China Securities Co., Ltd.: How do you view the investment opportunities in the non-bank sector at the current moment?

China Securities Co., Ltd. released a research report stating that in terms of securities, the elasticity of the wealth management business and the explosive performance of dual-creation investment banking are driving the industry towards prosperity. The PB(LF) is at its historical low of about 1.2 times, with capital market reforms and internationalization driving industry trends at an accelerated pace. With fund rotation, the momentum for recovery continues to accumulate. In the insurance sector, the relocation of deposits and the "anti-internal competition" policy are expected to drive the growth of liabilities, while the Shanghai and Shenzhen 300 index Q2 rose by over 13%, significantly boosting asset returns. Valuations of top insurance companies are historically low, and the unification of reporting and strengthened value rate, dividend insurance expansion, and health insurance policy catalysts are accelerating the industry trends, opening up long-term growth opportunities. It is suggested to lay out a dual strategy of high prosperity elasticity and low valuation restoration. The main points of China Securities Co., Ltd. are as follows: Securities: High prosperity + low valuation, driving value restoration through accelerated industry trends Core logic: The securities industry fundamentals are in a high prosperity zone, while index valuations have been compressed to near ten-year low percentiles, forming a significant core expectation gap between the two. Short-term performance: The certainty of high growth in the semi-annual report strengthens, with expectations of several consecutive quarters of financial reports exceeding expectations. 1) In the first quarter of 2026, 42 listed securities companies collectively achieved a net profit attributable to shareholders of 60.845 billion yuan, a year-on-year increase of 16.6%; 2) Entering the second quarter, the daily trading volume of stock funds maintained a level of 3.2 trillion yuan, a year-on-year increase of 96%, with margin trading daily balance of 2.79 trillion yuan, a year-on-year increase of 53%, and trading activity remaining strong; 3) Expectations for a concentration of high-quality investment banking projects listing in the third and fourth quarters form the support for the H2 performance relay. By mid-June, A-share IPO reserve projects cover many star companies in the hard technology sector, such as Changxin Technology, Yushu Technology, and Blue Arrow Aerospace, with considerable profits for securities firms for direct investment/following investment. Coupled with the deepening of the Science and Technology Innovation Board and the ChiNext Board reforms, as well as favorable policies for domestic listings of foreign companies, the second half of the year is expected to continue the high growth trend of large investment banks from Q1 year-on-year increase of 32.7%. The performance is expected to form a continuous chain of positive verification for two consecutive quarters of mid-year performance exceeding expectations driven by the "wealth business" and the third quarter performance exceeding expectations driven by investment banking capitalization business. Long-term trends: Three major long-term industry trends build structural benefits. 1) The concentration of the wealth management business continues to increase. In 2025, the industry's revenue from large wealth management reached 193.4 billion yuan, achieving a five-year high, with a CR15 stabilizing at 76%-78%. Some securities firms are gradually building a business closed loop of "brokerage -> sales -> consulting -> asset management," including companies such as Dong Cai, Guangfa, Beijing Compass Technology Development, Huatai, etc., with significantly enhanced profitability stability and predictability. 2) The dual-creation reform drives the technological attributes and elasticity of securities firms. The continuous deepening of the Science and Technology Innovation Board and the ChiNext Board reforms, as well as the acceleration of the listing of hard technology companies, are promoting the participation of securities firms through subsidiaries in the entire chain of science and technology creation. The average annual profit contribution of alternative and private equity subsidiaries of some securities firms is about 7%-10%. Taking CITIC as an example, in 2025, CITIC Golden Stone and direct investment subsidiaries contributed profits of 3 billion yuan, accounting for 10% of the group's total. With star projects such as Changxin Technology and Yushu Technology entering the listing pipeline, the reservoir effect of securities firms' investment in science and technology innovation will gradually be released. 