Analyzing the competitive landscape of China's securities firms, it has become apparent that the Matthew Effect is increasingly reinforcing the concentration of top firms in the industryThe performance elasticity of these listed brokerages surged primarily due to a significant increase in their proprietary trading profitsAmidst a backdrop of favorable capital market policies, the enlarged trading volumes alongside innovative swap instruments are poised to enhance the profitability flexibility for these firms.

In the first nine months of 2024, listed brokerages experienced a slight downturn in performance; however, the third quarter witnessed a notable recovery, particularly in terms of proprietary trading revenuesWhile there was an overall decline in income and profits for the first three quarters, the renewal in Q3 painted a more optimistic picture, contrasting the overall downward trend in Return on Equity (ROE).

Specifically, in the first three quarters, there was a adjustment-based decrease of 6.3% in operating revenue year-on-year, alongside a 6.1% decline in net profits attributable to shareholders

By the third quarter alone, there was an impressive adjustment-based year-on-year revenue increase of 21.6%, coupled with a remarkable 41.6% surge in net profits compared to the same period last yearThe average annualized ROE for the first three quarters registered at 5.5%, dipping slightly by 0.7 percentage points year-on-year.

When dissecting performance by business segments, it becomes evident that proprietary trading revenues significantly bolstered the overall figures, with other sectors such as asset management, brokerage, credit, and investment banking experiencing declinesThe year-on-year growth rates for proprietary trading, asset management, brokerage, credit, and investment banking stood at 28.5%, -3.6%, -13.5%, -28.2%, and -38.7% respectively, illustrating stark contrasts in performance across different sectors.

From an investment perspective, the current market demonstrates a clear reflexivity in the securities sector, particularly in light of favorable monetary policies such as interest rate cuts and reserve requirement reductions

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The elasticity in proprietary business has manifested prominently, making the sector ripe for catalytic performance boosts.

Moreover, in terms of profitability, the equity multiplier and asset turnover ratios have seen slight increases, indicating a more efficient use of capital despite the overall drop in profit margins—highlighting that the net profit margin for the first three quarters of 2024 was at 27.7%, down by 6.7 percentage points from the previous yearThis nuanced view sheds light on the dynamics affecting profit fluctuations within these firms.

The income structure of listed brokerages underscores a strong preference for proprietary trading, which has consistently occupied over 40% of net revenuesIn the first three quarters of this year, proprietary trading, brokerage, asset management, credit, and investment banking revenues contributed 44%, 22.3%, 11.2%, 8.3%, and 7.3% respectively to overall earnings.

As a testament to the evolving landscape, revenues from proprietary trading significantly outperformed those of other lines of business, marking an increase of 11.9 percentage points compared to last year—while asset management saw a slight uptick, the remaining sectors all experienced slight declines, showing a clear shift toward the proprietary side of the business.

When examining the broader context, the stark contrast in performance becomes more vividly pronounced

The total income from proprietary trading was attributed to a remarkably high growth rate of 176.7% in the third quarter alone, correlating with boosts in capital market activity, which act as a critical driver for brokerages’ investment revenues.

However, the subtle dips in other sectors pose ongoing challengesComparing brokerage revenue against trading volumes provides a clearer narrative; declining overall market activity has adversely affected revenue generation in the brokerage business, as evidenced by the 14.6% and 13.5% contractions in Q3 and year-to-date, respectivelyThe average daily trading volume has seen a notable decrease, with margin lending figures following suit.

Policy decisions, like the suspension of certain lending operations intended to stabilize market conditions, further curtailed potential revenue from the brokerage sector

As of late September 2024, the average daily trading volume registered at approximately 920 billion RMB, down by 8.6% year-on-year, which includes a particularly weak third quarter performance.

The pressures encountered in investment banking correspond to regulatory shifts that have constrained financing activitiesAfter the implementation of policy changes on IPO and refinancing applications, data showed a steep decline—significant enough to impact the investment banking revenues for these firms, which fell by unparalleled rates in Q3.

Nevertheless, forecasts remain cautiously optimisticThe resilience demonstrated within the proprietary trading segment highlights its ability to weather fluctuations and respond to market volatility compellinglyLooking ahead, as economic stimuli are implemented, improvements in trading volumes are expected, thus refining the profitability landscape for brokerages.

Particularly noteworthy is the liquidity influx prompted by the recently introduced swap instruments, which are designed to further enhance the operational capacity of brokerages