China brokerages' stock surge of 54% may be running out of steam

Shanghai

CHINA'S brokerages are on pace for their best quarter since 2014, though a rare sell call is a sign the rally may be topping out.

CSC Financial Co's rating was cut to sell from accumulate by Huatai Securities Co on March 8, based on the risk that the stock was "overvalued" following its almost 220 per cent surge this year.

Its valuation as measured by the price to book ratio is 4.97, outstripping the 1.78 measure for a broader Bloomberg gauge of China-listed brokerages, which in turn has risen to align with its 1.73 three-year average.

"I don't see this wild surge going too far," said Vincent Hsu, a Taipei-based fund manager at Fuh-Hwa Securities Investment Trust Co. "The prices of some brokers have reached the peak of 2015, and they're not that cheap."

Shares of Chinese securities firms were bashed in 2018, amid concern that authorities' crackdown on risky financing and the trade war with the US would hurt business.

They saw a turnaround this year, however, as the government took steps to spur demand for local stocks and on speculation that policymakers are pushing for consolidation.

The sector has risen 54 per cent this year, more than the Shanghai Composite Index's 21 per cent advance. CSC Financial paces gains on the domestic CSI 300 Index and Chinese brokerages dominate the top 10 spots on Bloomberg's gauge of Asia-Pacific financial companies.

The surge has swelled the market cap of 34 China-listed securities firms to S$367 billion, nearly five times the value of Goldman Sachs Group Inc, according to data compiled by Bloomberg. Yet, the group's combined profit for the past 12 months is only about 11 per cent bigger than Goldman's.

Risks are also building up as the sector prepares for an influx of new competition as China opens its market to foreign companies.

UBS Group AG was the first overseas firm to win approval to raise its ownership in a local securities venture to 51 per cent under new rules. Nomura Holdings Inc and JPMorgan Chase & Co have also filed applications for majority ownership in securities ventures. BNP Paribas SA plans to expand its China operations to include brokerage, futures trading and wealth-management ventures. Fuh-Hwa Securities' Mr Hsu said local reasons, such as optimism surrounding a planned new trading venue for technology stocks, won't be enough to boost investment-banking revenues.

Competition among brokers has kept deal fees very low, he said. Huatai Securities, which downgraded CSC Financial, predicts the stock could decline more than 50 per cent over the next year.

"For local players to grow into the size of bulge bracket investment banks, they may still need quite a long time," said Chi Man Wong, an analyst with China Galaxy Securities Co. BLOOMBERG