The Zhitong Finance app learned that Haitong Securities released a research report saying that brokerage valuations are low, and it is expected that alpha and beta markets will coexist in the future. On November 22, 2023, the average valuation of the brokerage industry was 1.2x 2023E P/B, and the CITIC Brokerage II Index PB was 1.34 times. The valuation was low. Considering the positive development policy of the industry, we recommend high-quality leaders and high-performing flexible varieties that fully benefit from active capital market policies.

▍ The main views of Haitong Securities are as follows:

Market activity needs to increase in the first three quarters of 2023.

1) The average daily stock trading volume of the market for the first three quarters of 2023 was 973.9 billion yuan, down 5% from the previous year. 2) As of the end of September 2023, the balance of securities financing was 1.59 trillion yuan, an increase of 3.4% over the previous year, and the average guarantee ratio was 274%. Overall risk was manageable. 3) The pace of IPO issuance has slowed down, and the average fund-raising scale has declined sharply. The average number of monthly distributors in the first three quarters was about 29, a year-on-year decrease of 13%. A total of 264 IPOs were issued in the first three quarters of 2023, with a capital raising scale of 323.6 billion yuan, -33% over the same period last year. The average fundraising scale for each company was 1.23 billion yuan, down 23% from the previous year.

4) Overall refinancing is under pressure. The first three quarters of 2023 raised additional capital of 487.3 billion yuan, down 2% year on year; allotment of shares was 56.7 billion yuan, down 77% year on year. Convertible bonds and convertible bonds declined 38% and 29%, respectively. 5) The scale of bond issuance increased year over year. The volume of bond issuance involving brokerage firms in 2023Q1-3 was 9.76 trillion yuan, up 21% year on year. 6) Margin recovery in equity markets. The total A index fell cumulatively by -1.41% from 2023Q1 to 30,000; the total price index of China bonds rose by 0.83% in 2023Q1-3.

The operating income of 51 listed brokerage firms increased 13% year on year, and net profit increased 14% year on year; in the third quarter, operating income fell 9% year on year, and net profit fell 7% year on year.

In the first three quarters of 2023, 51 listed brokerage firms achieved a total operating income of 412.1 billion yuan, an increase of 13% over the previous year, and net profit of 119.3 billion yuan, a sharp increase of 14% over the previous year. Among the 51 listed brokerage firms, Southwest Securities (+58%), Tianfeng Securities (+42%), and Caitong Securities (+40%) had the highest growth rates, while Xiangcai Shares (-38%) and Jinlong Shares (-21%) declined more.

In terms of net profit, Hongta Securities (+748%), Tianfeng Securities (+718%), and Southwest Securities (152%) saw high increases, while Haitong Securities (-28%) and CICC (-23%) declined significantly, and Jinlong Co., Ltd. lost money. Looking at a single quarter, 51 listed brokerage firms achieved operating income of 122.3 billion yuan in the third quarter of 2023, -9% year-on-year, -16% month-on-month, and net profit of 30.8 billion yuan, -7% year-on-year, and -27% month-on-month.

Self-employment has rebounded sharply, and asset-light businesses are under pressure.

1) Brokerage revenue fell 12%, and commission rates are expected to continue to decline. The brokerage revenue of listed brokerage firms in the first three quarters of 2023 totaled 77.8 billion yuan, down 12% from the previous year. The decline was greater than -5% of the average daily stock base trading volume in the market. The main reason is the continued decline in transaction commission rates. The brokerage business revenue of listed brokerage firms in the third quarter was 24.5 billion yuan, -17% year-on-year and -12% month-on-month.

2) The slowdown in IPO issuance affected the income of brokerage investment banks, and the concentration of investment banks remained high. In the first three quarters of 2023, 46 listed brokerage firms achieved investment bank revenue of 35.4 billion yuan, a year-on-year decrease of 18%. The number of IPOs issued fell 13% in the first three quarters, and the 33% decline in issuance scale was the main factor dragging down investment banks' revenue. Judging from the amount of underwriting projects completed in 2023Q3, the concentration of listed brokerage firms remained high. The top five brokerage firms accounted for 58%, an increase of 7 pct compared with the first three quarters of 2022.

3) The scale of fund issuance is still at the bottom, and asset management income has increased slightly. In the first three quarters of 2023, 46 listed brokerage firms achieved a total asset management revenue of 34.8 billion yuan, an increase of 1% over the previous year. After experiencing a sharp decline in 2022, the share of newly issued public funds in the first three quarters of 2023 was 774.9 billion shares, -30% over the same period last year, which is still at the bottom.

4) There was a marginal recovery in the equity market in the first three quarters of 2023, and the revenue from brokers' own business increased sharply. The investment income of listed brokerage firms in the first three quarters of 2023 (including changes in fair value) was 107.6 billion yuan, a sharp increase of 75% over the previous year. The sharp increase in self-operated income greatly boosted the overall performance of brokerage firms. Net investment income of 22.2 billion yuan was achieved in the third quarter, +52% year-on-year and -34% month-on-month.

Under a neutral assumption, the industry's net profit is expected to be +21% year-on-year.

Under a neutral assumption, the industry's net profit is expected to be +21% year on year in 2023, brokerage business revenue is expected to fall 11% year on year, investment banking business revenue is expected to fall 8% year on year, capital brokerage business revenue will increase 6% year on year, asset management will increase 10% year on year, and self-employment will increase 50% year on year.

The valuation is low, and it is expected that the alpha and beta market will coexist in the future.

On November 22, 2023, the average valuation of the brokerage industry was 1.2x 2023E P/B, and the CITIC Brokerage II Index PB was 1.34 times. The valuation was low. Considering the positive development policy of the industry, we recommend high-quality leaders and high-performing flexible varieties that fully benefit from active capital market policies.

Risk warning:

The sharp decline in capital markets has brought double pressure on performance and valuation.