In 2023, for Chinese brokerage firms in Hong Kong, the international market faced fluctuations and uncertainty. Interest rates on the US dollar rose and the risk of fluctuations in the global market increased. Many institutions had to reduce their risk exposure, and the performance of various institutions was also divided throughout the year.

In an environment of market turbulence, the primary and secondary markets for Hong Kong stocks continued to be sluggish. On the one hand, the Hang Seng Index of the stock market fell for the fourth year in a row, with a cumulative annual decline of 14%, and the average daily turnover of Hong Kong stocks fell 16% year on year; the bond market was affected by the Federal Reserve's interest rate hike, the issuance of Asian foreign bonds in the primary market continued to be sluggish, investors in the secondary market remained cautious in risk appetite, and the performance of investment grade and high-yield sectors was divided.

As one of the first Chinese brokerage firms to set up overseas, Cathay Pacific Junan International (01788) recently announced its 2023 results. In 2023, when the market is full of challenges, how is this “established” Chinese brokerage firm performing in Hong Kong? What new market opportunities are there for Chinese brokerage firms in 2024?

Revenue and net profit increased against the market in 2023, with outstanding performance in many core businesses

In the past year, despite the challenges in the market operating environment, Cathay Pacific Junan International achieved profit resilience against market growth in 2023 with diversified products and services. Looking back at the 2023 fiscal year performance, Guotai Junan International achieved annual revenue of HK$3,217 billion, a year-on-year increase of 39%. Since its listing in 2010, the company continued to be profitable, and achieved an excellent record of a sharp jump of 150% in net profit attributable to shareholders in 2023, reaching HK$201 million. Behind this, the performance of core businesses such as financial products, wealth management, and stock capital market underwriting, which are mainly driven by customer demand, is particularly prominent.

In terms of business segments, the company's wealth management sector achieved a significant increase of 46% over the same period last year. The business revenue scale reached HK$1,856 billion, and the growth performance was impressive. On the other hand, under effective risk management measures, the company's investment management division also turned a loss into a profit in 2023, reaching HK$153 million. The company's wealth management business mainly provides customized products and services such as financial products, fixed income, and structured notes by serving high-net-worth customers such as family offices and the Hong Kong New Capital Investor Entry Program.

In terms of the nature of revenue, according to the Zhitong Finance App, in 2023, Guotai Junan International's net revenue from financial products increased sharply by 85% over the same period last year to HK$760 million; underwriting commission income in the stock capital market increased 173% year on year to HK$73.49 million; and interest income from banks and others increased sharply by 198% year on year to HK$1,166 billion.

In terms of corporate financing, despite the overall decline in the Hong Kong stock and bond market in 2023, the number of IPOs on the Hong Kong Stock Exchange fell 19% year on year, and the scale of capital raised reached a ten-year low. Cathay Pacific Junan International still completed 4 initial public offering sponsor projects in Hong Kong in the past year. According to the Zhitong Finance App, in 2023, as a sponsor, Guotai Junan International successfully helped high-quality companies such as “China's Hydrogen Energy A+H First Stock” Yihuatong and “First Humanoid Robot” Preferred Technology to be listed on the main board of the Hong Kong Stock Exchange. The number of projects and financing amounts ranked among the top Chinese peers.

In addition, in terms of diversified product innovation, Cathay Pacific Junan International has also obtained many “first batch” qualifications in the past year. For example, in May of last year, it became one of the first overseas eligible participants in the “Swap Connect”, and in June of last year, it became the first batch of eligible market makers to become the Hong Kong Stock Exchange Hong Kong Stock Exchange's HKD-RMB double counter model; in September of last year, the company also became the designated market maker for the Hong Kong Monetary Authority's “Southbound Connect”.

Looking at the whole year, as the company's business returned to its roots, the revenue structure was dominated by commission fees and interest income. The outstanding performance of many core businesses drove the company's revenue and profit growth against the market for the full year of 2023. At the same time, in recent years, Cathay Pacific Junan International has continued to reduce its exposure to high-risk investments, improve the efficiency of resource allocation and capital utilization, and vigorously promote new businesses for low-risk customer demand institutions, which has also provided a guarantee for the company's steady development.

