CITIC Securities: The securities industry recommends focusing on two main investment themes

CITIC Securities research reports believe that by 2025, profits in the securities industry will reach a record high, but stock price performance will still lag significantly behind previous bull market cycles. Reviewing history, the industry has experienced a progression from “single brokerage business-driven” to “innovative businesses opening up incremental space,” and then to “policy cycle-driven business cycles.” During the 14th Five-Year Plan period, the industry is expected to enter a new stage of “leverage-driven ROE improvement,” with four major marginal changes: ROE shifting from “continuous decline” to “gradual increase,” development moving from “focusing on expansion and innovation” to “deepening existing assets,” the landscape shifting from “diverse and competitive” to “supporting the strong and limiting the weak,” and operations transitioning from “volatile” to “steady growth.”

We recommend focusing on two main investment themes: 1) Leading investment banks with the ability to increase market share, net profit margin, and leverage—“carrier-level” brokerages; 2) Mid-sized securities firms that are expected to rise into the top tier through mergers, acquisitions, and refined operations.

Full Text Below

Securities | Grasping Core Transformation Directions to Rebuild Industry Investment Value

By 2025, profits in the securities industry will hit a historic high, but stock price performance will still show a clear gap compared to previous bull market cycles. Reviewing history, the industry has gone through three phases: “driven by single brokerage business” (2003-2011), “innovation and expansion of new businesses” (2012-2017), and “policy cycle-driven business cycles” (2018-2025). During the 14th Five-Year Plan period, the industry is expected to enter a new stage of “leverage-driven ROE enhancement,” with four key marginal changes: ROE shifting from “continuous decline” to “gradual improvement,” development moving from “focusing on expansion and innovation” to “deepening existing assets,” the landscape shifting from “diverse and competitive” to “supporting the strong and limiting the weak,” and operations moving from “high volatility” to “steady growth.”

Review of Past: Three-Stage Evolution, Deep Iteration of Profit Models and Policy Impact

Looking back at 2003-2025, the securities sector has experienced three waves of investment logic evolution: 1) 2003-2011 (brokerage-driven period): characterized by a high-ROE, light-asset phase, with fundamental performance driven strongly by trading volume and high commission rates, and scarcity of targets boosting stock price elasticity; 2) 2012-2017 (innovation and capacity expansion period): the “Innovation Conference” marked the start of a heavy-capital business development cycle, with internet operations breaking physical branch limitations for client acquisition, and stock prices driven jointly by fundamental elasticity and policy easing expectations; 3) 2018-2025 (policy-driven period): the industry’s heavy-asset characteristics became established, leading to decreased ROE elasticity, with regulatory cycles becoming the core factor influencing alpha in the industry.

Review Conclusion: Declining ROE Elasticity, Fluctuating Policy Expectations, and Surge in Listed Targets Are Key Reasons for Industry Valuation Pressure

1. The industry’s shift to heavy assets and the pressure on fee rates for light-capital businesses have reduced ROE elasticity, causing the sector’s ROE during bull markets to no longer significantly outperform other sectors; 2) Increasing influence from policy and clear cyclical patterns make it difficult to establish stable growth expectations for business development. During periods of strict regulation, brokerages face multiple challenges in fundamentals and capital; 3) The surge in listed targets has eroded the scarcity value of industry assets, with small and medium institutions exhibiting low capital utilization efficiency, further lowering industry average return on capital.

Future Outlook: “Four Changes” Expected During the 14th Five-Year Plan Period to Rebuild Industry Investment Value

ROE is expected to shift from “continuous decline” to “gradual improvement,” with leverage increases reshaping the ROE core. The rise in leverage is likely to become the central logic of valuation restructuring. Domestically, risk control metrics optimization and macro regulatory guidance are easing leverage restrictions, with the securities industry expected to improve ROE through derivatives and other client-demand-driven businesses that boost equity multipliers; internationally, leading brokerages are experiencing rapid growth in global operations with significantly higher operating leverage—some subsidiaries achieving annualized ROE over 20%. With these factors, we project that during the 14th Five-Year Plan, the industry’s ROE median could rise from 7-8% to over 10%, with top brokerages potentially increasing from 8% to over 12%.

Development will shift from “focusing on expansion and innovation” to “deepening existing assets,” improving per-client value through deep service. China’s capital markets now cover investor proportions close to U.S. levels, but the allocation of stocks and funds within household assets still has over a 100% room for growth, offering significant potential for wealth management and related services. Based on this, we believe domestic securities firms can accelerate their pursuit of top-tier international investment banks, moving from current per-client profits of around 1,000 RMB to approximately 3,000 RMB, breaking out of the light-asset fee rate decline trap and improving ROA.

The landscape will evolve from “diverse and competitive” to “supporting the strong and limiting the weak,” with M&A and restructuring optimizing capital efficiency. Since 2018, excessive IPOs and refinancing by low-ROE institutions have become major drag factors on capital utilization. According to company reports and Wind data, 44% of refinancing projects over the past five years saw ROE three years post-financing never exceeding the level at the time of financing. To build a leading industry with 10 comprehensive institutions over the next five years and 2-3 top international investment banks by 2035, M&A and restructuring are expected to be the core pathways to reshape the industry landscape, accelerating capital concentration among top firms and improving capital operation efficiency.

Operations will shift from “high volatility” to “steady development,” with client-demand services reducing profit fluctuations. The 14th Five-Year Plan emphasizes “actively developing direct financing such as equity and bonds, and steadily developing futures, derivatives, and asset securitization.” Regulatory authorities will continue to promote more refined and inclusive countercyclical adjustments, stabilizing policy expectations. On the operational side, as seen in the 2024 annual reports and mid-2025 semi-annual reports, leading brokerages are steadily transforming away from directional trading, with reduced investment income volatility, stable asset business yields around 2%, and gradually diminishing market volatility impacts on performance. Based on this, we believe the industry’s long-term investment value can be gradually established.

Risk Factors:

• Delays or underperformance in deepening reforms and policy implementation in capital markets
• Significant fluctuations in equity markets leading to lower investment returns
• M&A and restructuring outcomes falling short of expectations
• Obstacles to international expansion and risks in overseas markets
• Downward pressure on fees due to stock of competition
• Excessive refinancing leading to industry risks

Investment Strategy:

From a ROE perspective, both domestic and international businesses contribute leverage growth; deepening existing services can steadily improve ROA; M&A and restructuring can enhance capital efficiency; stable policies and operations can reduce performance volatility. The sector’s investment value is expected to be reshaped during the 14th Five-Year Plan. We recommend focusing on two main investment themes: 1) Leading investment banks with the ability to increase market share, net profit margin, and leverage—“carrier-level” brokerages; 2) Mid-sized securities firms that are expected to rise into the top tier through mergers, acquisitions, and refined operations.

(Article source: Daily Economic News)