CITIC SEC: Policy reforms strengthen fundamental expectations, opening up long-term incremental development opportunities for securities firms.

CITIC SEC released a research report stating that in the current environment of improving liquidity and shifting policies, the securities sector is expected to achieve significant improvements in both sequential and year-on-year fundamentals due to high trading volume, large margin scale, and low base period advantage. Considering the current valuation levels, there is still room for industry valuation to increase. Around the long-term themes of securities industry mergers and acquisitions and international business development, it is recommended to focus on companies with long-term alpha attributes and companies with limited downside potential and stable fundamentals in the short term. In the short term, it is recommended to pay attention to 2024Q4 companies that are expected to demonstrate performance elasticity through brokerage and proprietary businesses, and whose current valuations are reasonable. The main points of CITIC SEC are as follows: The new round of capital market reform is implemented to relax capital constraints and strengthen market vitality. Since September 2024, a new round of capital market reforms, represented by securities industry capital leverage reform, interbank convenient swaps and refinancing new regulations, and the China Securities Regulatory Commission's measures on mergers and acquisitions, market value management, and mid- to long-term capital entering the market, have been successively implemented. This round of capital market reforms has shown strong policy coordination. Capital leverage reform has opened up space for securities firms to expand their balance sheets and laid the foundation for them to fully respond to the new interbank convenience regulations. The refinancing policy provides liquidity support for the effective implementation of market value management measures such as share repurchases under the new market value management regulations. The new rules on mergers and acquisitions have significantly strengthened market vitality and provided a selectable investment direction for interbank convenience funds to enter the market. The landing of the new round of fiscal support policies will better coordinate with the current capital market reform policies and promote the long-term stable and healthy development of the capital market. Policy reforms shape fundamental expectations, with profit improvement in three stages. In an environment where policy reforms are continuously strengthening the stability mechanisms of the capital market, the level of market activity has significantly increased, and securities companies are expected to achieve improvements in fundamentals at multiple levels. Firstly, brokerage business and interest income benefit from market activity and are expected to achieve sequential improvements in the short term. In the context of a continued bull market, securities companies are expected to improve their asset management and equity proprietary business income through the increase in AUM and gains from equity proprietary business, respectively. In addition, the Chairman of the China Securities Regulatory Commission, Wu Qing, has successively proposed that "strong supervision is not excessive" and "coordinate reforms on the financing and investment sides and gradually achieve normalization of IPOs." Under the background of a warming capital market, investment banking equity financing business is expected to gradually recover. The year-on-year performance growth rate in 2024Q4 is expected to increase significantly, and the securities industry's ROE is expected to reach 5.2% in 2025. Thanks to the rapid increase in trading volume since September 2024 and the expansion of margin trading and margin scale, profits of listed securities firms in the second half of 2024 are expected to reach 73.9 billion yuan, an increase of 15.6% over the first half of the year. The year-on-year growth rate of the securities industry's net profit in 2024 as a whole is expected to improve from -22.08% in the first half of the year to 0.03%. Looking ahead to 2025, under the core assumptions of the Shanghai Composite Index reaching 3,500 points, daily average stock-based transactions reaching 1.2 trillion yuan, equity financing scale reaching 500 billion yuan, and margin balance reaching 1.8 trillion yuan, the securities industry's net profit for 2025 is expected to reach 161.2 billion yuan, an increase of 16.98% year-on-year, and the industry's ROE level is expected to reach 5.2%, exceeding the profit scale and ROE level of 2022. Mergers and acquisitions continue to advance, and market-oriented and administrative mergers and acquisitions channel to enhance industry resource allocation efficiency. With the assistance of multiple policies, mergers and acquisitions in the securities industry are expected to accelerate. Around 10 high-quality leading securities firms are expected to form through market-oriented mergers and acquisitions, discovering high-quality acquisition targets from the perspective of client resources and advantageous business, as well as high-quality targets from the perspective of corporate governance capability and shareholder returns. On the other hand, 2-3 first-class international investment banks need to integrate into large institutions in terms of business scale and asset size to be comparable to European and American investment banks such as Goldman Sachs and Morgan Stanley. On one hand, it is necessary to push forward mergers under the same control through top-down administrative means, and on the other hand, it is necessary to design comprehensive reorganization plans regarding business line consolidation, organizational restructuring, and personnel arrangements. In addition, it is expected that with the formal implementation of the "Administrative Measures for the Qualification of Securities Companies," the industry landscape will move towards "medium to large securities firms expanding nationwide with full licenses, and small securities firms operating with regional characteristics." Internationalization steadily develops, with the combination of fundamentals and policies opening up long-term growth space for securities firms. The international business of securities firms is developing rapidly and has become an important part of their performance. Important conferences and policies such as the Central Financial Work Conference, the new "nine regulations for the state," and the Third Plenary Session of the Twentieth Party Congress have clearly outlined the development of financial internationalization. In the Hong Kong market, the market share of Chinese securities firms in areas such as wealth management, asset management, and investment trading has not yet reached the top tier. Actively coordinating with the internationalization strategy of the renminbi, improving the supply of high-quality renminbi-denominated financial assets is an important field for the development of Chinese securities firms. The landing of the "Cross-border Wealth Management Connect" pilot will bring opportunities for cross-border wealth management business. For the broader overseas markets, Chinese securities firms should seize the three major opportunities of overseas institutions allocating renminbi assets, providing financial services for Chinese companies going overseas, and Southeast Asian internet brokerage business, further improve their international business layout, and accelerate the construction of a world-class investment bank. Risk factors: Risks of a decline in A-share market trading volume, risks of a decline in equity financing scale in investment banking business, risks of losses in investment business, risks of exposure in credit business, and risks of capital market reforms falling short of expectations.