Sector Research | China Brokerage & Securities
THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON June 1, 2012
June 1, 2012 Brokerage & Securities BUY
A definite beneficiary of China’s financial reform
Investment highlights Analysts Shao Ziqin Chinese brokerage stocks have risen by 40% on average YTD. We reiterate our +0755-8213 0468 [email protected] positive view on the sector for the following reasons: S0980510120052
Tian Liang Beijing is determined to forge ahead with financial reform. Lower funding +0755-8213 0470 costs and transferring bad debts from the banking system to the broad market [email protected] S0980510120041 are the keys to resolving the economic issues in China. Measures that the central government may take may include continuing to develop the domestic bond and equity markets (i.e. GEM, OTC, international and main boards). Sales Contact Dan Weil Inevitable for brokerages to seek international and marketised operations. Global Head of Institutional Sales and Trading Managing Director China has already implemented 14 innovative measures to loosen regulation of +852 2248 3588 [email protected] brokerages, raise their operating leverage and accelerate market liberalisation. Eleven other proposals were made at the recent national brokerage innovation Chris Berney Managing Director conference to outline the industry’s future development. China is encouraging +852 2248 3568 brokerages to develop new businesses to establish themselves as [email protected]
wealth-management platforms. They will also be permitted to adopt a Roger Chiman “management-by-objectives” scheme, which is expected to lay a solid Managing Director +852 2248 3598 foundation for an effective and sustainable incentive mechanism. [email protected]
Andrew Collier Key changes in brokerages’ profit model: 1) Going forward, the revenue of Director +852 2248 3528 brokerages will be mainly from asset-management services, such as [email protected]
commissions for providing liquidity and investment returns, instead of execution Joe Chan services. 2) Asset managers are carving out a niche for themselves in specific Director +852 2248 3578 areas. The financial assets of retail clients will be re-allocated among banks, [email protected] insurance companies, trusts and funds. 3) Fixed-income and Cancy Kong asset-management businesses will become the new drivers for brokerages. Vice President +852 2248 3538 [email protected] Our top picks: We like CITIC Securities (600030 CH) and Haitong (600937 CH) for their capital strength, stable results and as valuations are below peers. We Gary Wong Associate also like Southwest Securities (600369 CH) for its growth potential given the +852 2248 3548 [email protected] changes in its senior management, clear path for development and strong
government support.
Exhibit 1: Earnings forecasts and ratings
Closing price Market cap. EPS (RMB) PE (x) Ticker Company Rating (RMB) (RMB mn) 2011E 2012E 2011E 2012E 600030 CITIC Securities Buy 13.88 152,915 1.14 0.40 12.16 34.75 600837 Haitong Securities Buy 10.63 101,886 0.33 0.46 32.40 23.22 600369 Southwest Securities Buy 12.25 28,451 0.11 0.34 108.31 36.01 Source: Wind, Guosen Securities Economic Research Institute
For ratings definitions and other important disclosures, refer to the Information Disclosures at the end of this report. 1 Bespoke translation by Guosen Securities (HK) Brokerage Co., Ltd. strictly for use by its clients only.
Brokerage & Securities Sector June 1, 2012| China THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON JUNE 1, 2012.
1.1 Conclusions & investment advice
Beijing is determined to forge ahead with financial reform. This is inevitable given the economic issues and the efforts made by policy leaders that advocate market liberalisation. As brokerages are carving out a niche for themselves in specific areas, it is an irreversible trend for them to seek international and marketised operations. To secure a competitive edge, domestic brokerages should move quickly and make changes in their corporate structure and assess measures according to overall economic conditions.
1.2 Our top picks:
CITIC Securities (600030 CH): being the initiator and active participant in China’s capital market reform, the company is well positioned to develop flow-based businesses. Besides, the company also enjoys a clear competitive edge given its well-established brokerage business channel, strong capital strength and lower-than-industry average PB ratio. Haitong Securities (600937 CH): the company follows prudent operating principles and has raised sufficient funds from the previous two financing activities. It occupies a leading position in terms of margin financing and investing in derivatives. The company’s PB ratio is also lower than the industry average. Southwest Securities (600369 CH): We have a positive view on the new management team and its development plan. With strong support from the government, we believe Southwest will be a dark horse among domestic brokerages.
