Open Source Securities has released a research report stating that low valuations, the removal of suppressing factors, and consistently exceeding profit expectations form the core rationale for its strong recommendation of leading brokerages.
From a marginal perspective, capital market pressures are expected to ease in the second quarter, with the follow-on financing overhang resolved. The expansion of IPOs is set to benefit brokerages' investment banking and investment chains, driving high profit growth. Second-quarter performance for brokerages is anticipated to continue surpassing expectations, with attention on the sustained improvement in ROE driven by three medium-to-long-term narratives: wealth management amid deposit migration, overseas balance sheet expansion due to cross-border demand, and the empowerment of investment banking and investment activities by the technology wave. The firm continues to emphasize opportunities in top-tier brokerages.
Key Views on Brokerages
The fund industry is confronting three significant strategic opportunities, and the outlook for brokerages' interim reports points to positive trends across all business lines.
First, the average daily stock and fund trading volume this week was 3.43 trillion yuan, down 7.1% week-on-week. The year-to-date average daily stock trading volume stands at 3.20 trillion yuan, representing a 98.6% increase year-on-year. The total IPO fundraising scale for April and May reached 32.3 billion yuan, a 25% increase compared to the 25.9 billion yuan raised in the entire first quarter.
Second, CSRC Chairman Wu Qing, speaking at the China Securities Investment Fund Association's Fourth Member Congress, stated that the fund industry faces important strategic opportunities. These include new growth drivers from economic development shifting towards new and superior quality, new asset management demand released by profound adjustments in financial structure, and a new development environment created by the reshaping of capital market systems. He emphasized accelerating the transition from a focus on "scale" to a focus on "returns" and resolutely curbing persistent issues such as betting on specific sectors, style drift, and high-priced fund launches.
Third, on June 3rd, the General Office of the State Council issued the "Guiding Opinions on the High-Quality Development of Private Funds," highlighting issues like an industry that is large but not strong and an imbalanced fundraising structure. Core measures in the document include: at the entry point, leveraging pre-registration comprehensive assessment and the dual review role of private fund registration and filing; in ongoing supervision, strengthening consolidated supervision and the ability to detect clues, and cracking down on illegal activities; and at the exit point, promoting the clearance of private funds and entities that do not meet requirements. The next step involves the CSRC formulating a three-year action plan to implement the Guiding Opinions.
With the acceleration of IPO expansion in the second quarter, brokerages' investment banking and entire investment chains stand to benefit. Brokerage performance in Q2 is expected to maintain high growth, as concerns over capital markets and follow-on financing are alleviated. The firm strongly recommends leading brokerages, with top picks being the low-valuation leaders CICC (HKEX: 03908), CITIC Securities, and Guotai Haitong, which possess comprehensive strengths in investment banking, overseas business, and wealth management. It also recommends Tonghua Shun, which fully benefits from increased trading volumes.
Insurance Sector Analysis
Ping An Insurance further increased its stake in China Life Insurance H-shares, with capital market conditions remaining a significant factor suppressing valuations.
Hong Kong Exchange disclosures show that on May 28th, Ping An Insurance increased its holding in China Life Insurance H-shares by 23.163 million shares at an average price of HK$28.37 per share, involving approximately HK$657 million. Following this purchase, its latest shareholding stands at about 1.269 billion shares, with the stake rising from 16.75% to 17.05%.
Amid capital market pressures, insurance sector valuations continue to decline, currently at relatively low levels. While the liability side is expected to maintain high-quality growth in the second quarter, net profit growth rates are likely to show significant improvement compared to the first quarter. The long-term logic remains unchanged: high liability-side activity driven by deposit migration and stable medium-to-long-term interest spreads as long-term interest rates stabilize. The firm is optimistic about targets with low valuations and sustained high-quality liability-side growth, monitoring catalysts on both the asset and liability sides. It recommends Ping An Insurance and China Pacific Insurance.
Recommended Portfolio
The recommended portfolio includes: CITIC Securities, Guotai Haitong, CICC (HKEX: 03908), Ping An Insurance; Caitong Securities, Tonghua Shun; China Pacific Insurance, CHINA LIFE (HKEX: 02628), Jiangsu Financial Leasing, and HKEX (HKEX: 00388).
Risk Advisory
Risks include market volatility impacting investment returns and insurance liability-side performance falling short of expectations.
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