China Brokers Sector:Multiple brokerage accounts to lead to likely margin decline

China Clear published an updated, Securities Account Management Rules, with two main changes: (1) removed the clause of “only allow one individual/legal person to have one securities account for one type of purpose”; and (2) lowered the account opening charge which is to be implemented from 1 October 2014.

    Currently the individual investors could only have one brokerage account with one broker in China. The potential multiple accounts would introduce competition which would put further pressure on the commission rate (been declining for the past several years as shown in Fig 1). We highlight online brokers including SinoLink Securities (partnered with Tencent) is charging a commission rate as low as 2 bp vs. 7.5 bp for industry.

    We think the commission rate will continue to be under pressure and highlight that a 0.5 bp rate drop implies 7%/6%/4% of earnings impact on Galaxy/Haitong/Citic. The main risk is the recent strong trading volume (ADT Rmb300 bn) to sustain.

    The Chinese brokers are trading at 1.5-1.8x P/B, expensive compared to its global peers. We maintain NEUTRAL on Haitong and Galaxy and UNDERPERFORM on Citic due to slow ROE improvement.