1.3 Key assumptions:
We assume the average daily trading volume throughout 2012 is RMB180 billion, the median of the fluctuation range of the SSE Composite Index is 2,600, and the prevailing commission rate, staff remuneration and other expenses within the sector decline by 5%, 15% and 10% y-o-y respectively. We did not factor in the innovative businesses when calculating 2012 results as they are still being developed.
1.4 Different view from the market expectation:
We see the national brokerage innovation conference recently held as the beginning of differentiation within the brokerage & securities sector. Although no significant achievement is expected in 2012, we believe brokerages’ results will gradually improve when new businesses are successfully established.
1.5 Upside catalysts:
rising market indicators and turnover; effects of the implementation of innovation policies manifest in certain fields.
1.6 Risk factors:
stock market plunges; prevailing commission rates fall sharply.
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We applied a Buy rating on the sector at the beginning of the year on expectation of improving fundamentals of brokerages due to the CSRC chairman Guo Shuqing’s efforts in pushing forward capital market reform. Chinese brokerage stocks have risen by 40% on average year-to-date. We reiterate our positive view on the sector for the following reasons:
Beijing is determined to forge ahead with financial reform. This is inevitable in China given the economic issues and collaborative efforts made by policy leaders that advocate market liberalisation.
As brokerages are carving out a niche for themselves in specific areas, it is an irreversible trend for them to seek international and marketised operations.
Brokerage firms have already made some achievements in certain areas, such as CITIC Securities’ fixed-income business, China Merchants Securities’ “E-Stop” model and “Zhiyuan Wealth Management” service, and Orient Securities’ asset management operation. To secure a competitive edge, domestic brokerages should move quickly and make changes in their corporate structure and assess measures according to overall economic conditions.
2 Beijing is determined to forge ahead with financial reform
2.1 Resistance to financial reform wears off under economic slowdown
Lower funding costs and transferring bad debts from the banking system to the broad market are the keys to resolving the economic issues in China. The biggest hurdles for China’s economic development are insufficient inducements to entrepreneurs to expand production, and the accumulation of banks’ bad debts. We believe the former can be mainly attributed to slackening overseas demand and the high cost of land, raw materials, human resources as well as capital, among which only the cost of capital will decline in the short term given the recent interest rate cut.
Measures that the central government may take to resolve the economic issues may include continuing to develop the domestic bond and equity markets (i.e. GEM, OTC, international and main boards). The bond market can adopt the market pricing system to reduce the cost of funding and spread banks’ risks within the broad market. The stock markets will not only provide exiting options to listed companies but also offer financial support to emerging industries.
We should have faith in Mr. Guo Shueqing’s judgment and execution ability, as well as the collaboration of free marketers among the government’s senior officials. Mr. Guo worked with the State Committee for the Reform of the Economic System during 1985 to 1998, and was awarded the Sun Yefang Economic Science Prize twice during the period. He, together with Wu Jinglian, Zhou Xiaochuan, Lou Jiwei and Li Jiange, is recognised as the “advocator of economic structure overhaul”. He has served successively with the People’s Bank of China, the State Administration of Foreign Exchange, Central Huijin
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Investment, China Construction Bank, and China Securities Regulatory Commission since 2001. Mr. Guo is a pragmatist with solid theoretical knowledge.
Mr. Guo proposed to invest pension funds in the stock market, which received immediate support from senior officials of the National Council for Social Security Fund. The State Council then permitted Guangdong to invest pension funds in the stock market in March 2012, only three months after Mr. Guo’s proposal. On May 17, PBoC governor Mr. Zhou Xiaochuan announced at the annual conference held by the International Organization of Securities Commissions that the central bank will work closely with the CSRC to enhance the synergy effect of China’s monetary policy and financial regulations, aiming to ensure a favourable macroeconomic environment for the steady development of China’s capital market.
3 Inevitable for brokerages to seek international and marketised operations
Mr. Guo has launched 14 innovative measures aimed at relaxing regulations, expanding operating leverage and accelerating brokerages’ internationalisation since he became chairman of the CSRC. Eleven other proposals were made at the recent national brokerage innovation conference to outline the industry’s future development, which are expected to greatly expand brokerages’ business scope, as well as to encourage them to explore new profit models and establish themselves as wealth management platforms. These proposals also allow securities firms to adopt a “management-by-objectives” scheme, which is expected to lay a solid foundation for an effective and sustainable incentive mechanism. We expect brokerages to launch various diversified products and services, except for deposits, loans and insurance policies.