3) The expansion of international business capital opens up incremental space. Chinese securities firms are accelerating their coverage of IPO projects in the Hong Kong market and foreign institutions. The ROE of international subsidiaries is significantly higher than the overall level of the group, with many top securities firms, such as CITIC, continuously increasing the capital of their overseas business. Valuations and fund side: As of June 22, 2026, the Shanghai Securities Index PB(LF) ratio is about 1.2 times, rising from the previous 5%~7% percentile to the 20% percentile. Data from Wind shows that as of Q1 2026, the publicly offered funds' holdings in the financial (banks + non-banks) industry were only 1.67%, significantly underweight compared to the standard industry allocation of -8.34%. The low valuations imply a pessimistic assumption that the market expects a significant decline in future earnings or long-term ROE below the cost of capital. However, the contradiction between industry trends and these valuations, as evidenced by the active trading pushing earnings growth in the second quarter, the possibility of earnings exceeding expectations from science and technology investment banking driving earnings in the third and fourth quarters, and the accelerated growth potential in international businesses, indicates that the industry is in a period of profit recovery validation rather than the peak of prosperity. In summary, the securities sector is currently in a window of resonance where high performance growth, low valuation, and accelerated industry trends are converging. On the performance side, the high growth of semi-annual reports and the realization of investment banking projects constitute continuous validation; on the industry side, the concentration of the wealth management business, the empowerment of the science and technology investment banking, and the accelerating expansion of international businesses solidify the central position in the medium to long term; on the valuation side, the historical low percentile of the PB implies a safety margin. In the background of increasing congestion in the technology sector trading and high to low fund rotation, the risk-return ratio of the securities sector remains attractive. Insurance: The recovery of performance is expected to drive stock price recovery, and the relocation of resident deposits opens up long-term growth space Core logic: The relocation of deposits and the "anti-internal competition" policy are expected to drive the growth of liabilities rapidly, the current valuations have a high safety margin, and the recovery of assets is expected to significantly repair Q2 performance and catalyze valuation restoration, suggesting to seize the allocation opportunities. On the liability side, in the life insurance sector, recent regulatory requirements for "reporting and unification" further strengthen the management of bank-insurance channels and the demonstration interest rates of dividend insurance are expected to be lowered. In the background of the relocation of resident deposits and the regulatory policies of "anti-internal competition," the life insurance liability side has solid support both in quantity and price. The NBV is expected to maintain rapid growth. In the first quarter of 2026, the arithmetic average NBV growth rate of the five listed insurance companies on the A-share market (including PICC calculated according to PICC Life's growth rate) was 30.3%; from January to April 2026, the original premium income of life insurance in personal insurance companies increased by 7.6% year-on-year. The restructuring of residents' wealth structure under low interest rates and aging brings significant development opportunities for new single insurance products that focus on savings, while the transformation of dividend insurance is expected to optimize the rigid liabilities costs under low interest rates and further enhance operational resilience. With the further strengthening of the requirements for "reporting and unification" in bank-insurance channels, the business structure is expected to be optimized, with an increase in the share of periodical business expected to improve the value rate. On the non-life side, the "reporting and unification" benefits the improvement of the expense ratio in non-life insurance, while a decrease in claims is expected to drive an improvement in the payout ratio of new energy vehicle insurance. Given the stable impact of natural disasters, the overall underwriting profit is expected to continue to grow. In the first quarter of 2026, the combined underwriting profit of the three major non-life insurers increased by 16.5% year-on-year to 12.416 billion yuan. On the asset side, after the increase in equity allocation ratios, short-term changes in performance have made them more sensitive to stock market fluctuations, supporting the profit growth rate of the second quarter of listed insurers. In the first quarter, the combined net profit of the mother of the five listed insurers on the A-share increased by -17.0% year-on-year to 698.83 billion yuan. Valuation-wise, the current A-share valuations of listed insurers are at historically low percentile levels. As of the close of June 22, the PEV of China Life/Ping An/Taibao/Xinhua was 0.65/0.59/0.46/0.64, ranking among the 26/30/17/74 percentile levels in the past 3 years, and the 24/31/26/84 percentile levels in the past 5 years, excessively reflecting the potential constraint of the low interest rate environment. The overall safety margin is high, and the expected recovery of the second quarter is expected to catalyze valuation restoration. Savings-type products: The restructuring of residents' wealth structure under low interest rates and aging drives long-term new single growth, and the transformation of dividend insurance helps with long-term stable operations. Currently, life insurance