China Merchants Securities' third-quarter profit may lead peers. Why has BofA turned bearish?
BofA expects China Merchants Securities' third-quarter net profit to rise sharply year on year, but the incremental contribution from valuation gains on ChangXin Memory Technologies will weaken. Together with a cut to turnover forecasts, profit could fall in 2027.
Original source：BofA Global ResearchFirst published on Unhidea：Original source date：
Key takeaway
BofA believes the strong growth from investment gains on ChangXin Memory Technologies is largely reflected in the share price and that China Merchants Securities' earnings growth will slow from the fourth quarter of 2026. It therefore downgraded both the A and H shares from Buy to Underperform.
Why did BofA downgrade the stock despite strong third-quarter growth?
BofA maintains its forecast for China Merchants Securities' third-quarter 2026 net profit at RMB 7 billion, up 89% year on year but down 5% quarter on quarter. It expects net profit for the first three quarters to rise 98% year on year, leading its peers. The main driver is investment gains on ChangXin Memory Technologies.
Looking ahead, BofA expects investment income to face a high base from the same period a year earlier, with earnings growth slowing both year on year and quarter on quarter from the fourth quarter. The contribution from fair-value gains related to ChangXin Memory Technologies will also become less significant from 2027.
Where is the benefit from ChangXin Memory Technologies reflected?
China Merchants Securities and its private equity subsidiary together hold approximately 0.7% of ChangXin Memory Technologies' post-money equity. The company marked up the investment's carrying value in the second quarter of 2026 based on its pre-listing valuation.
After ChangXin Memory Technologies listed in July, market expectations for China Merchants Securities' related third-quarter fair-value gains rose to RMB 7 billion–10 billion. BofA believes these expectations are largely reflected in the share price: China Merchants Securities' A and H shares have outperformed peers by about 10 percentage points year to date.
BofA expects third-quarter trading revenue may fall short of the market's high expectations, while investment businesses outside ChangXin Memory Technologies offer limited incremental growth drivers. It therefore sees a risk of downward revisions to market earnings expectations from 2026.
How much were earnings forecasts and turnover assumptions cut?
BofA lowered its forecasts for average daily market turnover in 2026 and 2027 from RMB 2.5 trillion and RMB 2.5 trillion to RMB 2.3 trillion and RMB 2 trillion, respectively. It correspondingly cut its earnings per share forecasts for China Merchants Securities by 2% and 7% for the two years.
Under BofA's model, adjusted net profit in 2026 is RMB 18.954 billion, up 61.5% year on year; in 2027, it falls to RMB 14.202 billion, down 25.1% year on year, a decline the bank expects to be the largest among peers. Its earnings forecasts for both 2026 and 2027 are more than 10% below market consensus, and it sees a risk of consensus downgrades after third-quarter results are announced.
How much valuation upside remains, and what could change the assessment?
BofA notes that China Merchants Securities' H and A shares trade at approximately 0.7 times and 0.8 times forward price-to-book value, respectively, not far from the industry leaders, leaving limited room for further valuation gains.
The bank cut its H-share target price from HK$ 17.50 to HK$ 13.50 and its A-share target price from RMB 19.50 to RMB 15.50. Higher-than-expected turnover and commission rates, and faster-than-expected listings of technology companies, are upside factors for its target prices; falling turnover or commission rates, delays in technology company listings and tighter restrictions on A-share IPOs are downside factors.