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Exhibit 2: Progress of innovation in the securities sector
Date Event Content July 8, 2011 Direct investment fund CSRC permits securities firms to establish direct investment funds and raise money for direct investment from third party institutional investors Oct. 19, 2011 Establishment of The China Securities Finance Corporation is officially established under the State Administration for refinancing companies Industry & Commerce’s approval. Oct. 20, 2011 Stock repurchase CITIC Securities, Haitong Securities and China Galaxy Securities approved to conduct the trial agreement operation of stock repurchase agreement Oct. 27, 2011 Issuance of guidance on CSRC issued guiding opinions on business and product innovation of securities firms to outline the brokerage firms’ future development of the industry and lower net capital regulation standards innovation Nov. 25, 2011 Expanding the range of The Shanghai and Shenzhen stock exchanges expand the range of underlying securities of margin underlying securities of financing from 90 to 285, including 7 ETFs margin financing Jan. 19, 2012 Relaxing regulations over CSRC announced to seek the market’s opinions on reducing the lower limit of net assets-to-debt ratio leverage ratio of securities firms from 20% to 10% Jan. 1, 2012 Promotion of bond China permits 20 brokerages to conduct bond pledge-style repo business after two-year trial operation pledge-style repo by Guosen Securities Mar. 1, 2012 Cash margin management Cinda Securities launched “Cinda Cash Management Collective Investment Scheme”, marking the first regulatory green light for securities firms to manage clients’ margins Apr. 3, 2012 China expanding QFII and The State Council approved the CSRC, PBoC and SAFE to increase the investment quota under the RQFII investment quota Qualified Foreign Institutional Investors (QFII) and RQFII programme by US$50 billion and RMB50 billion respectively Apr. 11, 2012 Relaxation of regulations CSRC lowered venture capital calculation standards of brokerage, proprietary and asset management over venture capital businesses Apr. 23, 2012 Mock trading of treasury China launched mock trading of treasury bond futures and by month end had opened this to the broad bond futures market May 7, 2012 Expansion of OTC market CSRC Vice Chairman Yao Gang announced at the brokerage innovation conference that China will and introduction of market expand the coverage of trials of the OTC market by allowing qualified individual investors participating making system in the OTC market and introducing a market-making system. May 18, 2012 Treasury bond futures to China Financial Futures Exchange is mulling resumption of treasury bond futures trading, according to be launched Zhu Yuchen, the general manger of the CFFEX. May 22, 2012 Administrative measures The Shenzhen and Shanghai stock exchanges issued the Administrative Measures on Trials of SME on the trial operation of Private Bond Placements high-yield bond of SMEs
Source: Guosen Securities Economic Research Institute
Exhibit 3: Financial reform is expected to focus on five issues
Asset management Sales channel reform Flow-based business Internationalisation Corporate governance
Expanding the product Supporting the Allowing securities firms Expanding the range of Supporting securities range under large-scale development of to determine their financial products sold on firms' cross-border listing collective wealth intermediate services of onshore and offshore commissions and M&A activities management to short- market value listing arrangements term financing, management medium=term notes and Conduct risk Allowing brokerages to Allowing offshore repurchase agreements Allowing brokerages to management system decide its corporate companies' shares and set up buyout funds, reform and further structure and business bonds to be issued and Expanding the product direct investment funds improve the untilization of scope underwritten in China range of small-scale and alternative funds collective wealth investment companies management to all Removing restrictions on Conduct acqusitions for institutions' qualifications Rasing QFII and RQFII products traded on stock Pushing forward the industry integration and locations to set up quotas and accelerate exchanges and inter- normalisation of share purpose, and expand the operating branches the approval process bank market repo and margin time schedule for easing financing competition within the Adjusting the pace and lauched cross-border industry from 2 years to 5 Negotiating product scale of setting up Conducting trials of SME dual-listed ETFs years range with investors operating branches private placement bonds under special wealth according to risk management programme and introducing market reserves Allowing brokerages to making system directly invest offshore Allowing the indirect with its own funds or via shareholding of senior Expanding the product Supporting securities special wealth manamgent and key range under cash Allowing setting up firms to establish OTC management program officers of securities firms management programme accounts on line market targeting at their and direct investment to various bonds own clients
Source: SRC, Guosen Securities Economic Research Institute
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4 Key changes in brokerages’ profit model
4.1 Brokerages will place key focus on developing asset management business
Although currently around 60% of brokerages’ operating revenue comes from brokerage business, we expect their net commission income to decline. This is due to the cancelation of saturation policies governing brokerages’ operating offices and the increase in the number of small branches. (The US government abolished high fixed fees for trading stocks and allowed market competition to dictate commission rates in 1975, and commissions have been declining ever since.) As clients’ demand for wealth management products rises, the main revenue source of brokerages will shift accordingly from brokerage business to the provision of liquidity and investment returns of client assets. Various products relating to market value management (i.e. brokerages help shareholders of listed companies manage their shareholdings), directional asset management (i.e. brokerages enter into agreements with retail clients to invest their assets through designated instruments), buyout funds and direct investment funds will emerge, jostling with banks’ wealth management products as well as IPOs and PE funds for market share.
