CMSC: Securities market boosted but significant differentiation within sectors highlighted, emphasizing the importance of valuation in highlighting allocation opportunities.

CMSC released a research report stating that looking ahead to the second half of the year, it is highly probable that the securities market will regain an upward trend and the center will steadily rise. Benefiting from the contribution of equity investment income to performance elasticity, coupled with the continuation of the fixed income "asset shortage" and downward interest rate fluctuations, securities firms are expected to maintain high growth in performance. There is a significant mismatch between current undervaluation, low positions, and high growth performance, with the sector's valuation performance ratio standing out. It is recommended to pay attention to this allocation window. The main points of CMSC are as follows: 2026 H1 Review: Equity style polarization, overall strength in the bond market In terms of equity, since the second quarter, led by the trends in industries, high-frequency data, and performance verification, the AI chain has led to rapid strength in the technology sector, with the ChiNext Index rising by 35.6% in the first half of the year, significantly outperforming the CSI 300 Index and the Shanghai Composite Index. In the fixed income sector, supported by overall loose liquidity and the return of the "asset shortage" logic, the overall performance of ChinaBond has been relatively strong, with a cumulative increase of 2.2% in the first half of the year. Market trading sentiment is high, with the average daily turnover of mutual funds in the first half of the year reaching 3.24 trillion, a year-on-year increase of +101%; the average margin balance per day has risen to 2.75 trillion, a year-on-year increase of +49%. Performance Overview: Sector performance boosted by business prosperity, but significant internal differentiation In the first quarter, 642 listed securities firms achieved operating income of 151.1 billion, a year-on-year increase of +31%, and a quarter-on-quarter increase of +15%; non-GAAP net profit was 59.5 billion, a year-on-year increase of +39%, and a quarter-on-quarter increase of +36%. Cost reduction still dominates the cost side, with the management fee ratio of 642 listed securities firms in the first quarter at 47.2%, a year-on-year decrease of 4.7 percentage points, and a quarter-on-quarter decrease of 6.0 percentage points. There is a significant differentiation in ROE performance, with top companies maintaining ROE growth driven by customer demand, with CKH HOLDINGS orderly expanding their balance sheet, China Securities Co., Ltd., CITIC SEC, CICC, and GF SEC leading the industry; small to medium-sized securities firms showing varying performance, with Changjiang, FounderROE among the industry's top performers, while Tianfeng's performance is dragged down by proprietary trading and its ROE ranking is not high. Chip Situation: Clearing chips, light preparations Through observing the holding situation of important institutional investors with a narrow perspective from China Securities Finance as of the end of March 2026, China Securities Finance held equity holdings of listed securities firms worth 19.4 billion, with holdings mainly concentrated in the top ten securities firms. With institutional chips clearing, the consensus on the severe mismatch between sector performance and valuation gradually solidifies, and funds are gradually flowing back to the sector with a high probability. Observing the situation, starting from mid-June, the securities II sector stabilized and reversed, with an upward slope significantly greater than the Shanghai Composite Index, while the insurance sector, also heavily invested by institutions, showed a relatively weak trend. This divergence or correlation to some extent confirms that the clearing of sector chips has been basically completed, and capital inflow is underway. Industry Trends: Technology leads, internationalizes, wealth reserves 1) Technology and finance lead, major investment banks undergo transformation: The reform of the capital market financing side in this round focuses on the "Innovation Board" reform. Against this backdrop, investment bank competition has shifted from original "contracting-doing-underwriting" business capabilities to all-round comprehensive capabilities such as "industry understanding-target selection-capital utilization-valuation pricing-distribution level". With the extreme interpretation of the technology trend, the investment income generated by alternative child and private equity sub-sectors has become an important growth point for securities firms' profits. 