CMSC: Policy dividends have arrived, demand is increasing, and the outlook for the industry is stable and improving.

CMSC released a research report stating that the current development goals of the futures industry are clear, the overall path is clear, policy support continues to protect the market, coupled with the rigid demand of the industry, collectively supporting the industry's basic fundamentals. In the long run, with a clear industry positioning, a clear development path, steady improvement of business capabilities, continuous efforts on both the supply and demand sides, the fundamentals are expected to stabilize and strengthen. In comparison to the securities industry with a similar business model, the futures industry has a stronger light asset attribute, with relatively larger profit fluctuations. Therefore, compared to the securities industry, the valuation of the futures sector should be higher and more flexible, while the current valuation of the futures sector is low, suggesting an active layout. The main points of CMSC are as follows: Why recommend the futures industry at this point in time? 1) Policy dividends have arrived, and a new cycle is about to begin: The issuance of the "Opinions on Strengthening Supervision, Preventing Risks and Promoting the High-Quality Development of the Futures Market" is of no less significance to the futures industry than the multiple versions of the "Nine Articles" are to the securities industry. 2) The advancement of the Belt and Road provides practical experience in "seizing the pricing power of commodities": The "resource-product-technology product" circular trade between China and countries along the Belt and Road determines China's dominant position in the spot market, coupled with the promotion of RMB internationalization and improvements in storage/logistics infrastructure along the Belt and Road. The futures market led by China will attract more domestic and foreign investors, enhancing the global influence of Chinese futures prices. 3) Rigid risk management demand: In a volatile market environment, industrial customers have become the "natural demand side" for futures market transactions. With the promotion of portfolio margin, improved market maker rules, the cost of industrial customers participating in hedging is expected to decline, and penetration rates are expected to further increase. 4) Marginal improvement in industry fundamentals: Commodity futures options continue to innovate, financial products are launched or subject to marginal relaxation, market boundaries are expected to expand further; commercial banks, medium- to long-term funds, and incremental inflows of foreign qualified investors boost market activity. Supply and demand resonance support the improvement in industry fundamentals. The domestic futures market is growing rapidly, differentiated development in structure. After thirty years of development, the trading activity in the domestic futures market is significantly better than that of Japan and Europe, slightly inferior to the United States. In 2023, CZCE, DCE, SHFE, and ZCE ranked among the top 30 in global exchange futures and options trading volume. Structurally, differing from the United States and even the global financial derivative focus, influenced by regulation and market selection, the Chinese futures market is mainly made up of commodity and interest rate derivatives, with the development of stock index derivatives being lackluster. The futures industry has a light asset volume, significant profit fluctuations, high concentration, and with policy dividends being released and endogenous growth, the overall industry will move towards being "small and beautiful." In terms of asset volume, revenue, and net profit scale, the characteristics of "large market, small industry" in futures are evident, with the revenue and net profit of the futures industry in 2023 being less than the leading securities company, CITIC SEC. In terms of industry structure, the leading effect is obvious and continues to strengthen. The business structure is mainly traditional brokerage business, a single business structure and intense market competition leading to industry ROE being lower and more volatile than that of the banking and securities industries. With increased leverage space in the industry, maturation of innovative businesses, and traditional brokerage businesses taking the lead in revenue generation, the industry is expected to move towards being "small and beautiful." Currently, brokerage business remains the main revenue contributor to the industry, with policy being the main variable affecting profitability. In recent years, brokerage business revenue has remained above 90%. In terms of business scale, the underlying hedging demand of traditional industries and policy attitudes determine the direction of changes in trading volume and the size of market trading increment space. In terms of business fees, intense market competition, trends towards institutionalization/industrialization of investments, weaken the bargaining power of futures companies, leading to a decline in commission rates; with ample domestic liquidity, futures margin interest rates are also under pressure. Following the maturity of the futures market, a downward trend in exchange rebate rates is likely, and futures companies overly reliant on traditional brokerage business may face being phased out. Asset management income is reinvigorated after channelization. After the new regulations on asset management, the growth rate of futures asset management has shifted gears and is currently steadily developing, with business income accounting for around 2.5%; in terms of fees, cost reduction is the trend, with management fees under significant pressure, and most futures asset management focused on FOF as the main line and developing CTA strategy assets to boost comprehensive fee rates of asset management. In terms of business pattern, futures asset management under brokerage agencies benefit from the parent company's personnel reserves, financial strength, brand recognition, with management scale far ahead. Risk management services are the fulcrum of industry innovation and transformation, and also an important lever for serving the real economy. Overall macro uncertainty is on the rise, making risk hedging more difficult and costly, leading to significant fluctuations in risk management income and net profit. Specifically: 1) Domestic basis trading: Rapid scale growth, wide coverage, high efficiency, with subsequent improvement in business personnel reserves and enhanced trading facilities, the profitability of basis trading is expected to continue to rise; 2) OTC derivatives business: Compared to securities and banks, futures companies are in a weaker position in the OTC financial derivative market, with a focus on developing commodity derivative tracks for differentiated competition to possibly pave a smoother path; 3) Market making services: Market making business is growing rapidly, effectively resolving issues of non-continuous active contract months and lukewarm trading in certain varieties. Investment recommendations: Focus on Nanhua Futures (603093.SH), Yongan Futures (600927.SH), Ruida Futures (002961.SZ), etc. Risk warning: Increased market volatility, changes in regulatory policies, intensification of market competitiveness, unexpected developments in industry innovation businesses, etc.