Exhibit 4: Commission rates in the US’ securities sector Exhibit 5: Commission rates of China’s securities sector are falling have been declining since the US abolished regulations over brokerages’ commission in 1975
0.7 2.5% 250 223 227 2.0‰ 1970s: - 1980s: - 1990s: - 2000s: 1.8‰ 0.6 28% 53% 66% +10% 192 2.0% 200 172 175 1.6‰
0.5 156 1.4‰
150 1.2‰ 0.4 1.5% 111 116 97 1.0‰ 0.3 1.0% 100 0.8‰
RMB bn RMB 74 US$/share 0.2 0.6‰ 0.5% 50 0.4‰ 0.1 0.2‰
0.0 0.0%
0 0.0‰
2007 2008 2009 2010 2011
1970 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Commission income/stock trade turnover (US$/share, Average daily trading volume (RMB bn, LHS) LHS) Commission revenue (RMB bn, LHS) Commission income/stock trade turnover (RHS) Commission rate of transactions of stocks, funds and warrants (RHS)
Source: SIFMA, Guosen Securities Economic Research Institute Source: Wind, Guosen Securities Economic Research Institute
4.2 Asset managers are carving out a niche for themselves in specific areas
The CSRC vigorously promoted third-party deposit and management in 2007 to ensure the safety of clients’ transaction funds and settlement funds, and prevent the illegal appropriation of clients’ funds by brokerages. In 2012, China expanded the product range of brokerages’ wealth management and commission-based businesses, pursuant to which brokerages’ are not only allowed to attract new clients with cash management, pledge-style repos and market value management services, but also permitted to absorb client assets from banks, insurance companies, trusts and funds via third-party wealth management product selling platforms. This is expected to re-allocate the financial assets of retail clients among banks, insurance companies, trusts and funds.
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Exhibit 6: Scale of investment in financial products in 2011
4,500 4,123 4,000 3,500
3,000
2,500
2,000 RMB bn bn RMB
1,500 1,104 1,000 736 500 268 64 0 Investment in banks' Total premium of New issuance of trust and New issuance of public New issurance of wealth management insurance companies' life wealth management in offering funds in 2011 brokerages' wealth products insurance policies in 2011 2011 management products in 2011
Note: Sales of wealth management products by commercial banks reached RMB16.49 trillion in 2011. Assuming the average term is three months, we only take life insurance and collective trust into consideration when calculating investment in banks’ wealth management products and trust funds, respectively. Source: Wind, CNBENEFIT, CIRC, Guosen Securities Economic Research Institute
4.3 Fixed-income and asset-management businesses will become the new drivers for brokerages
Development of China’s bond market will give rise to monopolies. The essence of Goldman Sachs’ business model is: to achieve risk-free returns by establishing a large-scale capital pool and then hedging risks among different clients via frequent transactions. The premise of this business model is: underwriting, asset management and propriety trading operations are managed under a unified system. We expect the business will be monopolised by a few brokerages given its strong scale effects.
Opening up of asset management business and market-making system will benefit capital-intermediate agencies with strong ability to invest. The investment of “seed funds” can expand financial leverage and investment returns both in primary and secondary markets. We expect market-making systems to be firstly launched in the OTC market and then gradually expanded to achieve profits from price differences. To profit from flow-based business, brokerages must have strong investment ability to constantly outperform the broad market.
