China Merchants Securities: The securities boom is boosted, but internal segmentation of the sector places significant emphasis on valuation and cost performance, highlighting the allocation window

The Zhitong Finance App learned that China Merchants Securities released a research report saying that looking forward to the second half of the year, the securities market regains an upward trend and a steady rise in the center should be a probable event. Benefiting from equity investment income contributing to performance elasticity, the continuing “asset shortage” of consolidated income and fluctuating interest rates, brokerage performance is expected to remain high. Currently, there is a significant mismatch between undervaluation, low holdings, and high growth performance. The sector's valuation is outstanding in terms of cost performance. It is recommended to pay attention to this allocation window.

The main views of China Merchants Securities are as follows:

2026H1 review: equity style is polarized, and the bond market is generally stronger

In terms of equity, since the second quarter, the AI chain has been leading the way under industry trends, high-frequency data and performance verification, and the technology sector has strengthened rapidly. The GEM index rose 35.6% in the first half of the year, significantly outperforming the Shanghai and Shenzhen 300 and the Shanghai Composite Index. In terms of fixed income, supported by overall capital easing and a return to the “asset shortage” logic, China Securities's full debt trend was relatively strong, with a cumulative increase of 2.2% in the first half of the year. Market trading sentiment was high. The average daily share base turnover in the first half of the year was $3.24 trillion, +101% year over year; the average daily balance of two loans rose to $2.75 trillion, +49% year over year.

Performance Overview: The boom boosted sector performance, but internal segmentation was significant

The 1Q2,642 listed brokerage firms achieved operating income of 151.1 billion yuan, +31% year over month, and +15% month on month; net profit after deducting non-net profit of 59.5 billion yuan, +39% year over month. Cost reduction is still the main theme on the cost side. The management rate for the 1Q2,642 listed brokerage firms was 47.2%, -4.7 pct year over year, and -6.0 pct month-on-month. ROE performance is significantly differentiated. Driven by customer demand business, leading companies maintained ROE growth and orderly expansion. CITIC Construction Investment, CITIC Securities, CICC and GF Securities led the industry; small and medium-sized brokerage firms showed very different performance. Changjiang Securities and Fangzheng Securities ROE ranked at the top of the industry, and Tianfeng Securities were dragged down by self-management and did not rank high in ROE.

Chip situation: Clear chips and go to battle lightly

Observe the positions of important institutional investors through the narrow caliber of China Securities Finance. By the end of March 2026, the market value of shares held by China Securities Finance in listed securities companies reached 19.4 billion, and their holdings were mainly concentrated in the top ten brokerage firms. As institutional chips are cleared, the market's consensus on the serious mismatch between sector performance and valuation is gradually being consolidated, and there is a high probability that capital will gradually flow back to the sector. According to observations, since mid-June, Securities II has reversed steadily, and the upward slope is clearly greater than that of the Shanghai Composite Index. The trend of the insurance sector, which also has heavy institutional holdings, was weak during the same period. The differentiation between the two may confirm to a certain extent that the clearance of sector chips has basically been completed, and the return of capital is ongoing.

