CMSC: Stabilizing the securities market operation to meet the opportunity of configuring fundamental and valuation severe mismatch.

CMSC released a research report stating that overall, regulation should prevent large fluctuations in the market and firmly maintain stable market operation; the capital supply is abundant, and demand is relatively elastic. The equity market is stable, with ample room for growth, and brokerage performance is expected to be stable. Currently, the valuation and holdings of brokerage sector are at low levels: as of April 3, 2026, the PB (LF) of the brokerage index is 1.24 times, which is at the 13.97th percentile in the past 5 years; by the end of 2025, the public offering holdings of the brokerage sector accounted for 0.99%, far below the standard 3.76%. The fundamentals and valuations of the brokerage sector are severely mismatched, and the bank believes that rare allocation opportunities should be highly valued. It recommends undervalued stocks with excellent performance. The main points of CMSC are as follows: As of March 31, 2026, 24 of the 42 listed brokerages in A-share have released annual reports, and the top brokerages have basically completed their disclosures. Equities are stable and rising, while the bond market is seeing wide fluctuations. After experiencing the impact of the Trump administration's excessive tariffs in April, the equity market rebounded, with the overall center significantly rising; the average daily turnover of stock funds increased by 70% year-on-year to 2.1 trillion. Due to the impact of the narrative of "anti-internal competition" policy and new rules on sales fee redemption, the bond market was mixed in the second half of the year, with wide fluctuations throughout the year. The primary market warmed up, with IPO fundraising amounting to 130.8 billion in 2025, a year-on-year increase of 97%; and refinancing raised funds (excluding the four major listed banks) were 426.7 billion, a year-on-year increase of 73%. Market prosperity enhances performance, actively expanding balance sheets in line with the equity market trend. In 2025, 24 listed brokerages achieved a total operating income of 435.3 billion, a year-on-year increase of 32%; net profit attributable to mothers was 172.4 billion, a year-on-year increase of 46%. In the fourth quarter alone, the 24 listed brokerages achieved a total operating income of 104.9 billion, up 6% year-on-year and down 22% quarter-on-quarter; net profit attributable to mothers was 36.1 billion, up 11% year-on-year and down 31% quarter-on-quarter. The average ROE was 7.4%, up 1.8 percentage points year-on-year; the operating leverage was 4.36 times, maintaining a trend of expanding balance sheets. Cost management fees controlled costs throughout the year, with a 49% management fee rate for the 24 listed brokerages, down 7.2% year-on-year. Heavy assets dominate, while light assets have a slight increase in proportion. In 2025, the self-operated/brokerage/asset management/credit/investment banking/other proportions of the main business income of the 24 listed brokerages were 41.9%/27.0%/9.5%/8.5%/7.5%/5.6%, respectively, with year-on-year changes of -2.0/+2.4/-2.1/+0.9/+0.4/+0.4%. Brokerages show elasticity, investment banking bottoms out, asset management performance stabilizes (1) Brokerage income was 115.8 billion, up 44% year-on-year; brokerage income in the fourth quarter alone was 30.7 billion, down 2% year-on-year and 17% quarter-on-quarter. Influenced by the intensifying competition in opening accounts and the active trading of quantitative trading by private equity funds, the commission rate for transactions in the second half of 2025 continued to decline by 0.29 basis points to 0.0153%. The increase in funds entering the market and the turnover rate pushed the agency's securities trading income up by 56% year-on-year to 116.8 billion; the revenue from leasing trading seats increased by 21% year-on-year to 9.8 billion. The pressure of redemption on the public offering debt side has not been resolved, leading to a year-on-year decline in the commission rate for public offering transactions; sales of financial products generated 11 billion in revenue, up 51% year-on-year, with the recovery of equity-type new issues, advantages in trading ETFs on the exchange, and low base effects supporting the year-on-year growth rate. (2) Investment banking revenue was 32.2 billion, up 38% year-on-year; investment banking revenue in the fourth quarter alone was 12.5 billion, up 57% year-on-year and 62% quarter-on-quarter. With the rise of the "double creation" reform, mergers and reorganizations reshaping the industry landscape, and an increase in demand for cross-border capital operations driven by Chinese capital going global, the Matthew effect in investment banking business is expected to be significantly enhanced. (3) Asset management revenue was 40.5 billion, up 8% year-on-year; asset management