CITIC SEC: The valuation cost-effectiveness of the securities industry is highlighted, recommending top securities companies and medium-sized brokerages.

CITIC SEC released a research report stating that the high activity in the market and the relaxation of regulations in the investment banking derivatives sector are the core themes for the improvement of the securities industry performance this year. Currently, the PB and PE valuations of the securities sector are both below the 20th percentile in nearly ten years, providing a high margin of safety for allocation. The continuous activity in the fundamentals, policies, and themes is expected to be the core driving factor for the valuation recovery. It is recommended to focus on sectors with high certainty in earnings growth and improvement in long-term industry competition layout, relying on the synergy brought by mergers and acquisitions and the leverage expansion to increase capital efficiency. Large institutions in the industry are expected to continue improving shareholder returns and gaining market share. It is recommended to invest in top securities companies and medium-sized securities firms. Key points from CITIC SEC: Stable foundation for performance growth in active markets, regulatory reforms bring long-term marginal improvement. According to Wind, in the first quarter of 2026, the daily average turnover of stocks in the capital market reached 2.58 trillion, an increase of 30.8% compared to the previous quarter and 69.7% year-on-year, significantly higher than the daily average of 1.73 trillion in 2025. The highly active market trading will continue to boost brokerage business income and stabilize the industry's performance growth foundation. Under the macro guidance of the Fifteenth Five-Year Plan, which emphasizes "actively developing equity and bond direct financing, steadily developing futures, derivatives, and securitization businesses," regulatory reforms in investment banking and derivatives businesses will further improve the industry's performance marginally. According to Wind, the scale of equity financing in the A-share market reached 253.8 billion in the first quarter of 2026, an increase of 36.2% compared to the previous quarter and 64.0% year-on-year. With the macro environment confirming the acceleration of consumer IPOs and technology companies' refinancing, the investment banking sector is expected to remain optimistic in 2026. On the derivatives business front, the January 2026 "Measures for the Supervision and Management of Derivative Trading (Trial) (Draft for Soliciting Opinions)" proposes to "maintain reasonable leverage levels and market size for derivative markets," potentially breaking through the rigid limits on the off-exchange derivative market size since November 2023, opening up space for leverage enhancement driven by customer demand and growth in investment returns. With this support, the securities industry is expected to achieve a year-on-year profit growth rate of over 30% in the first quarter of 2026. Continued resolution of investment pressure points, gradual solidification of sector bottom. As of April 10, 2026, the non-banking sector has experienced a significant retreat since the beginning of the year, with a decline of 11.69 percentage points year-to-date, ranking at the bottom among all sectors. The chief reasons for the significant decrease in sector profits include top shareholders reducing holdings, dilution risks from refinancing, and regulatory risks. However, with the current capital market returning to around 4000 points and the PB and PE valuations of the securities sector both below the 20th percentile in nearly ten years, the market value is under further pressure and the likelihood of industry refinancing has decreased. From a regulatory perspective, in contrast to past cycles of expansion and contraction, this round of capital market reforms is continuously advancing around countercyclical and fine-tuning reforms. It is expected that future regulation of illegal activities will continue to be implemented, but there is potential for active support in derivative products, investment banking, and buy-side advisory business. Looking ahead to the mid-year, the securities sector is expected to usher in a period of resonance in fundamentals, policies, and themes. Against the backdrop of a continuing stabilization and improvement in the capital market, market activity is expected to remain high, providing a stable foundation for positive expectations in the interim reports of the securities industry. We expect the profit growth rate of the securities industry in the first half of 2026 to remain above 30% year-on-year. From a policy perspective, according to the 2026 legislative work plan of the China Securities Regulatory Commission, policies in areas such as refinancing and derivatives have been included in the "key projects to strive to be implemented within the year," gradually becoming effective around the mid-year. Additionally, industry mergers and restructurings, as an important theme that continuously drives sector investment sentiment, will further land in the short term, with the mergers and acquisitions of central state-owned enterprises and local state-owned enterprises expected to make progress within the year. Risk factors: Decline in market turnover, tightening of equity financing, losses in investment businesses, exposure of credit business risks.