Brokerages fare well as bulls tighten grip

Earnings of mainland-listed securities firms surged as stock market turnover multiplied in March, and the sector may see further improvements later this year, analysts said.

Thirty-six of the pure-play mainland-listed securities firms saw healthy improvement in their monthly earnings for March, with total profits rising 54 percent on an annual basis to 16.05 billion yuan ($2.39 billion) and by 57 percent from the levels seen in February, according to data compiled by the Zhengzhou, Henan province-based Central China Securities.

Four brokerages - Huatai Securities, Guotai Junan Securities, CITIC Securities and Haitong Securities - saw their profits cross 1 billion yuan in March and account for 37 percent of the whole sector.

Analysts attribute the profit growth to the bullish A-share market in March. According to Bloomberg, average daily stock turnover of the market hit 887 billion yuan in March, or 50 percent higher than in February, driving brokerage revenue up.

Investors also resorted to more margin trading as risk appetite increased in March, pushing up securities firms' interest revenue. Meanwhile, the rising stock market also propped up their investment returns.

However, stock prices of securities firms did not get a major boost after the financial results were announced.

A subindex tracking the A-share securities sector dropped by 5.53 percent last week, breaking a three-week winning streak, according to Shanghai-based information provider Wind Info. The index further dropped by 2.17 percent on Monday, underperforming the 0.34 percent loss of the bench mark Shanghai Composite Index.

Hong Rong, founder of Shanghai-based investor education platform Hongda Education, said the stellar profits received lukewarm market response because investors had factored in the improved earnings before the announcements amid market recovery.

By the end of March, the securities sector subindex had rebounded by more than 70 percent from its trough in the fourth quarter, having largely priced in the improved earnings, Hong said.

"Meanwhile, the recent dip of the securities sector is likely to be temporary and insignificant," Hong said, citing the improved earnings have removed investors' concern that the decline in commission fees due to intensified competition may heavily weigh on the sector's earnings.

Looking ahead, analysts are upbeat on the full-year earnings and stock prices of A-share securities firms, as the bullish tone of the stock market is expected to continue.

"We believe that Chinese brokerages will see a double-digit recovery this year in earnings from the low base in 2018, while better-than-expected market conditions suggest potential upside to consensus earnings," analysts from JPMorgan said in a report.

However, considering the strong rebound the sector had registered, they said it is unlikely to continue to see broad stock price rises within the sector.

"We suggest investors stick with quality names such as CITIC and China International Capital Corp Ltd that are better positioned to benefit from structural developments, such as the introduction of a registration-based initial public offering mechanism under the science and technology innovation board."

"The supply-side reform of the financial sector, represented by the science and technology innovation board, is reshuffling the securities industry. Top industry plays are expected to extend their strength and enjoy higher valuation than peers in the next few years," said Liu Wenqiang, chief industry researcher with Shenzhen-based Great Wall Securities.

In the short term, whether securities firms can regain growth momentum in stock prices will mainly rely on investors' expectation on sustainability of the market rally and the sector's ability to continue improving earnings, Liu said.

"Factors such as credit expansion data that continuously beats expectations and steady foreign capital inflows to the stock market, if it happens, will boost performances of both securities firms and the whole market."