China Securities Brokerage:Booming volume boosted earnings
Catalyst:
Trading value to rise further on lower-than-2007 turnover ratio. The benchmarkShanghai Composite Index, which had rocketed 53% last year, surged another 36%year to date, with trading volume up 68%. The last time mainland market achievedsuch a high turnover was back in the 2007 bull market. We compare current A+Bmarket turnover ratio versus the peak time in 2007 to see the sustainability of thecurrent rally. The average daily turnover ratio hit its highest level in 2007 at 4.3%,whereas the number was only averaged at approximately 2.8% recently. Based onour estimates, every 0.1% change in turnover ratio will lift up trading amount by3.4%. We think trading value can potentially reach RMB1.78trillion per day,assuming RMB48.1 trillion A+B tradable market cap and 3.7% turnover ratio. If Ashare securities brokerage achieved our bull case criteria, the trading value is likelyto reach RMB1.96 trillion, versus current average value of RMB1.3 trillion.
Margin financing to push trading volume to new highs. We see margin financingas another growth driver for trading volume as margin financing allows equity tradersto take leverage position. The amount of margin financing had increased multifold inone year and contributed almost 25% of total earnings of Chinese brokers in 2014.
Despite stricter curbs on margin trading, outstanding margin loans were at arecord RMB1.7 trillion as of April 20, 2015, up 68% in less than four months. AfterChinese government clarified that those restrictions on illegal margin financing is notto stop market rally last Saturday, we expect demand for margin trading continuousto come, which will push trading volume to new highs.
Chinese brokerages stand to benefit from rising turnover. As Chinesebrokerages derive 60% plus revenue from equities trading, trading volume can be astrong driver for brokerages earnings growth. As shown in Figure 4, brokeragesdid badly in 2008 when the market fell and turnover shrink 42% yoy. After a shortrebound in 2009, China brokers’ performance was all way down to a 6-year low untiltrading volume entered into turning point in 2013. Chinese brokers’ net income thensoared 34%/119% in 2013/2014, as driven by a 49%/59% increase in tradingamount. With even greater booming in trading volume in early 2015, we expectChinese brokerage’s earnings to maintain its rapid growth in FY15F. The two biggestmainland brokerages Citic (600030CH) and Haitong securities (600837CH)reported their 1Q FY15 net income at RMB2.60bn/3.17bn, up 98%/162%respectively.
Our view。
While market volatility will remain as the swing factor, we see plenty upside fortrading turnover growth when compared the current velocity with that of the last peaktime. Other than the surge in trading volume, catalysts include more IPOs, boomingmargin financing and asset securitization all point to a sector re-rating on Chinesebrokers, which are currently trading at 3.0x FY15F PBR, versus the historical high of6.6x PBR in 2007.