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Exhibit 7: Overview of flow-based business
Item Description Source of profit Bond pledge-style repo A financing activity where the repo party pledges (brokerage firms) the Brokerages can achieve around 6% return bonds to the reverse repo party (clients), and at the same time the two on investment, of which 3% goes to clients. parties agree that the repo party will return to the reverse repo party the amount of funds at the appointed repo interest rate, and the reverse repo party will return the pledged bonds to the repo party at a date appointed by the two parties in future. Share-repurchase The sale of securities together with an agreement for the seller to buy back Brokerages usually charge 9% repo rate. agreement the securities at a later date. The repurchase price should be greater than the original sale price. The difference effectively represents interests. Margin trading Investors provide collaterals to securities firms to borrow funds for Brokerages usually charge 3% higher than purchasing stocks or borrow stocks for selling purpose, and pay back one-year lending rate. The rate currently is securities firms later with interest. 9.56%. Direct investment fund Direct investment firms, as managers, raise funds publicly to acquire Direct investment firms, as managers, non-listed companies’ shareholdings, and withdraw the funds after their charge 2% management fee and take 20% listings. of the profits as commission. Margin and cash Securities firms offer cash management products to brokerage clients, who The investment yield is usually 4.80%, of management can buy these products through margins. The funds generated will be which 3% goes to clients, and the remaining mainly invested in banks’ agreement deposits. 1.8% goes to securities firms. Market-making Securities firms constantly quote both buy and sell price of a certain stock, Brokerages profit from price spreads, which and take public investors’ offers to buy or sell the stock at the price quoted, are normally capped at 5% of the stock using its own funds and stocks. prices. Source: Wind, Guosen Securities Economic Research Institute
Exhibit 8: Development plan of China’s bond market Exhibit 9: Fixed-income business contributed over 50% to Goldman Sachs’ total revenue in 2007
Category Development plan Underwriting of 27% bonds Market To establish an unified and interconnected bond market building FICC trading and commissions To launch high-yield bonds (SME corporate bonds) 3% 11% Underwriting of To popularise assets securitisation securities 6% Stock trading and To launch interest-rate swap derivatives commissions 10% 38% Assets To expand the coverage of mock trading of treasury bond management fees futures Securities System To launch ”quotation + tendering” pricing system 5% services reform Financial To marketwise the issuance of corporate bonds (from consulting approval to registration) Fixed income business 43% Source: CSRC, Guosen Securities Economic Research Institute Source: Wind, Guosen Securities Economic Research Institute
5 Flow-based service providers represented by Goldman Sachs
Goldman Sachs aims to provide liquidity to clients via its flow-based business and profits from the price spread of a certain asset between different markets, investors and timing. It also generates profits from market making and arbitrage practice, and uses quantitative models to hedge against the risk of loss in the value of its inventories. The business model requires companies to set up large-scale asset pools and to participate in the market-making of various securities, including bulk commodities, credit products, currencies, interest-rate instruments and mortgage-backed products. Goldman Sachs is one of the tier-1 brokers of government bonds of major economies, including the US, UK and Japan. It is also a member of major stock exchanges qualified to trade in inter-bank money markets of New York, London, Tokyo and Hong Kong.
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Exhibit 10: Coverage of Goldman Sachs’ market-making trading
Item Description Including products and derivatives from various commodities, such as Bulk commodities crude oil, metals, natural gas, electricity and forestry. Including credit derivatives, investment grade corporate bonds, high-yield Credit products bonds, government bonds, investment in emerging markets and secondary debts. Providing monetary operation services to clients in international cash and Currencies derivatives market. Including interest-rate swaps, options and other derivatives, government Interest rate bonds, and monetary market instruments, e.g. commercial bills, T-bills, instruments repurchase agreements as well as other highly liquid securities and investment instruments. Dealing with loans relating to various commercial mortgages and Mortgage-backed residential mortgages as well as other assets-backed investment products instruments; initiating and providing commercial and residential mortgage-backed collateral services.
Source: Goldman Sachs’ annual report, Guosen Securities Economic Research Institute
6 Asset management intermediary agencies represented by Charles Schwab
6.1 Charles Schwab transformed from a discount broker to an asset manager in 20 years since 1991
Schwab’s assets under management grew at a 15.45% CAGR in 1995 to 2010. Schwab adopts the following measures to preserve client assets and to develop new customers: lowering commission rates, paying interests on clients’ idle funds and introducing third-party research and information services etc. As the growth of Schwab’s new clients has slowed since 2000, Schwab has been expanding the scale of assets under management for each client to offset the negative impact.
