China Merchants Securities: Financial management and international trends have surpassed expectations, and the time has reached a balanced allocation for the science and technology innovation sector

The Zhitong Finance App learned that China Merchants Securities released a research report stating that the 26H1 sector's performance fully verifies the main trends of science and innovation investment, international deepening, and financial management transformation. Entering 3Q26, when the investment benefits of the star project are realized, we will be able to see more clearly the results achieved by various brokerage firms in international development and financial management transformation. In a context where regulation firmly maintains the smooth operation of the market and the relationship between capital supply and demand is relatively balanced, the resilience of the equity market still exists. The concentration of positions in the science and innovation sector has declined, market capital is decentralized, and the time for balanced allocation of sectors has arrived. As a sector with excellent performance but no market performance in this round, the valuation of brokerage firms should have been re-evaluated.

The main views of China Merchants Securities are as follows:

Equity K-type differentiation is significant, and the bond market is relatively smooth

In terms of equity, the technology sector, which benefited from AI narratives and corresponding capital expenditure, showed strong performance. The 26H1 GEM Index and the Science and Technology Innovation 50 rose 35.6% and 64.3% respectively; the Shanghai Composite Index, which has a balanced industry distribution, and the Shanghai and Shenzhen 300 rose slightly less well, and 26H1 both rose 3.2% and 7.5%, respectively. In terms of fixed income, under macroeconomic conditions where domestic demand was weak, bond yields remained in a narrow range after falling rapidly. The China Securities Composite Bond Index rose 2.2% cumulatively, significantly stronger than 1.1% of 26H1. Market trading activity was maintained. The average share base turnover on 26H1 was 3.2 trillion yuan, +101% year over year; the average daily two-finance transaction amount was 271 billion yuan, +115% year over year.

The support of market sentiment and the flexible release of investment in science and innovation led to a rapid increase in net revenue and profit, making it the best in the same period in recent years

26H142 listed brokerage firms achieved operating income of 363.8 billion yuan, +46% year-on-year, after deducting non-net profit of 154 billion yuan, +63% year-on-year. On the revenue side, incremental investment contributions have returned to the top of all businesses, supported by trading activity, a stable brokerage base, and a high increase in net interest income. Net income from investment, brokerage, interest, asset management, other and investment banks of the 26H142 listed brokerage firms was $162.4 billion, $97.8 billion, $30.1 billion, $27.5 billion, $20.5 billion, and $19.4 billion respectively. The year-on-year incremental contributions were +45.9%, +30.1%, +4.7%, +6.9%, and +3.4%, respectively. On the cost side, the share of investment revenue increased, and management rates were passively diluted. The management rate for 26H142 listed brokerage firms was 42.9%, -8.1 pct year on year. In terms of operating performance, the industry's ROE increased significantly. The average ROE of 26H142 listed brokerage firms was 9.34%, +2.43pct compared to 25 years. On the one hand, increased operating leverage and stable capital utilization efficiency are important factors in the excellent ROE performance of leading brokerage firms, such as CICC and CITIC Securities; on the other hand, some brokerage firms benefit from investment income from science and innovation equity, and high ROA supports ROE, such as Changjiang Securities and Huaan Securities.

Brokerage flexibility has been fully released, and the transformation of leading financial management has been deepened

The revenue of 26H142 listed brokerage brokers was 97.8 billion yuan, +54% year over year; structurally, agency financial product revenue was 10.1 billion yuan, +86% year over year. The growth rate was significantly faster than transaction unit seat leasing (+75%) and agent trading securities revenue (+50% year over year). Proxy sales accounted for 10.4% of brokers' net revenue, +1.8 pct year on year. Looking at the industry as a whole, the transformation of wealth management continues to advance, and at the same time, the growth rate of seat rental revenue is somewhat higher than agency transaction revenue, which is a financial reflection of the institutional market in the first half of the year. Take a closer look at wealth management. On the one hand, private equity sales volume provides high flexibility for consignment revenue. On the other hand, in the midst of the ups and downs of the cycle, the buyer investment business of leading brokerage firms such as CICC and CITIC Securities has gone through multiple rounds of market and customer testing, and continues to develop iteratively, and has now become an important engine for brokerage revenue growth.

