Equity Research·Industry Research·Securities II Industry Securities II Industry Research 1 / 41 东吴证券（香港） 请务必阅读正文之后的免责声明部分 [Table_Main] Securities companies’ valuations approach historical low - time to accumulate Outperform (Maintain) Investment Thesis ◼ Boom-bust cycle keeps repeating itself. We reviewed six bull rallies of the securities industry. 1) The securities industry focus has gradually changed from asset-light businesses such as brokerage to asset-heavy businesses such as investments. The total net assets of securities industry expanded from 0.36 trillion to 2.57 trillion rmb in 2008-2021 (CARG is 16.32%). The percentage of brokerage revenue to the total dropped from 71% to 31% during 2008-2021 because of commission rate decline, while the percentage of capital-heavy business such as investment to the total increased from 22% to 48% in the same period. 2) The securities sector outperformed the broader market as bellwether in six securities bull rallies, and its valuation advancement often preceded earnings improvements. Historical similarities at the beginning of 6 securities bull rallies: ① 2 to 4 times RRR cuts (range between 1% to 4%) and interest rate cuts (range between 50 to 200 bps) boosted liquidity in the capital market. ② The link relative ratio of equity fund trading volume turns positive, and YoY newly issued fund scale maintains stable growth. ③ The securities industry is more likely to reverse when its PB historical quantile falls below 10%. ◼ Favorable policy expectations and undervaluation decides securities sector’s prominent allocation value. 1) Market liquidity and policies will perk up: The economy is under pressure due to the pandemic shock, and thus favorable policy expectations have strengthened. RRR and interest rate cuts will improve market liquidity, while favorable policies may broaden the business scope of securities companies. 2) Capital market sentiment is rebounding: The link relative ratio of equity fund trading volume has turned positive, investors’ sentiment has improved, and margin transactions have increased. 3) The fundamentals of the securities sector are stable and improving: The leverage ratio of listed securities companies has increased from 1.23 to 3.98 during 2008Q3~2022Q1, and the ROE core has steadily risen to nearly 10% in recent years. With the promotion of wealth management and innovative businesses, the ROE core will continue to rise. 4) Improving fundamentals and undervaluation lead to a significant allocation value for the securities sector: Since the beginning of 2022, the securities sector has underperformed the CSI 300 Index, and its valuation has fallen to the bottom of the past two decades. The performance of securities sector missed expectations due to the market downturn in 2022Q1, but the risk of stock pledge also declined sharply. We suggest investors to accumulate the securities sector due to its undervaluation and better fundamentals compared to that in 2018. ◼ Stock watchlist: 1) Internet retail wealth management leader: Eastmoney(300059). With the growing wealth management business, Internet retail securities leader will benefit from the Matthew effect. 2) Comprehensive securities leaders: Citics(600030), CICC(601995). The comprehensive securities leaders have significant advantages in capital utilization efficiency with current undervaluation and obvious long-term alpha. 3) Securities companies with equities of public offering of funds: GF(000776), DFZQ(600958). The securities companies with equities of public offering of funds have strong performance elasticity during the golden period of equity market development. 4) Growth securities companies with special features: Internet brokerage, Chinalin(002945); Securities company with rapid growing investment advisory business, Guolian(601456). ◼ Risks：Macroeconomic downturn; the market trading activity declines; the recurrent pandemic; innovative policies in securities industry are lower than expected. [Table_PicQuote] Industry Performance [Table_Report] Related reports 《Market cycle downturn impact the public offering of funds, while Tiantian Fund has significant advantages》 2022-05-08 《Self-operation dragged down performance, and valuations approached the bottom of history》 2022-05-02 《Securities industry: 2021 annual report review and 2022 first quarter report preview: with accelerating wealth management transformation, we are optimistic about the resilience of leading securities companies》 2022-04-05 Soochow Securities International Brokerage Limited would like to acknowledge the contribution and support provided by Soochow Research Institute, and in particular its employees Xiang Hu(胡翔), Jieyu Zhu(朱洁羽), Yuxiang Ge(葛玉翔), and