China Securities Co., Ltd. Non-Banking 2026 Investment Outlook: The securities industry is expected to usher in a new upward cycle.

China Securities Co., Ltd. released a research report stating that the core direction of anchoring the 15th Five-Year Plan is to "enhance the inclusiveness and adaptability of the capital market system", and the securities industry is expected to usher in a new upward cycle, helping to build a strong financial country. The core driving force comes from three major policy opportunities: First, policy guidance on capital market serving new quality productivity. The deepening reform of the Sci-Tech Innovation Board and the Growth Enterprise Board promotes the upgrading of investment banking value creation, matches the financing needs of high-tech entities throughout their life cycle, opens up long-term growth space in investment banking business; second, policy improves the long-term investment ecosystem. The channels for long-term funds such as social security and insurance to enter the market continue to be smooth, expanding equity products activate securities management and institutional business increment, promoting the industry towards a transformation driven by allocation; third, policy drives the cultivation of first-class investment banks and internationalization, Chinese securities firms can accelerate international business breakthroughs through the Chinese Hong Kong market and the mutual connectivity policy, and M&A integration will help concentrate industry resources towards leading firms, enhancing the capital strength and international competitiveness of leading securities firms. The main points of China Securities Co., Ltd. are as follows: The performance of the securities industry in 2025 exceeded expectations: the total assets of 42 listed securities firms approached RMB 15 trillion, and the net profit attributable to shareholders increased by 62% year-on-year. At the beginning of the year, concerns about falsification -- the industry did not experience a lack of growth momentum due to the weak growth of self-operated businesses in the 23-24 year period, instead rapidly switching to new growth drivers, highlighting the resilience of internal profitability. Although the current ROE of 7%-8% has reached a historical high, there is still ample room for improvement in business structure optimization and competition upgrading, and the future ROE may exceed previous peaks. So, is the industry already at the start of a new upward cycle? Looking at the entire year of 2025, the industry has presented six major core trends, perhaps signaling the accumulation of momentum for a new upward cycle, as follows: Redefining performance-driven logic: moving from sole dominance of self-operated businesses to collaborative efforts with light assets. Growth in performance no longer relies on individual self-operated activities, but shifts towards multiple collaborations with light asset businesses such as brokerage, asset management, and investment banking. The recovery of light asset businesses has just begun, and in terms of business scale, it has not yet reached cyclical peaks, leaving ample room for future growth. Key switch in growth momentum: diversified drivers such as equity replace fixed-income assets as the dominant force. This round of growth is not a continuation of old drivers, but is derived from new driving factors brought about by structural optimization, such as investment banking transitioning from traditional bond underwriting to diversified services, self-operated businesses moving from fixed-income investments to diversified portfolios, and wealth management shifting from stable financial planning to diversified services. A more stable growth foundation: internal strength replaces leverage expansion. The growth throughout the year relies on internal business operations, not on large-scale leverage expansion, which avoids liquidity risks and leaves a safe space for future balance sheet expansion. Transition in profit differentiation logic: the elasticity of light asset businesses becomes the determining factor for leading securities firms. While self-operated activities still support profits, the difference between leading securities firms is no longer determined by individual self-operated activities, but is shifting towards the elastic performance of light asset businesses such as investment banking and asset management. The differentiation in the competitiveness of light asset businesses is accelerating, becoming a potential variable in reshaping the industry landscape. Optimization of high barriers to entry in business structure: the continuous strengthening of the leading firms. The concentration of top-tier asset management and investment banking businesses is further increasing, and leading securities firms have begun to build defensive barriers around their businesses. The scale effects of these high barriers to entry continue to strengthen, driving resources towards leading firms in the industry, with the Matthew Effect becoming more pronounced. Policy opportunities for international business: spreading from the top-tier firms to more participating institutions. The overflow of demand from the Chinese Hong Kong and Asia-Pacific markets has provided more opportunities for securities firms to enter, becoming a sector-wide opportunity that can be shared by the entire industry. Looking ahead to 2026: Anchoring the 15th Five-Year Plan. In order to understand the long-term development direction of the securities industry in 2026, we need to start with the 15th Five-Year Plan's new expression