Eastern Securities: How to View the Current Divergence Between Brokerage Performance and Valuation?

Eastern Securities released a research report stating that since early 2025, policy tone has been positive, with reductions in reserve requirements and interest rates benefiting market liquidity. Continuous inflows of medium- and long-term funds are boosting market confidence. The firm believes that in 2026, market activity is expected to remain high, driven by risk appetite recovery and the implementation of capital market reforms. With macro policies taking effect and the economy continuing to recover, coupled with ongoing efforts in capital market policies, market trading activity is expected to stay active. Recently, equity markets have experienced volatility, but major stocks and bond indices are likely to continue their upward trend. Performance recovery and M&A restructuring may still be the main industry themes.

Eastern Securities’ main views are as follows:

Looking back at history, large-scale rallies in the brokerage sector are usually not triggered by a single catalyst but develop gradually as valuation, policy, and macroeconomic factors improve together.

The firm believes that the sector’s price-to-book (PB) ratio has fallen to historically low levels, indicating that pessimistic expectations are already well priced in. Under the current downward trend in interest rates, policies aimed at stabilizing growth and stimulating active capital markets continue to exert influence, which may help restore risk appetite and attract incremental funds, thereby boosting trading volume, margin financing activity, and profitability. As of now, the brokerage sector is still in the phase where fundamentals have begun to recover, but valuations continue to decline. Since 2024, the ROE of listed brokerages has gradually improved from 5.95% to 8.13% as of September 2025, a year-over-year increase of 2.76 percentage points. Meanwhile, the sector’s PB (MRQ) remains around 1.33x, significantly below the valuation center during periods of profit growth, leaving room for valuation to recover from ROE improvements. Since July 2025, trading volume in Shanghai and Shenzhen has remained high, with market activity notably above the first half of the year. At the same time, new account openings have generally rebounded, and margin financing balances have continued to rise since September 2024, reflecting a recovery in investor participation and leverage risk appetite. Overall, the indicators of trading volume, new accounts, and margin financing all point to improved market activity, providing a solid foundation for sustained benefits in cyclical businesses such as brokerage, capital intermediaries, and proprietary trading.

In terms of performance, listed brokerages have entered a phase of moderate revenue recovery and accelerated profit release, laying a solid foundation for ROE improvement.

Nine months into 2025, 43 A-share listed brokerages achieved operating revenue of 420.3 billion yuan, up 12.9% year-over-year; net profit attributable to shareholders was 168.6 billion yuan, up 64.2%. Profit elasticity is significantly stronger than revenue growth, mainly due to the recovery in net profit margin. The industry’s net profit margin in 2024 was 28.8%, rising to 40.1% by September 2025, indicating continuous improvement in profitability quality and likely to solidify ROE growth.

From a business perspective, the current performance recovery of brokerages is mainly driven by proprietary trading and brokerage services.

In proprietary trading, revenue reached 163.2 billion yuan in the first nine months of 2025, up 37.1% year-over-year, supported by both expansion in financial investment scale and the rebound in investment yields and leverage centrality. In brokerage, revenue was 112.6 billion yuan, up 68.0% year-over-year, with the proportion of revenue increasing to 26.8%. Despite ongoing declines in commission rates, the rise in trading volume has made brokerage services an important pillar for revenue recovery.

Pay attention to the sector’s recovery after risk appetite rebounds.

Currently, the sector is in a divergence stage where “high growth potential in performance + valuation at a low level” coexist. With macroeconomic stabilization and the continued high-quality development of capital markets, market activity is expected to further improve. Businesses such as proprietary trading, brokerage, investment banking, and asset management are expected to drive sustained growth in brokerage performance. The firm believes that in the short term, due to geopolitical conflicts, market risk appetite has not yet significantly improved. However, as external disturbances diminish, risk appetite is likely to recover, and the brokerage sector with “performance growth + valuation decline” safety margins may see valuation recovery. Investors are advised to pay close attention.

Investment recommendations and targets:

The firm suggests focusing on high-quality brokerages with leading advantages across multiple business lines during this performance recovery phase, such as CITIC Securities, Huatai Securities, and GF Securities.

Risk warnings:

Policy expectations fall short, market volatility increases, household wealth growth underperforms, and M&A activities slow down.