Hua Chuang Securities: Securities industry actively evolved in the first half of the year, sector valuation is expected to see substantial improvement.

Hua Chuang Securities released a research report stating that the current core driver of the brokerage sector lies in a resonance repair of "historically low valuation + high trading volume base + negative excess return convergence": the sector's valuation has long been at an absolute historical low percentile, with solid safety margin and prominent defensive attributes; the sector's prior underperformance versus the broad market reached historically rare levels, and the right-side inflection point for negative excess return convergence has now been established, with ample room for subsequent catch-up gains; market activity remains elevated, driving continued volume growth in brokerage and credit businesses, and enhancing proprietary liquidity reserves. The high-prosperity foundation for cumulative performance in the first three quarters is clear, and combined with the new growth poles built by realized floating gains from hard-tech projects on the STAR Market and the high growth of heavy-capital overseas platforms, the industry's long-term profit center is expected to shift upward, and the sector's valuation is expected to see substantial improvement. The main views of Hua Chuang Securities are as follows: Main businesses grew comprehensively at a high rate, with single-quarter profit hitting a stage peak The 42 listed brokerages achieved total operating revenue of RMB 363.78 billion in 2026H1 (yoy +44.4%) and net profit attributable to parent of RMB 155.15 billion (yoy +49.2%). More than half of the brokerages saw net profit growth exceed 30%, with China Merchants, Hua An, Zhong Tai and others more than doubling; among them, 26Q2 single-quarter net profit attributable to parent reached RMB 94.3 billion (yoy +81.9%, qoq +55.0%), the highest single-quarter profit level in nearly three years. By business segment, proprietary investment, as the largest profit swing factor, brought in a total of RMB 168.75 billion (yoy +50.2%); the normalization of RMB 2 trillion turnover drove brokerage net income (RMB 90.73 billion, yoy +55.4%) and credit business income (RMB 30.06 billion, yoy +52.9%) to resonate at high growth; investment banking and asset management also achieved steady recovery, with the head players' Matthew effect continuing to solidify. The industry's leverage cycle has systematically begun, with ROE returning to a double-digit platform In 2026H1, listed brokerages had a strong willingness to actively expand their balance sheets, with the industry average leverage ratio rising to 4.9x, breaking through the previous historical highs of 2015 (3.8x) and 2021 (4.2x). The leverage ratio of leading brokerages climbed steeply to 5.4x (CICC reached 6.4x, Shenwan reached 6.1x), while the leverage ratio of small and medium-sized brokerages also broke out of a nearly decade-long sideways range to rise to 4.0x. In a low interest rate environment, brokerages seized the window to issue corporate bonds of RMB 813.0 billion (yoy +150.3%, cost reduced by 16bp) and short-term financing bonds of RMB 263.1 billion (yoy +49.9%, cost reduced by 27bp), using low-cost active liabilities to greatly expand the capital intermediary base; asset-side ROA recovered to 2.1%, driving the industry's annualized ROE to 10.4%, a new high in nearly a decade. "STAR Market co-investment + overseas platforms" advance on two wings, building a strong profit reservoir Previously, the market mostly regarded investment-type and overseas businesses as marginal supplements, but the interim report has fully verified their transformation into core profit pillars. Alternative investment and private equity subsidiaries fully exploded: Guotai Haitong Zhengyu (net profit RMB 6.51 billion) and CMSC Investment (net profit RMB 5.22 billion) contributed 32.1% and 49.1% of group profit respectively, while alternative subsidiaries of distinctive mid-sized brokerages such as Changjiang, Orient Securities, and Huafu also broke through across the board; unexpired STAR Market co-investment projects are highly concentrated in the three major hard-tech mainlines of electronics (18 companies), pharmaceuticals (9 companies), and machinery (8 companies). Leading players such as China Securities Co.,Ltd. (RMB 6.47 billion), CICC (RMB 6.21 billion), and CITIC SEC (RMB 3.93 billion) have abundant floating gain reserves, and targets such as CXMT Corporation have verified the flywheel value of "investment banking + investment." At the same time, overseas platforms accelerated comprehensively under the recovery of the Hong Kong primary market and customer demand for cross-border derivatives/FICC. CITIC SEC International revenue exceeded RMB 10 billion (contributing 24.2% of group profit), and CICC International's profit contribution rate reached 46.1%, with overseas business entering a volume expansion stage. High-prosperity trading supports the performance foundation, forming a significant divergence from extremely low valuation and high negative excess returns In July and August this year, average daily market turnover reached RMB 2.7 trillion and RMB 2.3 trillion respectively, continuing to rank among the highest in history, providing a ample safety cushion for cumulative performance in the first three quarters. However, in the secondary market, the sector experienced long-cycle stagnation. Since the beginning of 2025, its negative excess return relative to the broad market once touched a rare bottom of about negative 40% at the end of May this year, and there is still more than 20% of repair space remaining; as of 2026/9/7, the brokerage sector's price-to-book ratio (PB) was only about 1.27x, within the absolute historical low percentile range of 16.1% over the past decade. The scissors gap between continuously improving fundamentals and deeply discounted valuation has reached an extreme state, breeding strong upward mean-reversion momentum. Risk warnings: downside risk in market trading activity, risk of capital market reform falling short of expectations, risk of sharp fluctuations in the secondary market, risk of STAR Market project exits falling short of expectations, and risk of overseas business development and overseas regulatory compliance.