Brokerage Stocks Surge: Who Will Be the Biggest Winner?

In recent days, the stock market in China has experienced a remarkable surge, particularly within the brokerage segment, which has eluded favorable sentiments from investors for quite some timeOnce dubbed a "bad boyfriend" by investors due to its lackluster performance, brokerage stocks have now skyrocketed, displaying bullish trends that many observers did not anticipate.

The pressing question surrounding this uplift in market activity is whether the momentum will continue and which players might emerge as the front-runners to lead this revival.

One of the pivotal meetings held on July 24 triggered a sense of optimism among market participants as it emphasized the necessity to "activate capital markets and boost investor confidence." This declaration represented a significant departure from previous gatherings, where discussions did not directly address capital market policiesThe attention from the top leadership has served as a shot in the arm for investors, evidenced by a strong leap in both the Shanghai Composite and Shenzhen indexes the following day, comfortably positioning the Shanghai index above the 3200-point mark.

The decision-makers' unexpected focus on the capital markets reflects a calculated assessment of current economic scenarios and possibly signals the unfolding of a larger strategy.

Firstly, a vibrant capital market acts as a barometer for the macroeconomy and is a crucial contributor to market confidenceAn active and lively capital market not only provides quality Chinese companies with higher valuations and liquidity but also instills confidence across various market participants including entrepreneurs and investors, paving the way for further economic recovery.

Secondly, the restructuring of the Chinese economy has become evident, as emerging technology industries have taken the helm as primary growth drivers

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Unlike traditional sectors such as real estate or infrastructure that could expand via debt financing, technology firms usually operate on lighter asset bases, necessitating robust support from the capital marketsThis rationale underlines the push towards a comprehensive registration system within A-shares.

Thus, for China to facilitate a smooth transition in its economy, an active capital market remains paramount as a foundational requirement.

Thirdly, with over 200 million stock investors and more than 700 million fund participants in China, nearly every household has a stake in the capital marketsAugmenting the populace's income through financial avenues such as the stock market is essential, making it a vital channel for wealth generation.

The rise in the capital market’s activity predominantly benefits the securities companies, which derive their revenue from securities brokerage, proprietary trading, asset management, and investment banking services – each intricately linked to the vibrancy of capital market operationsRecent rebounds have seen securities stocks rise nearly 20%, significantly outpacing overall market movements, affirming their position as some of the most resilient sectors amidst fluctuations.

Long-term investment values of brokerages are becoming increasingly evidentThe prolonged state of stagnation within the capital markets over the past two years has led to the current price-to-book ratio of A-share securities firms being a modest 1.45. This valuation is on par with other major financial categories like banks and insurance companies, marking a history of depressed valuations.

Moreover, buoyed by both policy impetus and fundamental economic recovery, an invigorated capital market stands to not only enhance brokerage performance but also bolster investor confidence in the sector, potentially leading to a significant uplift in firm valuations

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As prominent indicators of the market's health, securities companies could be positioned for a double boost as the overall market strengthens.

Turning our attention to the traditional brokerage firms, the industry landscape is characterized by a few strong players dominating the fieldIn China, only 133 securities firms hold operational licenses, with 50 listed on the A-share marketThe competition within this sector is marked by a concentrated advantage where leading firms excel across various business lines.

For instance, CITIC Securities stands as the unequivocal leader in brokerage activities, securing the highest revenue in the industryIn 2022, its revenue from brokerage reached 16.425 billion CNY, followed by Guotai Junan and Huatai Securities, with revenues of 10.952 billion and 10.588 billion CNY, respectivelyThis trio underscores the competitive edge that top firms hold over others, especially as they operate in a market characterized by heavy traffic and the agility demanded by investor behavior.

In proprietary trading, CITIC Securities continues its dominance, further widening its lead with revenues exceeding 15.772 billion CNY, far surpassing other competitorsWhen examining asset management, CITIC once again takes the lead, emphasizing its strength across the boardThe firm holds significant stakes in notable asset management companies, thereby cementing its standing as a powerhouse in the realm of securities.

This analysis isn't just a chalkboard exercise; it holds tangible implications for the future positioning of brokerages in China, particularly in an era characterized by ongoing shifts towards tighter capital controls and the need for heightened transparencySuccessfully navigating these waters will require not just financial strength but strategic vision.

On the other hand, newer entrants into the space, particularly Internet brokerages, face the challenge of making their mark in a domain traditionally dominated by established players

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Given the scarcity of brokerage licenses in the industry, even technology titans like Alibaba and Tencent have yet to secure their own licenses.

The first notable internet brokerage to break through was East Money Information, which acquired Tibet Tongxin Securities back in 2015, rebranding it as East Money SecuritiesThis strategic move set it on a path for rapid ascension in the competitive landscapeBetween 2016 and 2022, East Money Securities surged from a lowly position in the industry to become a top contender, demonstrating remarkable revenue growth and profitability that consistently outpaced the rest of the market.

By 2022, while East Money ranked approximately 25th by revenue among brokerages, its profit margins secured it an impressive fourth placeThis financial prowess led East Money's market capitalization to soar past many traditional players in the industry, positioning it as a powerhouse amidst established firms.

Following in its wake, the internet sector saw another breakthrough in mid-2022 with the acquisition of Wangxin Securities by Zhinanzhen, which later rebranded itself as Mai Gao SecuritiesThis marked the emergence of the second internet brokerage, capable of leveraging its digital heritage amidst shifting investor demographics in China.

Zhinanzhen’s background in stock trading software development provided it with a considerable edgeReporting substantial growth in revenue shortly after the acquisition, it is poised to exploit synergies between its core competencies and brokerage operations as it operates in a digital-first paradigm, thereby redefining the traditional investment landscape.

In summary, as the capital markets in China undergo a renaissance spurred by concerted policy efforts, both traditional and innovative brokerage firms are uniquely positioned to leverage this momentum

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