Guotai Junan: Securities sector expected to see profit and valuation double increase recommendations such as Huatai (601688.SH)

Guotai Junan released a research report stating that the current valuation of the securities brokerage sector has shown a cost-effective ratio, and the stabilization and improvement of the capital market is expected to drive the improvement of the securities brokerage industry fundamentals beyond expectations. Additionally, the industry supply side reform is expected to accelerate, and it is recommended to increase holdings in the securities brokerage sector. The bank recommends selecting stocks along the line of better-than-expected improvement in fundamentals, and recommends Huatai (601688.SH), GF SEC (000776.SZ), as well as benefiting targets Northeast (000686.SZ), Guolian Minsheng (601456.SH), and Tianfeng (601162.SH); paying attention to the progress of securities industry mergers and acquisitions. Guotai Junan's main points are as follows: The stabilization and improvement of the capital market combined with a low base point may drive better-than-expected improvement in fundamentals By 2025, the "1+N" policy system with the new "Country Nine" as its core will enter the implementation period as a whole, and the policy framework for long-term capital market funds will become clear, with more incremental policies expected to be introduced successively. The capital market continues to stabilize and improve, benefiting the securities brokerage sector in terms of fundamentals and valuation restoration. In the first quarter of 2024, the profitability of the securities brokerage sector was under pressure due to the extreme market volatility. From the current point of view, the stabilization and improvement of the capital market is expected to drive growth in securities brokerage retail and institutional businesses, leading to better-than-expected improvement in fundamentals. On the one hand, trading activity has significantly improved since the beginning of the year, with the average daily turnover of stock funds reaching 1.6764 trillion yuan as of February 21, a year-on-year increase of 77.6%. It is expected that retail businesses will support profitability growth in the sector, and under gradual market recovery, securities investment businesses are also expected to recover. The bank predicts that listed securities brokerages will achieve rapid year-on-year profit growth in the first quarter of 2025, and based on current market conditions and trading activity, it is estimated that profit growth in the first quarter of 2025 is expected to reach 44%. The progress of the industry supply side reform is expected to accelerate, focusing on building first-class investment banks and strengthening the securities industry On one hand, the industry supply side reform is continuing around "building first-class investment banks and investment institutions." On the other hand, in order to improve the efficiency of state-owned capital operation and better play its functional role, under the same actual controller, there are cases of merging securities brokerages. Currently, the industry is moving forward with merger cases including Guolian Minsheng's completion of share issuance for asset purchase on January 6, Zheshang's completion of country securities' 34.25% share transfer in December 2024, and Guosen's plan to issue shares for purchasing 96.08% equity of Wanhua Securities, to name a few. The bank believes that policy guidance, coupled with the industry's own development needs, will accelerate the progress of the industry supply side, promote the optimization and strengthening of the securities industry, and enhance its international competitiveness and market leadership. Securities brokerage valuation is at historical lows, and the cost-effective ratio has emerged Currently, the overall valuation of the securities brokerage sector is 1.44 times PB, which is at the 32nd percentile of the past 10 years, with limited downside potential. After adjustments since the beginning of the year, the cost-effective ratio has emerged. The bank believes that the securities brokerage sector currently has both allocation value and upward elasticity, and is optimistic about the uptrend potential of valuations. Risk Warning: Significant fluctuations in the capital market; Profit improvement may be lower than expected.