Brokerage stocks rebound after sharp fall: Diverging third-quarter earnings expectations put trading stability in focus
JPMorgan believes weaker trading activity, downward revisions to third-quarter earnings expectations and capital outflows jointly weighed on brokerage stocks. Net ETF inflows helped repair sentiment, but earnings expectations for CICC, China Merchants Securities and CITIC Securities diverged markedly.
Original source：J.P. MorganFirst published on Unhidea：Original source date：
Key takeaway
With market sentiment yet to improve on a sustained basis, JPMorgan prefers the H-shares of CICC and China Merchants Securities, whose third-quarter earnings growth has greater visibility.
Why did brokerage stocks fall before rebounding?
Among the brokerages covered by JPMorgan, A-shares fell an average of 3% from 19 October to the 22nd, while H-shares fell an average of 9% from the 20th to the 22nd because the Hong Kong market was closed on the 19th; they rebounded by 1% and 3%, respectively, on 23 October.
The bank attributed the earlier weakness to softer trading and investor sentiment, downward revisions to some brokerages’ third-quarter earnings expectations, and investor selling of brokerage H-shares. Since October, average daily A-share turnover has fallen to 1.6 trillion yuan, while the margin financing balance as of 22 October had dropped 4.5% from the start of the month to 2.43 trillion yuan.
How much improvement did ETF inflows bring?
From 22 October to the 23rd, six domestic ETFs recorded combined net inflows of more than 30 billion yuan. JPMorgan believes this gave investor sentiment a modest boost and supported the market rebound on the 23rd.
A-share turnover recovered to 1.97 trillion yuan on 23 October, but the bank is watching whether turnover can stabilize at around 2 trillion yuan and whether margin financing balances and net ETF purchases can continue to stabilize.
Why are third-quarter earnings expectations diverging?
JPMorgan expects CICC and China Merchants Securities to post the strongest year-on-year growth in third-quarter net profit, reaching 5.1 billion yuan and 6.98 billion yuan, up 128% and 89%, respectively. However, China Merchants Securities is expected to decline 5% from the second quarter, while CICC is expected to grow 10% quarter on quarter.
The bank expects GF Securities’ third-quarter net profit to rise 6% year on year. For CITIC Securities, JPMorgan estimates that investor expectations have fallen to 7 billion–8 billion yuan, below its forecast of 9.4 billion yuan, putting that forecast at risk of a downward revision.
East Money has reported third-quarter net profit of 3.84 billion yuan, up 9% year on year and down 11% quarter on quarter; brokerage revenue slightly exceeded the bank’s expectations. However, JPMorgan believes the composition of its investment assets differs substantially from that of other brokerages, limiting its relevance as a reference for the sector as a whole.
Which brokerages does JPMorgan prefer?
The bank believes market sentiment, capital flows and third-quarter results will determine the performance of brokerage stocks. While sentiment has not improved sustainably, it continues to favor CICC H-shares and China Merchants Securities H-shares, whose third-quarter earnings growth has greater visibility, and rates both overweight.
The timetable in the report shows that, apart from East Money, which has already disclosed its results, the other seven brokerages under coverage will release their third-quarter reports throughout the week. CITIC Securities is expected to report on 26 October and CICC on 30 October.