companies' new single savings products face three major opportunities. Firstly, as the wealth effect of real estate weakens, the financialization of residents' wealth structure is expected to continue to deepen. Secondly, in the low-interest rate environment and the era of the new asset management regulations, residents' financial asset allocation is shifting from a single deposit focus to a multi-level risk-return hierarchy. Savings insurance products have outstanding competitive advantages and are expected to become an important vehicle for meeting the substantial and long-term steady investment needs of residents. Thirdly, as the aging population deepens, the development of the third pillar pension is imminent. Insurance companies equipped with comprehensive solutions such as "commercial pensions + health care services" are expected to continue to meet the investment needs of residents' self-funded old-age reserves. The recent downward adjustment of the demonstration interest rate for dividend insurance from 3.9% to 3.5% helps to form rational expectations for insurance consumers, reduce sales misrepresentation, and maintain the profit base of insurance companies. In the first four months of 2025, the original premium income of life insurance companies increased by 7.6% year-on-year to 1.7289 trillion yuan, driving the original insurance premium income of life insurance companies to increase by 6.3% year-on-year to 2.6998 trillion yuan. Protective products: Commercial health insurance positioning is improving, and medical insurance and nursing insurance are expected to contribute to long-term incremental growth. In the 2025 government work report, it is mentioned for the first time to "accelerate the development of commercial health insurance," while the "Outline of the 15th Five-Year Plan" proposes to improve the multi-level medical security system, encourage commercial insurance to expand the coverage of innovative drug payments, fully tap the supplemental protection role of commercial medical insurance, and significantly enhance the positioning of health insurance in the national medical security system. The boundaries of the "basic medical security" system are becoming clearer, while the payment gaps for high-value innovative drugs, rare disease drugs, CAR-T, etc., will gradually be taken over by commercial insurance. The official execution of the "Commercial Health Insurance Innovative Drug Catalog (2025)" highlights that medical insurance will become a significant growth area in health insurance. In addition, long-term care insurance has transitioned from local trials to national establishment, and with the increasing demand for care of disabled elderly people under the backdrop of an aging population, nursing insurance is expected to become the second growth curve in health insurance. Leading insurers are actively building health care ecosystems, constructing long-term barriers with the "insurance + service" commercial model. Bank-insurance channels: The recent further strengthening of the "reporting and unification" provides solid support for NBVM, and it is optimistic about the rapid growth of NBV in bank-insurance, with the performance of leading insurers expected to be relatively superior. According to a report on March 31 in the Shanghai Securities Journal, on March 27, regulatory authorities issued a notification to the industry on "Further Strengthening the Management of Expenses in Bank Insurance Channels," detailing requirements for the reporting compensation incentives, training, and customer service fees for bank insurance commissioners. The insurance companies will incorporate compliant management of "reporting and unification" into their company's assessment and accountability mechanism. They will establish a mechanism for industry notification of violations and typical cases of "reporting and unification." The requirements of "reporting and unification" aim to strengthen regulations, promote the healthy and standardized development of banking and insurance business, and optimize structures, providing support for bank-insurance channel NBVM. In the first quarter of 2025, Taibao and Xinhua bank-insurance channels saw a 30.9% and 23.0% increase in the share of periodical new business premiums, respectively, to 54.8% and 72.3%. Agent channels: The keynote of high-quality development continues, with improvements in the quality of the workforce and an increase in productivity as the main drivers. The results of channel reforms for listed insurers are continuously improving. In the first quarter of 2026, Taibao and Xinhua saw new single premium distribution of agent channels grow by 34.5% and 21.2% to 18.383 and 14.928 billion yuan, with new single premiums of periodical business increasing by 6.3% and 0.7 points respectively to 62.1% and 97.3%. The overall size of the workforce is stabilizing. National Life and Ping An's workforce declined by 0.3% and 1.8% year-on-year at the end of the first quarter. This is an increase of 1.2% and -5.4% respectively from the end of 2025. In the long term, the agent channel's role in building a long-term moat remains significant, and insurance companies with professional agent teams are likely to enjoy premium valuations. Non-auto insurance: The implementation of "reporting and unification" is expected to drive optimization of non-auto insurance