China Brokerage Slump May Extend as Retail Investors Flee

(Bloomberg) -- Chinese brokerages may continue to plunge as retail investors flee the nation’s sinking stock market, underscoring the need to diversify business.

Shares of the five largest brokerages have dropped as much as 26 percent this year and analysts are shaving off 2018 profit forecasts after they posted their worst first-half earnings since 2015. About 95 percent of stock trading accounts in Shanghai and Shenzhen were for retail investors at the end of 2017, leaving brokers vulnerable to swings in sentiment as the market entered bear territory.

The volatility shows how crucial it is for local brokerages to boost resilience by widening their client base. Termed by local media as a “rice bowl that depends on the weather,” the securities industry suffered as volume dropped amid the rout and their business models weren’t equipped to cushion the blow from authorities’ crackdown on risky lending.

“The focus of regulators to control risks from the market slump and putting the brakes on market development opportunities is a headwind for brokers,” said Sharnie Wong, a senior analyst at Bloomberg Intelligence. “Brokerage is still the largest revenue driver for the sector, so we will need to see signs of a stock market recovery before turning positive.”

China Brokerage Slump May Extend as Retail Investors Flee

The Shanghai Composite Index is the second worst performer among 95 global equity indexes tracked by Bloomberg and daily trading volumes dropped below 100 billion yuan ($14.5 billion) four times since August. The last time buying and selling fell so low was January 2016, when the trading day lasted only 20 minutes because the market-wide circuitbreaker was triggered. China’s average daily stock-market turnover in July to September was 302 billion yuan, 41 percent lower than a year earlier.

GF Securities Co., Guotai Junan Securities Co., Huatai Securities Co., and Haitong Securities Co. had their 2018 earnings-per-share estimates cut by between 23 percent to 34 percent. Citic Securities Co.’s was cut by 9.1 percent.

Citic and Huatai didn’t reply to emails seeking comment. Guotai Junan and GF declined to comment but pointed to interim results statements where underperformance was attributed to sluggish market conditions and the government’s deleveraging campaign. Calls to Shenwan Hongyuan Securities’ office were unanswered.

China Brokerage Slump May Extend as Retail Investors Flee

Heightened financial scrutiny and fallout from the U.S.-China trade war has led to poor performance of recent technology initial public offerings in Hong Kong and risks drying up the supply of investment banking deals. The average forward price-to-earnings ratio for the 10 largest Hong Kong-listed brokers was 12.2 times at the end of September versus 10.6 times at end-August.

“For Chinese brokers, which derive the bulk of revenue from stock trading, the souring sentiment really weighed on them,” said Kenny Wen Kit, a strategist at Everbright Sun Hung Kai, the Hong Kong unit of Everbright Securities Ltd. In contrast, Hong Kong subsidiaries “are better off, indicating diversification and internationalization is the way to go,” he said.

©2018 Bloomberg L.P.