Huachuang Securities: Small and medium-sized brokerages still possess cyclical elasticity, and product capability determines development space.

Huachuang Securities has released a research report stating that the trend of industry concentration continues, with small and medium-sized brokerage firms still relying primarily on capital increases and share expansions to support business growth. The key factor is whether capital replenishment can be transformed into stable asset returns and improvements in ROE. While strong profit elasticity can still be released during market upswings, profit fluctuations are more apparent during market pressure phases. Furthermore, there should be a focus on regional outlets and local customer bases to enhance customer conversion rates for product holdings, investment consulting, and margin financing and securities lending businesses. Attention should be given to medium-sized brokerage firms that possess regional resources, distinctive business offerings, and potential for improving capital efficiency. The main viewpoints from Huachuang Securities are as follows: The trend of industry concentration continues, with small and medium-sized brokerages facing sustained pressure on their capital and asset share. Against the backdrop of building a first-class investment bank, classified supervision to "support the strong and limit the weak," and ongoing mergers and consolidations, resources in the securities industry are further concentrating towards leading institutions. From 2016 to 2025, the CR10 of net assets attributable to listed brokers will rise from 59.0% to 62.1%, and the CR10 for total assets (excluding client funds) will increase from 60.6% to 69.7%. Among these, small and medium-sized brokerages continue to rely on capital increases and share expansions to support business growth, and whether capital replenishment can be converted into stable asset returns and improvements in ROE will be critical. The profit gap mainly comes from leverage and capital utilization efficiency, and small and medium-sized brokerages still exhibit cyclical elasticity. By 2025, the financial leverage ratio of leading, medium, and small brokerages will be 4.74 times, 3.51 times, and 2.82 times, respectively, with ROEs of 9.2%, 6.7%, and 5.8%, while ROAs will be 2.02%, 1.96%, and 2.03%, showing relatively limited differences. Leading brokerages leverage their advantages in financing costs, institutional customer bases, risk hedging, and asset turnover to convert higher leverage into higher ROE. Small and medium-sized brokerages can still release strong profit elasticity during market upswings, but profit fluctuations are more notable during market pressure phases. The brokerage and wealth management landscape remains generally stable, and small and medium-sized brokerages should shift from "incremental customer acquisition" to "deepening existing customer relationships." In 2025, the average daily trading volume of stock funds in the market is projected to be 20.5 trillion yuan, a year-on-year increase of 69.7%; in the first half of 2026, it is expected to further rise to 32.4 trillion yuan, reflecting an approximate year-on-year growth of 101.0%. By 2025, the CR10 of stock fund transaction volumes at brokerage firms will have risen to 50.9%, with the CR10 of client funds consistently maintaining around 60%. The customer and channel barriers of leading institutions are relatively solid. Small and medium-sized brokerages should rely on regional outlets and local customer bases to improve conversion rates for product holdings, investment consulting, and margin financing and securities lending businesses. Equity financing is concentrating on leading firms, while bond underwriting remains an important breakthrough for small and medium-sized brokerages. From 2016 to 2025, the CR10 for IPO and refinancing underwriting scales will increase from 67.2% and 60.4% to 85.0% and 88.8%, respectively, while the CR10 for corporate and enterprise bond underwriting will rise from 45.8% to 58.6%, indicating relatively low concentration. Small and medium-sized brokerages can leverage local shareholders, regional governments, and regional industrial resources to focus on expanding regional state enterprise bonds, specialty industry clients, and comprehensive financial services for small and medium-sized enterprises. Asset management business will move beyond channel expansion, and product capabilities will determine development space. By 2025, the entrusted asset management scale of brokerages will rebound to 8.39 trillion yuan, with the AUM CR10 rising to 69.2%. After channel business has declined, small and medium-sized brokerages need to shift towards active management, institutional customization, and acquiring specialty assets. During the same period, the CR10 for equity, money market, and bond funds will decrease to 32.6%, 41.1%, and 26.9%, respectively. The relatively dispersed public fund landscape provides a development window for small institutions that have strong fixed income research and investment, asset acquisition, and risk pricing capabilities. Proprietary business provides performance elasticity, with high-quality balance sheet expansion being more sustainable. In the first half of 2026, 42 listed brokerages achieved a total proprietary income of 133.19 billion yuan, a year-on-year increase of 14.6%. However, performance among companies shows clear differentiation. Small and medium-sized brokerages should reduce reliance on a single market direction and enhance capital utilization efficiency and income quality by allocating high-dividend stocks, perpetual bonds, and developing market-making and customer-demand-oriented trading businesses to control profit fluctuations. The Beijing Stock Exchange and the New Third Board are important entry points for differentiated development of small and medium-sized brokerages. Their service objects are primarily innovative small and medium-sized enterprises, aligning better with the regional customer base of small and medium-sized brokerages. Some brokerages have already established first-mover advantages in ongoing supervision and market-making areas. Small and medium-sized brokerages should link industry research, listing cultivation, continuous supervision, market-making, financing, mergers and acquisitions, and wealth management together, shifting from pursuing single projects to providing full lifecycle services, enhancing comprehensive customer value. Investment Recommendations Pay attention to medium-sized brokerages that possess regional resources, distinctive business offerings, and potential for improving capital efficiency. It is recommended to focus on three types of institutions: first, regional leaders with a solid local customer base and substantial wealth management conversion space; second, specialty brokerages that have formed advantages in bond underwriting, fixed income asset management, market-making on the Beijing Stock Exchange and New Third Board; and third, brokerages that have received shareholder capital increases or completed refinancing, while also having clear expectations for capital direction and operational mechanism improvements. Risk Warning: Market trading volumes may decline; capital market reforms and business innovations may fall short of expectations; recovery of the real economy may be less than anticipated; fluctuations in proprietary investment returns; mergers, integrations, and changes in shareholders may not meet expectations.