Cathay Pacific Haitong: Q3 self-operation drags down brokers' performance, recommending the dual main lines of international business and wealth management

The Zhitong Finance App learned that Cathay Pacific Haitong released a research report saying that due to fluctuations in the Tier 1 and 2 equity market, the proprietary business became the core drag of the Q3 single-quarter performance decline; under the influence of the cycle, the differentiation between leading brokerage firms and small and medium-sized brokerage firms widened, and they are optimistic about the future development of leading brokerage firms based on advantages such as international business and wealth management. Currently, high-quality leading brokerage firms have significant advantages in terms of ROE level, growth, and valuation cost ratio, and recommend both international business and wealth management.

Cathay Pacific Haitong's main views are as follows:

The brokerage business contributed to the main increase in the first three quarters, and the proprietary business was the main drag on the decline in a single quarter

The total net revenue of the 42 brokerage firms in 26Q1-3 was 494.3 billion yuan/year on year, and net profit to mother was 209.2 billion yuan/year on year +24%; of these, Q3 profit was 54.1 billion yuan in a single quarter, -17% YoY/-43% YoY. The annualized ROE for the first three quarters was about 10.7%, of which the Q3 annualized ROE was 8.2% in a single quarter. After splitting the increase in performance in the first three quarters, brokerage and net interest income were YOY +28%/+38%, respectively, contributing 40%/16% to net revenue growth. Self-employment benefited +6% year over year, contributing 14% to growth. Investment banking and asset management respectively contributed +26%/+26% year-on-year growth, contributing 8%/11%.

Proprietary business declined year-on-month in the third quarter due to fluctuations in the Tier 1 and 2 equity market

Looking at the Q3 single quarter, self-employment declined -69% month-on-month, contributing 93%, and -56% year-on-year, contributing 113%. One of the core reasons is fluctuations in equity assets (equity, fixed income +, overseas), and the second is the decline in valuations of Tier 1 and 2 science and innovation projects.

Expected rates for brokering/wealth management businesses are still under pressure, and leading wealth management advantages are highlighted

1) Brokerage business revenue in the 26Q3 sector was -11% month-on-month, comparable to the -18% decline in stock base turnover. Considering the resilience of consignment sales, channel rates are expected to continue to decline; 2) Leading brokerage firms continue to maintain better performance, such as CITIC brokerage business revenue of -1% month-on-month, fixed income level, and wealth management narratives are still being interpreted.

The impact of the international business cycle is gradually showing

In the past 2 years, the international business of brokerage firms has grown rapidly against the backdrop of improved prosperity and layout. There are betas and alpha. Judging from the 26Q3 observation, due to factors such as interest rate hikes on US bonds, some brokers' international business expansion process was interrupted, and the investment assets of CITIC and Huatai subsidiaries each shrunk by 181/22 billion yuan month-on-month. We expect significant differentiation in the international business performance of leading brokerage firms.

In terms of the industry pattern, leading brokerage firms can't hide the cyclical drag, but the differentiation between small and medium brokerage firms is expanding

The average annualized ROE of the top ten brokerage firms in 26Q1-3 was 12.8%. The average ROE values after 11-20, 21-30, and 31 in the industry were 9.3%, 6.8%, and 4.5% respectively, which slightly widened the average gap between small and medium brokerage firms. The core difference is the stability of self-operated brokerage businesses. Large and medium-sized brokers' self-operated business is more stable, and their overall revenue contribution remains relatively stable, and natural growth can be achieved along with table expansion; small and medium-sized brokerage firms are more aggressive in their exhibition model, leading to large fluctuations in self-operated income contributions.

Risk warning: The equity market fluctuates, and the macroeconomic recovery falls short of expectations.