Exhibit 11: Schwab’s assets under management (Unit: US$ bn) Exhibit 12: Schwab’s commission rate (Unit:US$)
1,500 US$ bn 80 US$
1,200 60
900 40 600
20 300
- - 1995 1998 2001 2004 2007 2010 1995 1998 2001 2004 2007 2010
Client assets (US$ bn) Average commission per trade (US$) Source: Company data, Guosen Securities Economic Research Source: Company data, Guosen Securities Economic Research Institute Institute
6.2 Turning brokerage fees to asset management fees on the premise of enhancing the value of client assets
In 1992, Charles Schwab launched Mutual Fund OneSource, which is a one-stop fund investment service. It enables clients to purchase various funds without any conversion
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costs and deposits them under just one account. Assets under management of Schwab’s OneSource business grew at a CAGR of 52% in 1991-2000. Profits of the Mutual Fund OneSource business mainly comes from charges paid by fund companies, with the average management fee rate standing at 0.27%-0.33%.
Exhibit 13: Structure of Schwab’s revenue during the period of its wealth management business restructuring
2% 2% 2% 1% 2% 2% 5% 3% 3% 3% 3% 4% 4% 3% 4% 4% 4% 4% 3% 3% 3% 3% 1% 2% 2% 2% 9% 11% 10% 6% 4% 4% 3% 11% 11% 18% 15% 13% 14% 17% 11% 11% investment: 9% 7% 12% 12% 22% 22% 21% 26% Investment: 7% 8% 21% 24% 21% 10% 8% 7% 27% 7% 6% 8% 27% 31% 29% 30% 15% 18% 40% 19% 16% 21% 18% 41% 42% Brokerage: 51% 11% 28% 10% 8% 10% 11% 51% 53% 52% 6% 8% 10% Brokerage: 57% 8% 61% 59% 10% 65% 15% 9% 10%
47% 8% 43% 45% 45% 46% 45% 46% 45% 43% Asset management: 8% 7% 7% 39% 43% 7% 29% 27% 27% 4% 5% Asset management: 15% 15% 17% 19% 10% 10% 10% 8% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Asset management fees Net interest earned on client funds in brokerage accounts Commission income Net interest on investment Capital investment Other revenue
Source: BCG, Guosen Securities Economic Research Institute
Exhibit 14: Assets under management of Schwab’s OneSource Exhibit 15: The share of management fee from Schwab’s grew rapidly OneSource in its total revenue increased
120 20% 100 US$ bn 15% 15% 80 13% 13% 12% 11% 11% 11% 60 10%
40 7% 7% 6.00% 6.00% 6% 5% 5.00% 20
0 0%
1993 1994 1995 1996 1997 1998 1999
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Share of Onesource assets management fees in total … Client assets of Onesource Source: Company data, Guosen Securities Economic Research Source: Company data, Guosen Securities Economic Research Institute Institute
7 Adapt rapidly to beat the competition
7.1 Changes in corporate structure is the premise of improving business structure
Financial reform requires brokerages to diversify and differentiate their operations. Therefore, many changes will be required, i.e, their profit models should be more client oriented rather than sales oriented; headquarters will play more dominant roles than
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operating offices; the brokerage firms’ internal cooperation will be more crucial for competing in the market; and platform construction will also be crucial for their development.
Brokerages will serve both retail and institutional clients through their extensive operation network. Specialised teams will individually take responsibilities for investment banking, asset management and fixed-income businesses, and collectively support the customer-service system. Operating platforms will be considered as the most important competitive edge at the final stage of China’s financial reform.
Exhibit 16: Brokerages’ ability to modify corporate structure will impact their future development under China’s financial reform
Brokerage (retail, institutional)
Share placement Product allocation Product allocation Product allocation Third-party wealth Business support Investment banking Asset management Fixed income Propriety trading management
Brokerage Research, IT, risk management, auditing, financial management, human resource (retail,institutional)
Source: Wind, Guosen Securities Economic Research Institute
7.2 Effective incentive mechanism laid a solid foundation for business development
Goldman Sachs’ partnership structure has been playing a crucial role in its success for over 130 years. As suggested in the 11th proposals made at the national brokerage innovation conference, senior management and key officers of securities firms are expected to indirectly hold their respective companies’ shares through a trust scheme. This will create a favourable environment for brokerages to attract talent and improve their competiveness.
