Latest policy changes

We believe that the government’s current policy (Figure 1) stance supports the recovery of the brokerage industry in two ways:

• By encouraging direct financing, the policy gives brokerage companies more business
• By introducing a tax and fee reduction, the policy benefits the profit of brokerage companies

Encouraging direct financing: The CSRC repeatedly emphasized to increase the proportion of direct financing in 2019. In 2018, the proportion of direct financing in the increment of social finance was only 24%.

The Kechuang Board is one of policies to encourage direct financing, mainly to attract emerging technology companies to list in China rather than overseas. Applications from big data, cloud computing and artificial intelligence companies will be favored by the board. Until July 24^th, there are 25 stocks (Figure 2) traded at Kechang board, with RMB 64.38bn market cap.

We expect the establishment of Kechuang board to contribute to the recovery of brokers’ underwriting business. By comparing the listing standards and pricing method (Figure 2) to the main boards,  we noticed that the new board has the following advantages:

• Less regulation disturbances for the IPO process, improve the efficiency of share issue.
• Differentiating the listing standards for companies, provide more securities financing
• Follow the market-oriented pricing mechanism, give companies favorable valuation.

Tax and fee reduction: On February 2019, CSRC was open for collecting proposals regarding the tax and fee reduction for the brokerage industry. We expect related policy will come alone in the third quarter.

Fundamental  business: Investment income growth

Latest 2019 Q1 statistics from CSRC showed brokerage company’s Securities Investment Income continues to surge, growing 215% YoY (Figure 3), led by overall operating revenue growth of 54.47% YoY as China’s stock market gained over 20% in the first quarter.

In June, there was increased market volatility, trading activity and the scale of margin trading declined slightly. We expect that the performance will continue to rise YoY due to the surge of investment income. Also, the opening of Kechuang board is expected to catalyze the investment opportunities for leading securities firms.

Market: the scale of bond underwriting is 583.3 billion yuan, up 31.2% QoQ.

According to Bloomberg’s June data, the Shanghai Composite Index rose 2.77%, the Shenzhen Composite Index rose 2.86%, the GEM Index rose 1.88%, and the Shanghai Treasury bond rose 0.44%.

Latest statistics from CSRC showed that the monthly turnover of stocks was RMB 8,752bn, up 25.19% YoY. At the end of June, the balance of the margin trading was RMB 912.8bn, down 2.31% QoQ. The scale of IPO is RMB10.5bn, down 32.7% QoQ, while the scale of bond underwriting is 583.3 billion yuan, up 31.2% QoQ.

Investment Actions

We are OVERWEIGHT on the China Brokerage Sector. Despite market volatility in the second quarter, we believe the robust investment income and more policy support will shelter the sector from the risks.