The upward trend in the investment banking cycle is driving recovery, and the trend of heavy capitalization is remarkable

The revenue of 26H142 listed brokerage investment banks was 19.4 billion yuan, +25% over the same period last year. Against the backdrop of the “Double Innovation Board” reform and heated competition in the Hong Kong stock primary market, the decisive factor for investment bank revenue returned to the A-share market, and CITIC Securities, CICC Securities, CICC, and Cathay Pacific Haitong steadily occupied the top three seats. The “Three Investments Linkage” was cashed in. The combined net profit of 26H1 Huaan Securities, Cathay Pacific Haitong, and Changjiang Securities contributed 52.7%, 36.1%, and 35.7% to the Group's net profit, respectively; however, the combined net profit of CITIC Securities and CICC, which lead the investment banking business, was 9.0% and 3.7%. The reason for the differentiation was the exit strategy, liquidity discount, and main business volume of the unbanned project. Subsequently, the return on investment in science and innovation depends on two key variables, namely the continuation of IPOs for science and innovation projects and the popularity of active trading in the secondary market. Furthermore, if subsequent market fluctuations intensify and the project ban is about to be lifted, we need to be wary of the negative impact of the pace of withdrawal on the apparent performance of brokerage firms under the influence of countercyclical policy adjustments.

Asset management is steady, and the leading effect is further highlighted

The asset management revenue of the 26H142 listed brokerage firms was 27.5 billion yuan, +24% year over year; the asset management business CR5 and CR10 were 66.6% and 81.4% respectively, +4.4 pct and +3.6 pct, respectively. Societe Generale Securities, Great Wall Securities, Guangfa Securities, and Orient Securities have a higher “base ratio”. The 26H1 public offering of the four companies contributed 34%, 34%, 16%, and 15% to their net profit to their mother, respectively. Looking at it now, the asset management business has basically absorbed the policy impact of the new asset management regulations. The competitive dimension of securities asset management will converge into three stages, namely building a performance base with active management capabilities, driving product creation through collaborative institutional lines, and strengthening channel bargaining and customer base stickiness with wealth line empowerment. However, for the public offering business, in addition to reshaping investor confidence and leveraging brand effects through a steady and upward product net value curve, focusing on the trend of product rate hierarchy and switching organizational division of labor structures may be a better way to absorb the impact of fee cuts and concessions.

Investing in science and innovation and cross-border business unleash resilience

The investment income of 26H142 listed brokerage firms was $162.4 billion, +48% year over year; return on investment (after annualization) was 6.19%, +1.25pct over 25 years. For leading brokerage firms, the increase in financial assets is mainly due to the increase in customer demand business (OTC equity derivatives) and the increase in the valuation of science and innovation equity. For small and medium-sized brokerage firms, in addition to factors that increase the valuation of science and innovation equity, financial assets are incremental sources of transactional bonds and high-dividend assets, and at the same time, some companies choose to cash out the surplus of OCI bonds. Focusing on leading brokerage firms, the increase in OTC equity derivatives mainly comes from cross-border business, the consolidated trading financial assets of leading brokerage firms, and transactional financial assets of subsidiary caliber (obtained by rolling the difference between consolidated statements and parent company statements). Both have similar increases compared to the beginning of the year, and the increase of the latter is also similar to the increase in TPL shares, or provides financial confirmation for this judgment. However, looking back at the time of September, it is necessary to emphasize the cyclical nature of the derivatives business and the stepwise fluctuation in revenue. Furthermore, in terms of concentration, 26H1's investment income CR5 and CR10 was 51.1% and 73.9%, respectively, higher than industry capital concentration (CR 539.9%, CR 1061.2%). When concentration dividends brought about by mergers, acquisitions and restructuring are released, competition in capital business will completely shift to competition between license advantages, customer base, product design, and transaction ability.

Market sentiment drives scale expansion, and rates are falling at an accelerated pace

Net interest income from 26H142 listed brokerage firms was $30.1 billion, +53% year-on-year. In terms of business scale, at the end of 26H1, 42 listed brokerage firms raised 2.5 trillion yuan, +62% year-on-year, +19% compared to the beginning of the year; buying and reselling financial assets totaled 397.8 billion yuan, +16% year-on-year, and +1% compared to the beginning of the year. Judging from the competitive pattern, the concentration of financing continued to increase. CR5 at the end of 26H1 was 37.3%, +0.5pct compared to the beginning of the year. GF Securities surpassed Galaxy in market share of China and rose to 4th place in the ranking. From a rate perspective, market competition is heating up, and interest rates on financing are falling at an accelerated pace. The financing interest rate of 26H142 listed brokerage firms was 4.31%, -0.75pct compared to 25H2, and the decline was significantly wider than in the previous year and a half (25H2 fell 0.14pct from 25H1).

Risk warning: Market fluctuations have intensified, economic recovery has fallen short of expectations, policy effects have fallen short of expectations, etc.