revenue in the fourth quarter alone was 11.5 billion, up 14% year-on-year and 10% quarter-on-quarter. With the market steadily improving and a clear focus on technology-related themes, active equity-based asset management companies such as CICC, Guotai Asset Management, GF Fund, and Huatai Fund have seen significant year-on-year growth in operating income; Industrial, Zhongtai, and Orient remain in the leading positions regarding the "expense rate", and their public offering subsidiary net profits accounted for 30%, 19%, and 17%, respectively, in 2025. Self-operated activities are stable and rising, with an increase in margin trading volume and decrease in pricing (1) Self-operated income was 179.3 billion, up 26% year-on-year; self-operated income in the fourth quarter alone was 31.5 billion, down 15% year-on-year and 48% quarter-on-quarter. The self-operated profit rate was 4.7%, up 0.59 percentage points year-on-year. In terms of strategy, brokerages increased their allocation in TPL bonds and realized profits from OCI bonds in the first half of the year, while in the second half of the year, they increased their equity allocations and slightly increased their allocation in OCI bonds, with an increased allocation to equity OCI throughout the year. For the top brokerages, the recovery of customer demand has been the main drive for expanding balance sheets, with GF SEC and Huatai's customer margin scale at the end of 2025 showing leading growth rates of 49% and 37% year-on-year. (2) In 2025, the interest income from margin trading of the 24 listed brokerages was 67.3 billion, up 21% year-on-year; the scale of funds lent out was 1.68 trillion, up 47% from the beginning of the year; with intense rate competition, the overall margin trading rate of the 24 listed brokerages in 2025 was 5.02%, down 0.24 percentage points from 2024 and 0.17 percentage points from the first half of 2025. The expansion of credit business is accompanied by cautious provisions for impairment losses by the brokerages to solidify asset quality. Excluding Guotai Haitong, the 23 listed brokerages collectively provided for impairment losses of 4.4 billion, up 166% year-on-year. The Hong Kong market is warming up, and international business is growing strongly In 2025, most brokerages' overseas entities achieved net profits of over 50%, with Shenwan Hongyuan Group International, China Securities Co., Ltd. International, and Oriental Gold Control's net profit growth rates exceeding 100% year-on-year. CITIC SEC International and CICC International have outstanding advantages, with net profits of 6.4 billion and 4.6 billion respectively, up 74% and 68% year-on-year. The top brokerages are strategically investing in internationalization, with Huatai, CMSC, GF SEC, and China Securities Co., Ltd. injecting capital into their Hong Kong subsidiaries to enhance their capital strength; Guotai Haitong acquiring an Indonesian securities firm, Huatai's Japanese subsidiary completing registration, GF futures (Singapore) registering, and Chinese brokerage firms' global operational networks continuously improving. It is expected that the market will operate stably, and performance will steadily improve Regulatory determination to "prevent large fluctuations in the market" is firm. On one hand, important breakthroughs have been made in the construction of the unique stable market mechanism in China, and the trend of market warming and improvement is constantly consolidating; on the other hand, regulatory reductions are guiding fund expectations with counter-cyclical thinking to prevent overheating in the market. The bank believes that the bottom of the equity market is stable, and there is ample room for growth. The market's fund supply and demand relationship is healthy, with high numbers of individual and institutional accounts maintained, marginal acceleration in the registration of private equity firms, and sufficient unused quotas for two structural monetary policy tools. The volume of medium and long-term funds entering the market is expected to be maintained, with ample capital supply; exploration of refinancing optimization policies such as the issuance of shelf registration may increase the flexibility of equity financing demand. Considering the regulator's protective attitude towards the secondary market, the bank expects that regulatory measures in the primary market to counteract the cycle will not be absent. Benefiting from the early-year trading enthusiasm, good pace of margin trading, and the revival of fund new issues, brokerage sector performance is expected to steadily improve. It is estimated that the industry will achieve a total operating revenue of 592.5 billion in 2026, an increase of 9% year-on-year, and achieve a net profit of 242.9 billion, an increase of 11% year-on-year. Risk warning: Increased market volatility, economic recovery slower than expected, and policy effects falling short of expectations.