-shares was 2.58 trillion yuan, representing a 69% year-on-year increase. The average daily margin trading and securities lending balance was 2.66 trillion yuan, up 42% year-on-year. The pace of equity financing accelerated quarter-over-quarter, with funds raised increasing by 132% year-on-year, aided by a low base effect. As of the first quarter of 2026, non-monetary assets under management totaled 21 trillion yuan, a 15% year-on-year increase. The bank forecasts that listed brokers' revenues from brokerage, credit, investment banking, and asset management businesses in the first quarter of 2026 will increase by approximately 45%, 60%, 90%, and 35% year-on-year, respectively. Regarding proprietary trading, considering the favorable bond market conditions, active commodity trading, and the trend of RMB appreciation in the first quarter of 2026—all beneficial for FICC business—the impact of equity market volatility on apparent returns may be somewhat mitigated. Proprietary trading revenue is expected to grow by about 25% year-on-year. Overall, the core net profit of listed brokers for the first quarter of 2026 is projected to increase by approximately 35% year-on-year.
The bottom of the brokerage sector has been confirmed, with expectations that improved liquidity will provide sustained upward momentum. Since the beginning of the year, the brokerage sector has faced continued pressure due to weakened risk appetite stemming from geopolitical issues, structural selling pressure, concerns over ROE dilution from potential refinancing activities, and doubts about earnings growth momentum. As of April 13, 2026, the Securities II (CITIC) index had fallen by 10.4% cumulatively, underperforming most sectors. The price-to-book ratio of the brokerage index stood at 1.30 times, at the 17.6th percentile since 2019. However, given that the Shanghai Composite Index remains around the 4000-point level, the initial implementation of H-share financing for some brokers, and the potential for the "Measures for the Supervision of Derivative Transactions (Trial) (Draft for Comment)" to marginally increase the scale and leverage of the derivatives market, the bank believes short-term funding pressure on brokers is relatively low, industry-wide refinancing is unlikely, and the certainty of high earnings growth is strong. The sector bottom is considered confirmed, suggesting it is time to consider positioning. Nevertheless, it is also noted that sustained sector gains will still depend on support from market liquidity.
Risks include intensified market volatility, slower-than-expected economic recovery, and policy effects falling short of expectations.
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