UBS expects mainland brokerages third-quarter recurring net profit to rise 16% year-on-year, with Changxin Technology's listing acting as a key buffer

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According to a research note from UBS, the third-quarter recurring net profit of listed Chinese brokerages is expected to slow to a 16% year-on-year increase, below the 83% and 39% growth recorded in the second and first quarters, and down 18% quarter-on-quarter, reflecting weakening trading activity and softer market conditions, while the listing of Changxin Technology (688825.SH) provides a key profit buffer.

The bank noted that during the quarter, the average daily turnover of A-share equities and related products, as well as margin financing and securities lending balances, still rose 11% and 7% year-on-year respectively, but fell 18% and 15% quarter-on-quarter.

Fair value gains on STAR Market and ChiNext investments had accelerated earnings in the second quarter, but are expected to become a drag for most listed brokerages in the third quarter, with the exception of those benefiting from Changxin's listing.

The CSI 300, STAR 50 and ChiNext indices fell 12.5%, 30.7% and 27.8% respectively in the third quarter, compared with gains of 11.9%, 75.7% and 36.4% in the second quarter.

The bank estimated that investment banking net revenue rose 88% year-on-year and 72% quarter-on-quarter in the third quarter, driven by strong initial public offering fundraising, especially the Changxin listing; A-shares saw 52 IPOs raising RMB 146 billion, up 2.6 times year-on-year and 2.3 times quarter-on-quarter.

Investment income is estimated to have risen 29% year-on-year but fallen 14% quarter-on-quarter; brokerages held Changxin through direct investments and IPO cornerstone participation, generating an estimated more than RMB 20 billion in unrealized gains in the third quarter.

Brokerage business revenue is estimated to have fallen 11% year-on-year and 15% quarter-on-quarter; net interest income is estimated to have fallen 9% year-on-year and 15% quarter-on-quarter.

The bank views CICC (03908) H-shares and CSC Financial (06066) H-shares as having the strongest short-term earnings momentum, benefiting from exposure to Changxin's listing; CITIC Securities (06030), Guotai Haitong (601211.SH) A-shares and Huatai Securities (06886) remain the bank's preferred long-term names.

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