7.3 Re-establishing corporate culture is inevitable for brokerages
Changes in brokerages’ business models require them to re-establish their corporate culture, which is the root of a company’s presence. A good example comes from Goldman Sachs: the ultra-flat organisation structure has successfully planted the idea of “client comes first” and team spirit in every employee’s mind.
7.4 Achievements of domestic brokerage firms
CITIC Securities’ fixed-income securities trading platform began to take shape. As mentioned above, going forward, fixed-income business, which has strong potentials, will be monopolised. Companies with strong financial background and well-developed underwriting, asset management and proprietary trading operations are more likely are expected to stand out. Therefore, CITIC Securities has clear competitive advantages as it has already established a good reputation in terms of bond underwriting business. To strengthen the synergy effect of its underwriting, asset management and propriety trading operations, the company has implemented a job rotation programme for relevant officers. We believe the company’s fixed-income business will further improve.
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Exhibit 17: Scale of corporate bonds and convertible bonds Exhibit 18: Market share of corporate bonds and convertible underwritten by CITIC Securities (Unit: RMB bn) bonds underwritten by CITIC Securities (Unit: %)
40 37.8 25% RMB bn 35 30.5 20% 19.55% 30 23.3 25 22.5 15% 20 15.6 11.77% 15 10% 7.56% 10 5% 5.73% 5.38% 5 0 0% 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011
Scale of corporate bonds and convertible bonds underwritten Market share of corporate bonds and convertible by CITIC Securities (Unit: RMB bn) bonds underwritten by CITIC Securities
Source: Wind, Guosen Securities Economic Research Institute Source: Wind, Guosen Securities Economic Research Institute
China Merchants Securities’ “E-Stop” model for account opening and centralised operation, and its “Zhiyuan Wealth Management” service have provided a unified product mix and service platform for its sales department. The wealth-management team under China Merchants Securities’ private banking department is in charge of product review, client segmentation, as well as working together with the research team to provide unified information to clients. The “E-Stop” model, on the other hand, connects all of the company’s operating branches and thus allows the company to offer clients with one-stop services, which helps the company to secure a leading position in terms of provision of standardised services.
Southwest Securities strengthens asset-management products and market value management services to reach more clients. The company is working with Chongqing Rural Commercial Bank to launch wealth management products that normally use discounted notes as the major instrument. Southwest targets assets under management to reach RMB10 billion by the end of 2012. Going forward, the company will secure client assets, achieve investment returns and expand their asset pool by selling its asset-management products and third-party wealth management products to them. Besides, the company launched tailor-made market value management products targeting substantial shareholders of listed companies in 2011, and has gained valuable experience since then.
Orient Securities has already established a distinctive competitive edge in terms of asset management business. Assets under collective wealth management (i.e. combine all the funds of retail clients) of Orient Securities amounted to RMB8.7 billion, which is the largest in the industry after Guotai Junan Securities and CITIC Securities, occupying 6.5% of the market share. The company has been at the head of the industry in terms of absolute investment returns since 2006, and has firmly established its brand given its stable management team and clear investment target.
Guosen Securities (HK) 12 Bespoke translation by Guosen Securities (HK) Brokerage Co., Ltd. strictly for use by its clients only
Brokerage & Securities Sector June 1, 2012| China THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON JUNE 1, 2012.
Exhibit 19: Assets under collective wealth management and market share of China Orient Asset Management Corporation
April Item 2005 2006 2007 2008 2009 2010 2011 2012 Assets under collective wealth management (RMB mn) 687 2,414 1,957 2,508 4,725 8,406 9,058 8,660 Market share of collective wealth management (%) 7.01 8.15 2.50 5.68 4.88 6.24 6.46 6.45 Market share ranking 7/10 4/14 10/14 8/19 6/31 5/50 3/60 3/63 Number of products as at the end of the year/ period 1 2 1 2 4 12 18 18 Source: Guosen Securities Economic Research Institute
8 Our top picks
CITIC Securities (600030 CH): being the initiator and active participant in China’s capital market reform, the company is well positioned to develop flow-based businesses. Besides, the company also enjoys a clear competitive edge given its well-established brokerage business channel and strong capital strength. As at the end of 1Q2012, the book value of the company’s funds available for investment reached RMB77.4 billion. We expect the company’s leading position to be strengthened by the expected financial reform. Based on the above and given the company’s lower-than-peers 2012 prospective PB of 1.77x, we maintain our Buy rating on CITIC Securities.
