CMSC2020 Securities Industry Strategy Report: Bull Market Revives Under Policy Stimulus, 25-Year Sector Performance Expected to See Strong Recovery

The CMSC report predicts that in the future, the capital market will present a pattern of "stock market fluctuating upwards, bond market overall favorable", which will be beneficial for most of the securities business. The performance of the 25-year sector is expected to see strong recovery. In terms of valuation, as of December 13, 2024, the PB valuation of the securities sector is 1.59 times, at the 39th percentile in nearly 10 years. In terms of institutional holdings, benefiting from the 924 situation and the contribution of rising stock prices, the sector's holdings have risen to a year-to-date high of 0.72%. In the long term, the industry's performance recovery, supply-side reform logic, and other favorable factors have not yet been fully priced in, and there is still room for upward valuation of the sector. In the short term, structural opportunities in the sector can be focused on. The CMSC's main points are as follows: The industry is experiencing a reversal, "a mix of light and dark." In the past year, the bond market has been bullish, while the equity market has experienced a bottom reversal and entered a new round of "bull market starting point." The first-tier market is still influenced by total stock pledge control and is still in a "cooling period." Against this backdrop, the securities industry's brokerage, investment banking, and credit businesses have been significantly under pressure during the first three quarters, but with the rebound in equities, proprietary trading has been released, and the industry's overall revenue and net profit have significantly recovered year-on-year. In terms of valuation, performance in the first three quarters was weaker, with an overall underperformance compared to the broader market, until the end of September when regulatory measures ignited market sentiment and led to a comprehensive sectoral counterattack and market leadership. A new industry ecology is being constructed, and a new landscape is brewing. The new "nine provisions" have initiated a new capital market reform cycle with the main theme of "strengthening regulation, preventing risks, and promoting high-quality development." Supporting policies have been successively introduced to promote securities firms, public funds, and other institutions to return to their core business and fully leverage their "functional" roles. Measures such as stock buybacks, special repurchase agreements, and SFISF two innovative monetary policy tools further stimulate the capital market. Long-term funding, including insurance funds and individual pensions, continues to grow, reinforcing the intrinsic stability of the capital market. ETF investment has become popular, and the capital market has entered a new era focused on "investors-first." Additionally, with Guotai Junan's acquisition of Haitong, Zheshang's approval as a major shareholder of Guodu Securities, and Guolian's merger with Minsheng Securities formally approved, the securities industry's supply-side reform continues to advance, and sectoral dynamics are improving. Brokerage elasticity is ample, and financial and investment business transformation remains ongoing. Since the end of September, market sentiment has significantly improved, liquidity has improved, and with continuous client inflows, there is significant potential for brokerage business revenue improvement. Securities firms focusing on the internet sector such as Guosen and East Money Information have reaped substantial benefits. With ongoing updates and iterations in media, and a younger demographic of investors, traditional brokerage businesses continue to rely on traffic as a key to success. In the wealth management sector, under the policy background of reduced commissions for public funds and the trend towards passive investments, the single financial product sales business is facing a dual challenge of increasing revenue and profit. Integrating platform resources, developing advisory services, and building an ETF ecosystem may serve as breakthrough strategies. The pace of stock financing may form a new normal, with mergers and acquisitions becoming a major driver of business growth. With the secondary market heating up, abundant market liquidity, and the inclusiveness of equity financing on the rise, normalizing IPOs is expected to gradually alleviate the pressures on investment banking. From simplifying the review process to diversifying transaction tools to enhance the efficiency of mergers and acquisitions, regulatory encouragement for market consolidation has greatly stimulated market activity in this area, offering new opportunities for investment banking. Asset management focuses on quantity to supplement price, overall stability. In terms of scale, amid the equity market rebound, investor subscription enthusiasm, combined with the increase in net asset values, has led to overall stability and growth in asset management scale. Regarding fees, the trend towards reduced public fund fees favors investors and has led to a decrease in product fees for fixed income and ETF products, driving down overall product fees. Additionally, under the wave of ETFs, the top public fund companies will continue to contribute to the parent companies' profits. Equity OCI is favored, and the development of derivative products is regulated. For equity proprietary trading, the market's downward trend at the beginning of the year severely impacted equity proprietary trading and performance in the first quarter, leading most securities firms to prioritize protecting income and reducing volatility in equity proprietary trading. Based on the mid-year report, it has become an industry consensus to include high dividend assets in the OCI account to stabilize dividend returns and reduce the impact of fair value changes on apparent profits. In terms of derivative products, under regulatory guidance aimed at risk prevention and capital intensity, business scale has contracted overall, and leverage has been reduced. However, under the requirement to fulfill the "functional" role, the market-making business for derivative products is expected to shine. Credit business scale climbs moderately, and overall spreads remain manageable. With the market turning positive and margin trading sentiment high, margin balances remain healthy and continue to grow, driving the overall scale of credit business. Market competition has pushed down margin rates, but thanks to loose liquidity and overall reductions in financing costs for securities firms, although spreads have narrowed, overall they remain manageable. Overseas business focuses on Hong Kong and seizes the opportunities of the "Belt and Road," accelerating its presence in foreign markets. Amid fierce competition and saturation in the domestic market, the development of the Hong Kong market has reached a bottleneck. Seizing the opportunities of expanding capital market openness and the "Belt and Road" strategy, as well as expanding into Southeast Asia and the Middle East to find the next growth point has become an important option for many top securities firms. Based on the performance in the first half of 2024, CITIC SEC, Huatai, and Guotai Junan's overseas businesses have achieved significant growth. In 2025, under nurturing regulation, the industry's performance is expected to see strong recovery. On the policy front, regulatory measures have focused on maintaining market stability. With a moderately loose monetary policy allowing for imaginative space in monetary policy, the implementation of SFISF, long-term funds such as insurance entering the market, stock buybacks, and repurchasing loans revitalizing the market, and adjustments taking place in first and second-tier markets, overall medium-term liquidity is abundant, ensuring overall ease. Taking all factors into consideration, the equity market is expected to enter a period of mild, healthy, and sustained upward trend. It is estimated that by 2025, the industry will achieve a total revenue of 511.1 billion.Year-on-year growth increased by 17%, achieving a net profit of 181.4 billion, a year-on-year increase of 16%; ROE is 5.76%, a year-on-year increase of 0.59 percentage points.Investment advice: It is recommended to select stocks around the following ideas (1) Stable operation, high capital efficiency, good performance but still at low valuation: CITIC SEC (06030), Guotai Junan (601211.SH), Huatai (06886, 601688.SH), Guosen (002736.SZ), GF SEC (01776, 000776.SZ); (2) Follow closely the merger and reorganization trends, focus on thematic stocks: CICC (03908, 601995.SH), China Galaxy (06881, 601881.SH), China Securities Co., Ltd. (06066, 601066.SH), Changjiang (000783.SZ), Guangdong Golden Dragon Development Inc. (000712.SZ). In addition, pay attention to the progress of the Zheshang integration and Guolian merger. Risk Warning: Market adjustment beyond expectations; marginal policy tightening; liquidity tightening; interest rate risk; continuous decline in business fees.