Industry trends: technology driven, international deepening, wealth accumulation

1) Driven by technology finance, big investment banks are facing changes: This round of capital market financing-side reforms focuses on the “double innovation board” reform. In this context, investment banking competition is moving from the original “underwriting - underwriting” business capability comparison to a comprehensive competency competition of “industry understanding - target screening - capital use - valuation and pricing - distribution level”. However, along with the ultimate interpretation of the technology market, investment income generated by alternative brokers and private equity firms has become an important growth point for brokers' profits. 2) Deepening international business and boosting the ROE center: As Chinese enterprises accelerate global layout, domestic and foreign interest rates are deeply inverted, and the global equity market has set off a technological boom, cross-border investment, financial investment and wealth management jointly support the international business development of brokerage firms. Considering that the cross-border investment banking business faces significant high base pressure, and that cross-border wealth management is constrained by tight supply-side constraints, the cross-border investment business has continued to be popular on the demand side and relatively relaxed supply-side constraints, or has become the biggest growth point for international business revenue during the year. It is also the core supporting the high-leverage operation and high ROE of international business. 3) Deposits have moved and penetrated, and financial management is ready to go: the era of low interest rates has arrived, real estate investment attributes have subsided, and capital is urgently needed for new asset carriers. Unlike in the previous round of rising markets, the mass affluent customer base acted as the main deposit-mover and public-equity fund product. On the one hand, when the market style was extremely interpreted and the variety and scale of OTC derivatives instruments were relatively limited, and as one of the few leveraged tools in the market, financing became the first choice for high-favored customer groups to increase profits; on the other hand, private equity funds are significantly superior to the yield level of public funds with strategic flexibility, position freedom, absolute return orientation, and scale management flexibility., becoming a relatively moderate risk appetite and pursuing excess returns The customer base is the main driver for increasing revenue.

Industry pattern: Mergers, acquisitions and restructuring are advancing at an accelerated pace, and competition among first-class investment banks is heating up

The integration of brokerage licenses has been accelerated under the same actual controller. Since the end of 2025, Central Huijin has promoted the absorption and merger of Dongxing Securities and Cinda Securities by CITIC, the Shanghai State-owned Assets Administration Commission has promoted the absorption and merger of Oriental Securities with Shanghai Securities, and the Jiangsu State-owned Assets Administration Commission has promoted the cross-market acquisition of Donghai Securities. All three have distinct administrative dominant characteristics. Furthermore, competition among top investment banks is gradually heating up. With “Guojun+Haitong” initially achieving the “1+1>1” integration effect and CICC's “three in one” stage of substantive supervision and acceptance, it is expected that CITIC Securities, Cathay Pacific Haitong, and CICC have basically secured the top three seats in the industry. As second-tier leaders, GF Securities and Huatai Securities continue to make efforts in terms of capital strength, business innovation and international layout; it remains to be seen who can take the lead in breaking through between China Merchants Securities, Shenwan Hongyuan, China Galaxy, CITIC Construction Investment, and Guoxin Securities.

2026H2 outlook

Since July, the Shanghai Composite Index has rebounded markedly and hit a low of 3,741, and the balance of the two loans has decreased by 312.2 billion dollars; in this context, supervision has restarted the market stabilization mechanism, showing a firm determination to make every effort to maintain the stable operation of the market. In the context of regulation and care for the secondary market, regulation measures for the primary market are not expected to be lacking. The capital demand side is relatively flexible, and the capital supply remains stable. It is expected that the relationship between supply and demand in terms of capital in the second half of the year will maintain a relatively balanced trend. Looking back, the bank believes that a return to the upward trend of the market and a steady rise in the pivot should be a probable event.

Investment advice

Considering that equity market prosperity continued during the year, equity investment income provided performance flexibility, the “asset shortage” of fixed income continued, and interest rates fluctuated, the brokerage sector's performance is expected to increase. The industry is expected to achieve total revenue of 674.6 billion yuan in 2026, +25% year over year, and net profit of 276.6 billion yuan, or +26% year over year. As of July 22, 2026, the PB of the brokerage sector was 1.32 times, at the 34.7% quantile in the past 5 years; 26Q1 institutions held only 0.52% of positions, which is significantly lower than the standard 3.25%. Currently, there is a significant mismatch between undervaluation, low holdings, and high growth performance. The sector's valuation is outstanding in terms of cost performance. It is recommended to pay attention to this allocation window. In terms of individual stock recommendations, I look forward to the continuation of the narrative of science and technology venture capital banks in the short term, and the arrival of a “singular moment” for international development to boost ROE centers and wealth management in the medium to long term. I recommend GF Securities, Cathay Pacific Haitong, CITIC Securities, and CICC.

Risk warning: The market has been sluggish for a long time, policy effects fall short of expectations, marginal policy tightening, liquidity tightening, business rates continue to decline, etc.