expense ratios. The China Banking and Insurance Regulatory Commission recently issued a notification on "Strengthening the Supervision of Non-Auto Insurance Business," which presents six specific regulatory requirements targeting the optimization of assessment mechanisms, the regulation of premium income management, strengthening market behavior supervision, and improving the non-auto insurance underwriting and claims service among others. According to the guidelines for strengthening the supervision of "non-auto insurance business" issued by regulatory authorities previously, different types of non-auto insurance, such as property insurance, liability insurance, employer's liability insurance, and other non-auto insurance, are required to complete product re-filing by December 1, 2025, January 1, 2026, February 1, 2026, and December 31, 2026, respectively. As the "reporting and unification" of non-auto insurance progresses in various categories, the expense ratios and comprehensive cost ratios of non-auto insurance business of listed insurers are expected to continue to improve. In the first four months of 2026, property insurance companies' non-auto insurance premium income increased by 4.3% year-on-year to 367.14 billion yuan, accounting for an increase of 1.1 points to 55.4%. Auto insurance: Leading insurers have already achieved underwriting profits for new energy vehicle insurance, with future profitability expected to continue to improve. According to data released by the China Actuarial Association and Bank of China Insurance Information Technology Management Co., Ltd. in 2025, the insurance industry still suffered an underwriting loss of 5.6 billion yuan for auto insurance, but based on the 2025 financial reports, PICC, Ping An, and Taibao's new energy vehicle insurance have all achieved underwriting profits, demonstrating the advantages of leading insurers in data, pricing, channels, and cost control. Looking ahead, as the proportion of old cars in new energy vehicle insurance portfolios increases and driving habits improve, the accident rate for new energy vehicles is expected to further decrease. In January 2025, the China Banking and Insurance Regulatory Commission issued the "Guiding Opinions on Deepening Reform, Strengthening Supervision, and Promoting High-Quality Development of New Energy Vehicle Insurance," proposing the establishment of a risk grading system for insurance vehicle models. If implemented, this system is expected to promote more attention from car manufacturers and continuous improvement in the safety and economic efficiency of vehicle models, thereby lowering repair costs and claims rates for new energy vehicle insurance. In the first four months of 2026, property insurance companies' auto insurance premium income decreased by 0.3% year-on-year to 2.958 trillion yuan, with a recent narrowing of the decline. Asset side: The recent revival of the equity markets is expected to increase profits and strengthen the long-term interest margins for assets and liabilities. Over the years, the proportion of listed insurers' investments in public equities has increased. As of Q1 2026, life insurance companies and property insurance companies' proportion of stock investments were 10.14% and 9.46% respectively, increasing by 0.59 and 1.89 points respectively year-on-year, making their performance more sensitive to fluctuations in equity markets. Since April 2026 (as of June 22), the Shanghai and Shenzhen 300 index has increased by 13.70%, with a 1.25% increase during Q2 of 2025, and the expected recovery of the equity markets is expected to boost the profits of listed insurers in the second quarter. On one hand, insurers are optimizing their asset allocation structures, strengthening asset-liability matching, actively utilizing high dividend stocks and new high-quality equity assets to increase returns. On the other hand, they are pushing down the rigid liability costs on the liability side. In the future, the long-term margin space still has solid support. Risk warnings: Uncertainty of market price fluctuations: The influence factors of capital market prices are numerous, including the fluctuation of macroeconomic conditions, changes in the global economic situation, and the fluctuation of investor sentiment, all of which may trigger changes in stock prices or affect the valuation of institutions such as securities firms and insurance companies, and the performance of the non-banking financial industry is significantly affected by market prices and trading volumes. Uncertainty in corporate profit forecast: The profits of the securities and insurance industries are influenced by multiple factors. The report's forecasts for industry valuations and performance carry a certain degree of uncertainty, and increased competition within the industry could lead to deviations from the forecast results. Technological updates and iterations: The rapid development of emerging technologies requires financial institutions to continuously keep up and adapt to the pace of technological change. However, the faster pace of technological updates and iterations also brings high research and development costs and training costs, which may increase the operating costs of securities firms and insurance companies. Additionally, the outbreak of technological innovation has a certain degree of uncertainty.