China Securities Co., Ltd.: Bright performance in securities business, why is the stock price not in sync?

China Securities Co., Ltd. released a research report stating that this year, the securities sector has shown a significant deviation between market performance and earnings growth: the industry's net profit growth rate in the first half of the year reached 64%, ranking fourth among industry indexes, but the sector's cumulative increase in the first three quarters was only 7%, ranking 22nd. This underperformance compared to the Shanghai and Shenzhen 300 Index has led to a general sense of dissatisfaction among investors holding securities stocks. This deviation from traditional market perception is not only associated with the sector's own investment logic but also reveals deep-seated structural issues in the industry. Perhaps the only way to break through this deadlock is through innovative business models. The main points of China Securities Co., Ltd. are as follows: The core reason for the mismatch between the rise in securities stocks and earnings elasticity This year, the securities industry has shown a significant deviation between outstanding performance and market performance: the industry's net profit growth rate in the first half of the year reached 64%, ranking fourth among the 34 Shanghai Stock Exchange industry indexes, but the sector's cumulative increase in the first three quarters was only 7%, ranking 22nd, underperforming the Shanghai and Shenzhen 300 Index during the same period. This phenomenon requires an in-depth analysis combining industry characteristics with ecological changes, and the key to breaking through the industry deadlock lies in business model reconstruction and strategic transformation. The reasons for the discrepancy between the rise in securities stocks and earnings can be divided into surface features and deep-seated logic. Superficially, the difficulty of timing is high, with a 35% difference between the maximum interval increase in the securities sector and the cumulative increase, ranking in the top three but poor timing could lead to negative returns. Market performance and earnings mismatch, as market trends typically lead earnings by about a quarter, resulting in market realization before financial disclosures. Lastly, there is severe differentiation among individual stocks, with only 20 out of the 50 components of the Shanghai Securities Index outperforming, and only 3 out of the top ten securities companies with a weight of over 60% outperforming, leading to errors in stock selection resulting in "earning the index but not making money". The deeper logic points to the essence of the industry: firstly, earnings are difficult to predict, with proprietary business revenue accounting for over 45% in the first half of 2025, its income relying on market volatility and difficult to predict through industry trends. Secondly, profits are cyclical, with brokerage business depending on market trading activity and innovative businesses relying on policy and market cycles, resulting in a pulsating performance. Thirdly, competition is homogeneous, with securities firms primarily following a layout strategy lacking differentiated barriers. Only a few securities firms with unique characteristics in investment banking and asset management areas can achieve differentiated valuation. In fact, securities firms have not truly lost their position as "bull market leaders", but through a significant adjustment in their business structure, investors need to make more careful timing and stock selection to achieve returns that are more in line with the elasticity of securities firms. In other words, as long as the market still offers money-making opportunities and trading activity remains active, the securities sector's performance will not be absent. The core direction and practical path of transformation of the securities industry Facing these structural issues, in the historical context of the high-quality development of the financial industry and the goal of building first-class investment banks, whether securities firms should shift their focus from pursuing revenue and profit scale to focusing on improving ROE and performance stability is the key issue that needs to be clarified. To achieve the goal of becoming the best and strongest securities company, it is often necessary to enhance the ability of the buying-side business; and to enhance this ability often requires capital supplementation. However, in the process of continuous expansion in the past, the efficiency of capital utilization was low, which made it difficult to stabilize valuation in the long term, making it difficult to continue public market equity financing, and forcing them to adopt targeted share placements or supplemental capital through subordinated debt, leading to dilution of EPS or constant debt issuance. In the context of declining bond yields, if funds continue to flow into low-yield assets, it is difficult to break this cycle. The core of the solution is to optimize the way capital is used and to innovate in the business model, "making heavy on capital-based business and light on capital-based businesses", breaking the capital supplementation paradox, and achieving rapid progress through the three major paths of "mergers and acquisitions + technology investment + internationalization". Making the heavy capital business "light" does not mean shrinking in scale, but shifting from capital dominance to ability dominance: under the traditional model, proprietary trading and margin trading depend on leverage and expanding the balance sheet, competing based on capital size. "Making light" involves integrating external resources with professional capabilities, such as using derivatives to help customers hedge risks and using asset securitization capabilities to realize assets, shifting from "passively assuming risks" to "actively managing risks", earning stable premiums through risk management and asset securitization capabilities, breaking free from the constraints of capital size. Making the light capital business "heavy" focuses on moving from channel services to a value hub: traditional brokerage and investment banks primarily focus on "realizing value in a single transaction", with income fluctuating with market trends. "Making heavy" focuses on long-term customer needs, such as shifting wealth management from "selling funds" to "life-cycle asset allocation", earning management fees driven by trust. Investment banking shifts from "single-time financing" to "full-cycle enterprise services", earning strategic partner premiums, transforming revenue from pulsating to sustained. Referring to the development practices of international investment banks, the key to breaking away from the capital supplementation paradox lies in "defining the value of capital". Mergers and acquisitions are a way to "exchange capital for time" to quickly fill capability gaps; technology is a way to "build a moat with capital" to create internal growth engines; internationalization is a way to "expand space with capital" to hedge cycles and create new scenarios. The synergy of these three elements pushes securities firms from being "capital-dependent" to "capability-driven". At this point, capital is no longer a shackle hindering development, but a leverage to unlock long-term value, ultimately realizing a positive cycle of "financing-capacity building-value enhancement-valuation enhancement-refinancing" and completing a sharp turn on the curve. Risk warnings: Uncertainty of market price fluctuations: There are many factors influencing capital market prices, including macroeconomic fluctuations, changes in the global economic situation, and fluctuations in investor sentiment, all of which may cause stock price fluctuations or affect the valuation of institutions like securities firms, with performance in the non-banking financial industry being significantly affected by market prices and trading volumes. Uncertainty in corporate profit forecasts: The profits of the securities industry are affected by various factors, and there is a certain level of uncertainty in the forecasts regarding industry valuations and performance. In addition, intensified competition within the industry may also lead to deviations in forecast results. Technological updates and iterations: The rapid development of emerging technologies requires financial institutions to constantly keep up and adapt to technological changes. However, the accelerated pace of technological updates and iterations also brings high research and development costs and talent training costs, which may increase operating costs for securities firms. At the same time, the outbreak of technological innovation carries a certain level of uncertainty.