CITIC Securities: The securities industry recommends focusing on two main investment themes

CITIC Securities research reports believe that by 2025, profits in the securities industry will reach a record high, but stock price performance will lag significantly behind previous bull market cycles. Reviewing history, the industry has experienced a progression from “single brokerage business-driven” to “innovative businesses opening up incremental space,” and then to “policy cycle-driven business cycles.” During the 14th Five-Year Plan period, the industry is expected to enter a new stage of “leverage-driven ROE improvement,” with four major marginal changes: ROE shifting from “continuous decline” to “gradual increase,” development moving from “focusing on expansion and innovation” to “deepening existing assets,” the landscape shifting from “diverse and competitive” to “supporting the strong and limiting the weak,” and operations transitioning from “volatile” to “steady growth.”

We recommend focusing on two main investment themes: 1) “Aircraft carrier-level” securities firms capable of increasing market share, net profit margin, and leverage through top-tier investment banking; 2) Mid-sized securities companies that are expected to rise into the top tier through mergers, acquisitions, and refined operations.

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Securities | Grasping Core Transformation Directions to Rebuild Industry Investment Value

By 2025, profits in the securities industry will hit a historic high, but stock price performance will significantly lag behind previous bull market cycles. Reviewing history, the industry has undergone three phases of investment logic evolution: 1) 2003-2011 (brokerage-driven period): characterized by a high-ROE, asset-light phase driven by trading volume and high commission rates, with scarcity of targets amplifying stock price elasticity; 2) 2012-2017 (innovation expansion period): the “Innovation Conference” initiated a cycle of heavy-capital business development, internet operations broke physical branch limitations for client acquisition, and stock prices were driven by fundamental elasticity and policy easing expectations; 3) 2018-2025 (policy-driven period): the establishment of heavy-asset features led to decreased ROE elasticity, with regulatory cycles becoming the core factor influencing industry alpha.

Review Conclusion: Declining ROE elasticity, fluctuating policy expectations, and a surge in listed targets are key reasons for valuation pressures in the industry.

1. Heavy-asset characteristics and fee pressure on light-capital businesses have reduced sector ROE elasticity, causing the industry’s ROE during bull markets to no longer significantly outperform other sectors; 2) Increasing influence of policy cycles and clear periodicity make it difficult to establish stable growth expectations for industry business development. During periods of strict regulation, brokerages face multiple challenges in fundamentals and capital; 3) The rapid increase in listed targets has eroded the scarcity value of industry assets, with small and medium institutions exhibiting low capital utilization efficiency, further lowering industry average return on capital.

Future Outlook: During the 14th Five-Year Plan period, four major changes are expected to reshape industry investment value.

ROE is expected to shift from “continuous decline” to “gradual increase,” with leverage boosting the central ROE. The rise in leverage is likely to become the core logic of valuation reshaping. Domestically, risk control indicators are being optimized, and macro regulatory guidance is easing leverage restrictions, allowing the securities industry to improve ROE through derivatives and other client-demand-driven businesses. Internationally, leading securities firms are experiencing rapid growth in global operations with significantly higher operating leverage than domestically, with some subsidiaries achieving annualized ROE over 20%. With these factors, we anticipate that during the 14th Five-Year Plan, the industry’s ROE median could rise from 7-8% to over 10%, with top-tier firms potentially increasing from 8% to over 12%.

Development will shift from “focusing on expansion and innovation” to “deepening existing assets,” by providing in-depth services to enhance individual client value. China’s capital markets already cover investor proportions close to U.S. levels, but the allocation of stocks and funds within household assets still has over 100% room for growth, offering significant development potential in areas like investment advisory. Based on this, we believe domestic securities firms can accelerate their pursuit of top-tier international investment banks, moving from current per-client profits of around 1,000 RMB to approximately 3,000 RMB, breaking out of the light-asset business fee decline dilemma and improving industry ROA.

The landscape will evolve from “diverse and competitive” to “supporting the strong and limiting the weak,” through mergers and acquisitions to optimize capital utilization. Since 2018, excessive IPOs and refinancing by low-ROE institutions have become major drag factors on capital efficiency. According to company financial reports and Wind data, 44% of refinancing projects over the past five years saw ROE three years post-financing never exceeding the level at the time of financing. To build a leading industry with 10 comprehensive institutions over the next five years and develop 2-3 world-class investment banks by 2035, M&A and restructuring are expected to be the core pathways to reshape the industry landscape, accelerating capital concentration among top firms and improving capital operation efficiency.

Operations will shift from “high volatility” to “steady development,” with client-demand services reducing profit fluctuations. During the 14th Five-Year Plan, the industry will actively develop direct financing channels such as equity and bonds, and steadily develop futures, derivatives, and asset securitization. Regulatory authorities will continue to promote more refined and inclusive countercyclical adjustments to balance investment and financing, stabilizing policy expectations. On the operational side, top firms are continuing to transform away from directional trading, reducing volatility in investment returns, with heavy-asset business yields stabilizing around 2%. Market fluctuations’ impact on performance is gradually diminishing, allowing us to expect a gradual build-up of long-term investment value in the industry.

Risk Factors:

• Underperformance of deepening reforms and policy implementation in capital markets
• Significant fluctuations in equity markets leading to lower investment returns
• M&A and restructuring outcomes falling short of expectations
• Obstacles to international expansion and overseas market risks
• Downward pressure on fees due to stock of competition
• Excessive refinancing risks within the industry

Investment Strategy:

From the perspective of ROE, both domestic and international businesses contribute leverage growth; deepening existing services can steadily improve ROA; M&A and restructuring can enhance capital efficiency; stable policies and operations can reduce performance volatility. The sector’s investment value is expected to be reshaped during the 14th Five-Year Plan. We recommend focusing on two main investment themes: 1) “Carrier-level” securities firms capable of increasing market share, net profit margin, and leverage through top-tier investment banking; 2) Mid-sized securities companies expected to rise into the top tier through M&A and refined operations.

(Source: Daily Economic News)