Haitong Securities (600937 CH): the company follows prudent operating principles and has raised sufficient funds from the previous two financing activities. As at the end of 1Q2012, the book value of the company’s funds available for investment totaled RMB53.3 billion. It occupies a leading position in terms of margin financing and investing in derivatives. The company’s prospective 2012 PB ratio stands at 1.71x, lower than the industry average. Therefore, we maintain our Buy rating on Haitong Securities.
Southwest Securities (600369 CH): We hold a positive view towards the company’s new management team and its development plan. With strong support from the government, we believe the company will be a dark horse among domestic brokerages. We reiterate our Buy rating on the company on its prospective 2012 PB ratio of 2.66x, while the industry average is expected to be 2.49x.
Exhibit 20: Earnings forecasts and valuations of key companies
Closing EPS (RMB) PE (x) PB (x) Ticker Company Rating price (RMB) 2010 2011 2012E 2010 2011 2012E 2012E 600030.CH CITIC Securities Buy 13.88 1.03 1.14 0.40 13.52 12.16 34.75 1.77 600837.CH Haitong Securities Buy 10.63 0.39 0.33 0.46 27.27 32.40 23.22 1.71 600369.CH Southwest Securities Buy 12.25 0.35 0.11 0.34 35.33 108.31 36.01 2.66 601688.CH Huatai Securities Cautious Buy 11.83 0.61 0.32 0.43 19.34 37.13 27.53 1.90 000776.CH GF Securities Cautious Buy 33.03 1.36 0.70 1.10 24.28 47.37 30.00 2.93 601788.CH Everbright Securities Cautious Buy 14.80 0.64 0.45 0.59 22.99 32.75 25.05 2.24 600999.CH China Merchants Securities Cautious Buy 13.45 0.69 0.43 0.55 19.42 31.22 24.48 2.34 000562.CH Hong Yuan Securities Cautious Buy 17.89 0.66 0.33 0.60 27.20 55.04 29.99 2.33 000686.CH Northeast Securities Cautious Buy 18.98 0.82 -0.24 0.28 23.02 - 67.59 3.72 000728.CH Guoyuan Securities Cautious Buy 12.02 0.47 0.29 0.46 25.52 41.95 25.91 1.52 000783.CH Changjiang Securities Cautious Buy 10.38 0.54 0.18 0.43 19.18 56.58 24.10 2.00 600109.CH Sinolink Securities Cautious Buy 15.41 0.44 0.23 0.33 35.16 66.53 46.58 4.44 Source: Guosen Securities Economic Research Institute
Guosen Securities (HK) 13 Bespoke translation by Guosen Securities (HK) Brokerage Co., Ltd. strictly for use by its clients only
Brokerage & Securities Sector June 1, 2012| China THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON JUNE 1, 2012.
Information Disclosures
Stock ratings, sector ratings and related definitions Stock Ratings: Buy: Indicates that the analyst expects the stock to outperform the Benchmark by 20% or more over the next six months. Cautious Buy: Indicates that the analyst expects the stock to outperform the Benchmark by 10% or more but less than 20% over the next six months. Neutral: Indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 10% over the next six months. Reduce: Indicates that the analyst expects the stock to underperform the Benchmark by 10% or more over the next six months.
Sector Ratings: Buy: Indicates that the analyst expects the sector to outperform the Benchmark by 10% or more over the next six months. Cautious Buy: Indicates that the analyst expects the sector to outperform the Benchmark by 5% or more but less than 10% over the next six months. Neutral: Indicates that the analyst expects the sector to either outperform or underperform the Benchmark by less than 5% over the next six months. Reduce: Indicates that the analyst expects the sector to underperform the Benchmark by 5% or more over the next six months
Disclaimers This report is based on public data. Guosen does not warrant the accuracy and completeness of the information contained herein. This report is published solely for reference purposes and shall in no way be construed as a solicitation or an offer to buy or sell securities or related financial instruments stated herein. Guosen and its employees do not accept responsibility for any direct or indirect losses arising from the use of this report. Guosen or its affiliates may hold or trade securities issued by the companies mentioned in this report, and provide or seek to provide investment banking services for these companies. All rights of this report are reserved by Guosen. Without the prior written consent of Guosen, no one may copy, reproduce or publish part or whole of this report.
Guosen Securities (HK) 14 Bespoke translation by Guosen Securities (HK) Brokerage Co., Ltd. strictly for use by its clients only