Continue to focus on risk control management and accelerate internationalization

According to the Zhitong Finance App, in 2023, against the backdrop of high global interest rates, the investment and trading atmosphere in the Hong Kong stock and bond market was lackluster, and market turnover and financing scale continued to decline, which had a significant impact on the fees and commission income of Chinese brokerage firms.

Meanwhile, in terms of capital costs, due to rising global interest rates, in 2023, Guotai Junan International's financial costs were affected to a certain extent, and overall financing costs increased 1.2 times over the same period last year. However, compared to the 1.9 times increase in the annual market average interest rate (1 month Hibor), the increase in the company's financing costs was far lower than the market increase, reflecting that the company's cost control remained in a leading position in the industry.

On the B-side of the impact of market interest rate hikes, in the global interest rate hike environment, in 2023, the company's interest income from banks and other sources jumped 198% over the same period. The increase in revenue was far higher than the increase in cost, which shows that Guotai Junan International has achieved good results in resource allocation and capital utilization.

It is worth mentioning that Guotai Junan International has always been one of the Chinese brokerage firms in Hong Kong that continue to focus on risk control management. Since the beginning of 2022, Cathay Pacific Junan International has mentioned “reducing risk exposure” in four consecutive performance conferences, enabling the company to achieve steady development in an environment of significant market fluctuations in the past two years. According to Ao Qishun, CFO of Cathay Pacific Junan International, at the company's 2023 results meeting, the asset structure of Cathay Pacific Junan International has changed a lot in recent years. As the company continued to reduce its risk exposure many times, the company basically had no positions in the high-risk sector in 2023, greatly reducing the impact of market fluctuations on the company's business performance. According to information, in the second half of 2023, Guotai Junan International's new investment holdings were mainly based on high-rated, low-risk fixed income products, which was a year-on-year increase in the company's overall trading and investment financial assets.

In terms of liquidity, in 2023, the scale of the company's cash and cash equivalents was HK$7.4 billion, which remained at a reasonable level; the bank's credit limit remained stable at over HK$33 billion, with a usage rate of around 30%; and overall capital resources were HK$54.74 billion, and overall liquidity was healthy and steady.

As the company continued to strengthen management and prevent risks over the years, in 2023, Cathay Pacific Junan International received the long-term issuer ratings of “BBB+” from the international credit rating agency Standard & Poor's and Moody's reaffirming the “Baa2” long-term issuer ratings. The rating outlook is “stable”, maintaining the lead among the Chinese investment industry in Hong Kong.

On the other hand, looking at the current development of Chinese brokerage firms, mainland brokerage firms have been exhibiting overseas for more than 20 years. According to CITIC Securities research statistics, at present, 36 mainland brokerage firms have set up international business subsidiaries in Hong Kong. Among them, the top 10 brokerage firms invest an average of 14.6% of their balance sheets on international business platforms based in Hong Kong. Today, mainland brokerage firms have established a foothold in the Hong Kong market. The share of stock brokerage and IPO underwriting shares on the Hong Kong Stock Exchange in 2023 was 13.6% and 51.4%, respectively.

Meanwhile, along with the two-way opening up of the mainland capital market, increasing demand for cross-border investment and financing, increasing demand for RMB asset allocation from overseas capital, etc., as well as the outward relocation of China's manufacturing industry chain, the domestic consumer industry and internet giants going overseas, Chinese brokerage firms are also moving in depth towards an international layout with Hong Kong, China as the main rear.

In terms of regional linkage layout, according to the Zhitong Finance App, Guotai Junan International has now set up separate subsidiaries in Singapore, Vietnam, and Macau. Among them, the company is the first Chinese brokerage firm to enter Vietnam and Macau, deepening the international layout. In 2023, the pre-tax profit of the Vietnamese subsidiary of Cathay Pacific Junan International increased 48% year over year.

Looking forward to the future, the management of Cathay Pacific Junan International believes that after the interest rate hike cycle of the past two years, the current US dollar interest rate hike has reached a relatively high level, and interest rate cuts may occur in the future. Among them, high-rated, low-risk US dollar bonds in 2024 may have investment opportunities.

In 2024, the company will continue to adhere to a steady and progressive business strategy, adhere to the customer demand-oriented business development direction, vigorously develop wealth management business, promote cross-border financial services, expand customer resources and diversified revenue sources, and accelerate the coverage of Southeast Asian and global markets, and strive to provide customers with comprehensive financial services and systematic solutions to fully meet customers' overseas asset allocation needs.