of the capital market -- "enhancing the inclusiveness and adaptability of the capital market system, and enhancing the coordinated functions of investment and financing in the capital market." By combining this with the article authored by Wu Qing, Chairman of the China Securities Regulatory Commission, in the guidance manual on October 31, we can further understand that the core of "inclusiveness and adaptability" may mean: it covers both the inclusiveness of financing parties and investors, as well as the comprehensive adaptation of local businesses and openness to the outside world. Therefore, the future opportunities for the securities industry can be summarized as the three core drivers of "serving new quality productivity, long-term capital entering the market, and opportunities for internationalization of securities firms", with the following internal logic in line with the planning: Serving new quality productivity is a manifestation of inclusive adaptation to entity innovation in the system. New quality productivity is characterized by high technology and efficiency, and providing institutional accommodation for financing and M&A business for entities that align with its direction enables capital market rules to adapt to their rapid development, which is not only a direct implementation of "inclusiveness", but also promotes the upgrade of investment banking from a "channel" to "value creation", becoming a booster for new-quality productivity. Long-term capital entering the market is a crucial aspect in solidifying the market's foundation through institutional adaptation. Long-term capital is the cornerstone of the capital market, improving the inclusiveness of the system towards this type of capital essentially involves facilitating the entry of insurance, social security, corporate pensions, and other long-term funds into the market to address the issue of enabling them to come in and stay, which is the core of enhancing the functioning of investment and financing coordination, driving the expansion of brokerage and asset management business of securities firms, and pushing the industry from being "transaction-driven" to "allocation-driven". The opportunity for internationalization of securities firms is the path to cultivating leading investment banks in an open and inclusive manner. The guidance manual places "cultivating leading investment banks" in the section on opening up to the outside world, highlighting that being "leading" requires benchmarking against international standards. Currently, internationalization of Chinese securities firms has shifted from being concentrated among the top-tier firms to involving a large number of institutions, the overflow of demand from the Chinese Hong Kong market has provided more opportunities for securities firms, and the future policies such as mutual connectivity, simplification of QFII procedures, etc. will allow more Chinese securities firms to share policy dividends, driving industry competitiveness closer to international standards. In conclusion, from an investment strategy perspective, there are investment opportunities brought about by discrepancies in expectations in the securities sector. The core approach can be focused on valuation safety margins, sustainability of performance growth, and adjustments in allocation strategies from three perspectives: First, valuation has a strong safety margin. As of November 17th, the price-to-book ratio (LF) of the securities sector is 1.39 times, placing it in the 55th percentile over the past five years and 35th percentile over the past ten years, lower than the median over the past ten years. Historically, based on a sample of 42 listed securities firms, when the annualized ROE of listed securities firms has been in the range of 7%-8% since 2012, the price-to-book valuation of the securities index typically ranges from 1.75 to 2.00 times (approaching the upper limit with an increase in the following year's ROE, and vice versa approaching the lower limit). The annualized ROE of listed securities firms has already reached 7.1% in the first three quarters of 2025, corresponding to a PB valuation of only 1.60 times at the peak in August, 1.47 times at the end of the third quarter, and 1.39 times on November 17th, significantly lower than the valuation range historically associated with ROE at the same level, indicating a noticeable room for recovery. Second, the sustainability of performance growth. The three core logics of "serving new quality productivity, long-term capital entering the market, and opportunities for internationalization of securities firms" have not yet been fully priced in by the market, and the new dynamics of investment banking, asset management, and international business driven by these logics are expected to gradually materialize in the fundamentals of the industry after 2026, providing solid support for the long-term elasticity and resilience of performance, without worrying about a growth gap. Third, the need to shift allocation towards individual stock logic. In the past, many investors have been accustomed to allocating securities stocks based on the weightings of the securities index, but in the context of profound changes in the industry structure, the divergence in securities stock markets continues to intensify, and continuing with traditional allocation strategies may face the risk of "underperforming the index". It is necessary to abandon single-weight thinking and adjust allocation strategies based on differentiated logics such as business advantages and competitive barriers of individual stocks.