2) Deepening international business, boosting ROE center: With the acceleration of Chinese companies' global layout, deep inversion of domestic and foreign interest rates, and the global equity market ushering in a technology boom, cross-border investment banking, financial investment, and wealth management jointly support the development of securities firms' international businesses. Considering that the cross-border investment banking business faces significant pressure from a high base, cross-border wealth management is constrained by tight supply, and cross-border investment business, with persistent strong demand and relatively loose supply, may become the biggest growth point in international business income for the year, as well as the core support for high-leverage operation and high ROE in international business. 3) Deposit migration penetration, wealth management poised for growth: With the arrival of the low-interest rate era and the fading investment property attributes, funds urgently need new investment vehicles. Unlike the last bull market, where the mainstream affluent retail clients were the main force in deposit migration and increased holdings in public funds, in this round of bull market, deposit migration is mostly driven by high-net-worth individuals. On the one hand, as the market style is pushed to the extreme, with limited off-exchange derivative tools, leverage tools as one of the few in the market, financing becomes the preferred choice for high-risk clients to increase profits; on the other hand, private equity funds, with superior strategy flexibility, position freedom, absolute return orientation, and scalable management, provide significantly higher yield levels compared to public funds, becoming the main driver for clients with moderate risk preference to increase profits. Industry Landscape: Accelerating mergers and acquisitions, intense competition among top investment banks Under the control of the same ultimate controller, securities firms' licenses are accelerating integration. Since the end of 2025, Central Huijin has propelled CICC to absorb and merge Dongxing and Cinda, Shanghai State-owned Assets Supervision and Administration Commission promoted Orient to merge with Shanghai Securities, and Jiangsu State-owned Assets Supervision and Administration Commission promoted Soochow to acquire Donghai Securities across markets, with all three displaying clear administrative leadership characteristics. In addition, competition among top investment banks is gradually intensifying. With the preliminary integration effect of "Guosen + Haitong" achieving "1+1>1", and the substantial regulatory acceptance of "Three-in-One" by Zhongjin, it is expected that CITIC SEC, Guotai Haitong, and CICC have locked in the top three positions in the industry. GF SEC and Huatai, as leaders in the second echelon, continue to exert efforts in capital strength, business innovation, and international deployment; while between CMSC, Shenwan Hongyuan Group, China Galaxy, China Securities Co., Ltd., and Guosen, the one that can break through first remains to be observed. Outlook for 2026 H2 Since July, the Shanghai Composite Index has significantly retraced and touched a low point of 3,741, with margin balances decreasing by 312.2 billion; in this context, regulatory authorities have restarted stability mechanisms, demonstrating a firm determination to maintain market stability. Under the background of regulatory protection in the secondary market, adjustments measures for the primary market are not expected to be lacking, with relatively sufficient elasticity on the demand side and stable liquidity supply, it is expected that the supply-demand relationship in the market will maintain a relatively balanced posture in the second half of the year. Looking ahead, the bank believes that regaining an upward trend in the market and steadily lifting the center should be a high probability event. Investment Advice Considering the continued prosperity of the equity market this year, providing performance elasticity with equity investment income, the continuation of the fixed-income "asset shortage" and downward interest rate fluctuations, the securities sector is expected to achieve high growth in performance, with industry total revenue projected to reach 674.6 billion in 2026, a year-on-year increase of +25%, achieving a net profit of 276.6 billion, a year-on-year increase of +26%. As of July 22, 2026, the PB ratio of the securities sector was 1.32 times, at the 34.7th percentile over the past five years; institutional holdings in the first quarter of 2026 were only 0.52%, significantly lower than the standard allocation of 3.25%. There is a significant mismatch between current undervaluation, low positions, and high growth performance, with the sector's valuation performance ratio standing out. It is recommended to pay attention to this allocation window. For individual stock recommendations, in the short term, there is anticipation for the continued realization of the narrative of technology and innovation in investment banking, while in the medium to long term, there is optimism about the rise of international development and the arrival of a "critical moment" in wealth management. Recommended are GF Securities, Guotai Haitong, CITIC Securities, and CICC. Risk Warning: Long-term market downturn, policy effects falling short of expectations, marginal policy tightening, liquidity tightening, continuous decline in business fees, etc.