Soochow: It is expected that the net profit of securities companies will still have a 15% growth rate in 2026, and large securities companies are more likely to generate alpha.

Soochow released a research report stating that brokerage stocks generally exhibit high beta characteristics, but this round of bull market has significantly weakened, with performance and valuation significantly deviating. Since 2025, market activity has remained at a high level, with listed brokerages' net profit attributable to the parent company increasing by 43% and 38% year-on-year in 2025 and 2026 Q1, respectively. The bank expects brokerage net profit to continue to grow by 15% in 2026 despite the high base. However, since the fourth quarter of 2025, the beta attribute of brokerage stocks has significantly decreased, with the industry average valuation falling to around 1.25x P/B. Currently, valuations of brokerage firms in China are at extremely low levels, making large brokerage firms more likely to generate alpha. At the same time, brokerages continue to increase their dividend levels, making H-share brokerage stocks attractive in terms of dividend yield. Soochow's main points are as follows: Compared to the deviation in the valuation of A-share brokerages, PB-ROE of Hong Kong brokerage firms is still effective. Since Q4 25, except for Guolian Minsheng-H, valuations have increased to varying degrees. The bank believes that this is mainly due to the higher proportion of institutional investors in the Hong Kong stock market, who pay more attention to the stability and sustainability of company performance. With the expectation of continuous improvement in ROE, H-share valuations have been restored. On the other hand, the A-share market is mainly driven by retail investors and is more event-driven. Therefore, speculation is weaker in the context of weakening elasticity in brokerage stock prices and performance. Furthermore, looking at the valuations of AH in both places, stocks with better asset quality and higher stock liquidity have smaller AH price differences. CITIC's AH premium is around 10%, Huatai, Guotai Haitong, Ping An, and GF AH premium rates are around 35%, while other brokerages are above 80%. The bank believes that the decrease in brokerage stock beta and the deviation of valuation from performance may be due to four factors: 1) Under the investment model of heavy capital, the existing business structure does not make efficient use of capital. Margin trading and stock pledges are capital-consuming businesses, with a continuous narrowing of spreads significantly reducing brokerage ROE levels to below 10% since 2012. After 2020, against a backdrop of continued fee reductions, traditional brokerage businesses such as wealth management and asset management have transformed. The direct correlation between brokerage performance and market performance has further decreased, leading to a further weakening of the beta attribute of the brokerage industry. 2) Brokerage stock leverage ratio is only 4 times, much lower than other domestic financial institutions and overseas investment banks (which are generally over 10 times), hence the central ROE is also lower. In this round of bull market, although brokerage ROE has increased, it is not significant, with the average ROE of the brokerage industry in 2025 being 6.8%, while Goldman Sachs and Morgan Stanley ROEs reached 14% and 16%, respectively, higher than those of banks and insurance companies. 3) The reduction in proprietary directional positions has led to a decrease in performance elasticity. Against a backdrop of prolonged downturn in the equity market, brokerages are reducing directional positions and increasing high dividend assets in other equity instruments to smooth performance fluctuations. At the same time, as the bond bull market of several years approaches its end, brokerages are increasing their allocation to perpetual bonds, fixed income, etc., further reducing the volatility of financial statements. Additionally, customer demand business also plays a role in smoothing financial statements. 4) In terms of regulatory environment, there are still many restrictions on equity derivatives, and domestic IPOs mainly concentrate on top-tier companies, with relatively few incremental businesses capable of increasing ROE. Against the background of the weakening beta attribute, looking for alpha in brokerages. In the past, due to the close correlation between brokerage performance and the secondary market, there has been a perception in the market of "strong beta" and "bellwether of bull market". However, with adjustments in the industry's business structure, the weakening linkage with the market has led to a continuous weakening of the beta attribute. How to find alpha in brokerages against the backdrop of decreasing beta attribute? The bank believes that the essence lies in improving the central ROE. The brokerage industry needs to complete from both external and internal aspects: external development includes mergers and acquisitions to achieve supply-side reforms, internal development includes developing wealth management businesses such as investment advisory, deepening international business layout, and strengthening the synergistic mechanism of "direct investment + investment banking + investment research". Risk warning: 1) Macroeconomic performance falls short of expectations; 2) Policy tightening suppresses industry innovation; 3) Increasing market competition risks.