The final independent financial reports of Dongxing Securities Corporation Limited (601198.SH) and Cinda Securities Co.,Ltd. (601059.SH), both of which were formally delisted on October 19, have recently been disclosed ahead of their merger. The data show that in the third quarter, Dongxing Securities posted operating revenue of 979 million yuan, down 28.06% year-on-year, with net profit attributable to shareholders of 586 million yuan, down 24.85% year-on-year. Over the same period, Cinda Securities reported operating revenue and net profit attributable to shareholders of 870 million yuan and 191 million yuan respectively, down 11.37% and 42.03% year-on-year. Both brokerages had achieved growth in revenue and net profit in the first half of the year, so why did their third-quarter performance weaken? Changes in proprietary trading income may be the key.
A review of the two brokerages' semi-annual and first-quarter reports shows that Dongxing Securities and Cinda Securities recorded single-quarter proprietary trading income of 335 million yuan and 333 million yuan respectively in the third quarter, with quarter-on-quarter declines exceeding 50% for both. Since July, the A-share market has experienced sustained volatility and adjustment, with the technology sector undergoing a deep correction. This may have weighed on the third-quarter performance of brokerages that currently rely heavily on proprietary trading and gains from follow-on investments in science and technology innovation. The non-bank financial team at Guotai Haitong Securities Co., Ltd. (601211.SH) expects that the third-quarter net profit attributable to shareholders of 42 listed brokerages will decline 31% quarter-on-quarter. Among the factors, affected by equity market volatility, declines in primary and secondary market investments have put pressure on brokerages' proprietary trading business, which may become the core drag on third-quarter brokerage performance on a quarter-on-quarter basis, expected to account for 83% of the quarter-on-quarter decline.
Both Proprietary Trading and Brokerage Income Fall in the Third Quarter
In the first three quarters of this year, the performance of Dongxing Securities and Cinda Securities diverged somewhat. Dongxing Securities reported operating revenue of 3.485 billion yuan in the first three quarters, down 3.47% year-on-year, with net profit attributable to shareholders of 1.611 billion yuan, up a slight 0.75% year-on-year. Cinda Securities saw its two figures move in opposite directions: operating revenue of 3.305 billion yuan, up 9.48% year-on-year, while net profit attributable to shareholders fell 4.83% year-on-year to 1.288 billion yuan.
Looking at the business data, proprietary trading accounted for more than 40% of both brokerages' revenue in the first three quarters of this year, making it the absolute pillar of their revenue. However, in the single third quarter, both brokerages' proprietary trading income fell significantly compared with the second quarter. Specifically, Dongxing Securities' third-quarter proprietary trading income was 335 million yuan, down 64.97% from 955 million yuan in the second quarter. Cinda Securities' proprietary trading income was 333 million yuan, down 53.99% quarter-on-quarter from 725 million yuan in the second quarter.
In addition, factors such as reduced trading activity and fewer new account openings in the secondary market during the third quarter also dragged on both brokerages' brokerage business to some extent. In the third quarter, Dongxing Securities and Cinda Securities recorded net fee income from brokerage business of 217 million yuan and 238 million yuan respectively, down 20.59% and 15.52% quarter-on-quarter.
In investment banking and asset management, the two brokerages diverged again. In terms of investment banking, Wind data show that Dongxing Securities won only one IPO project this year, that of Beijing Stock Exchange-listed Guoliang New Materials (920076.BJ). In the first three quarters of this year, the brokerage's net fee income from investment banking business was 222 million yuan, down 40.28% year-on-year. Cinda Securities, meanwhile, came up empty on IPO projects this year, with net fee income from investment banking business of only 51.2895 million yuan, making it its worst-performing business line in the first three quarters.
In asset management, Dongxing Securities' net fee income from asset management business in the first three quarters was 171 million yuan, up 13.9% year-on-year. Cinda Securities' net fee income from asset management business was 120 million yuan, down 5.38% year-on-year.
Market Adjustment Drags on Proprietary Trading
The market has now entered a period of intensive third-quarter report disclosures. When will the full picture of brokerages' third-quarter performance emerge? Wind data show that this week, Guangdong Golden Dragon Development Inc. (000712.SZ), Huaxi Securities Co.,Ltd. (002926.SZ), Harbin Hatou Investment Co.,Ltd. (600864.SH) and East Money Information Co.,Ltd. (300059.SZ) will disclose their third-quarter reports one after another.
Most brokerages' third-quarter reports will not be known until next week, including several leading brokerages such as Guotai Haitong and Huatai Securities Co., Ltd. (601688.SH), all of which have chosen to disclose on October 31 right at the deadline.
Judging from the semi-annual report data, proprietary trading has become the ballast of brokerages' revenue. Wind data show that in the first half of the year, the combined proprietary trading income of 43 listed brokerages was 168.733 billion yuan, up 55.19% year-on-year, accounting for 46.26% of brokerages' total operating revenue in the first half. But since entering the third quarter, the A-share market has continued to adjust, with the CSI 300 falling 12.5% in the third quarter. The technology sector, which had surged in the first half, pulled back most notably, with the ChiNext Index and the STAR Composite Index both posting sharp drawdowns of more than 20% in the third quarter. As of the close on October 19, the two indices had fallen 14.26% and 4.05% respectively for the year.
The non-bank financial team at Guotai Haitong believes that the overall volatile downward movement of the equity market and the significant correction in the science and technology innovation sector in the third quarter will, on the one hand, affect brokerages' primary and secondary market investments to some extent, and on the other hand, the pullback in unrealized gains on key science and technology innovation projects will affect the quarter-on-quarter growth of brokerages' proprietary trading income.
Gao Chao, chief non-bank financial industry researcher at Open Source Securities, also believes that direct investment and follow-on investment gains will become an important factor affecting the performance divergence among brokerages. But he also noted that the recovery in IPOs, incremental direct investment and follow-on investment gains brought by the listings of projects such as Changxin Technology, as well as the operational resilience of wealth management and overseas businesses, are expected to provide support for the profitability of the brokerage industry.
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