How to Capitalize on China’s Brokerage Bonanza

Brokerages are reaping the benefits of China's new bull market

The robust cheers in office buildings near the Shanghai Stock Exchange these days are coming from brokerage executives celebrating success now that China’s main equities market has taken off.

brokers tradingWhat was basically a seven-year bear market for the exchange suddenly turned bullish with the Chinese government’s launch of the Shanghai-Hong Kong Stock Connect program in November. The SSE Composite Index has jumped about 34% since the launch, while daily trading volumes — and brokerage revenues — have soared accordingly.

Brokerages have thus been among the biggest beneficiaries of the cross-border trading program, which gives overseas retail investors partial access to the previously closed Shanghai exchange. It has also given Chinese retail investors the power to trade equities on the Hong Kong Stock Exchange, although interest in this so-called “southbound” trade has been modest so far.

Although some of the connect program’s excitement has been wearing off lately, there’s still time for non-Chinese investors to join the brokerage celebration by getting behind one or more of the big brokerages doing business on the mainland. These brokerages are still busy drumming up retail and institutional clients for the Shanghai exchange, whose index topped 3,000 in December and is still rising. Some bulls are forecasting a 5,000 Shanghai index by the end of 2015.

Brokerages Soar in China

Among the brokerages doing well in China in recent months and accessible to U.S. investors are the French financial giant Societe Generale Group (SCGLY), China’s CITIC Securities (CIIHF), Goldman Sachs (GS) and UBS (UBS).

Societe Generale’s over-the-counter shares have shed about 10% of their value since the connect program started. But CITIC’s over-the-counter stock price has gained about 50% during the same period after barely budging for nearly two years.

Goldman Sachs and UBS are worth noting because their Hong Kong brokerage units are the only non-Chinese firms allowed by the Chinese government to handle the accounts of foreign retail investors trading Shanghai shares through the connect program.

Other big Chinese brokerages with a lot of cheering lately include Haitong Securities, Galaxy Securities, Shenyin Wanguo Securities, and Guotai Junan International. Shares in these firms soared in the first month of the stock connect program but later slipped, although some are still up 7% or more over early November levels.

Haitong recently announced a private placement of Hong Kong shares to raise about U.S. $3.8 billion from institutional investors. The firm said the cash would be used to bolster its brokerage’s margin trading business on the mainland.

China’s largest brokerage CITIC has hinted that it, too, may launch a private placement in early 2015 to take advantage of its sudden popularity.

There’s Still Time to Play Chinese Brokerages

A lot of brokerage stocks listed in Shanghai did extremely well during the seven months between the government’s announcement of the connect program and the actual launch. Some bowed to government calls for industry consolidation by merging with smaller rivals.

In September, for example, a BOCI Securities report said net profits for 18 brokerages listed in Shanghai rose an average 60% over the same month 2013. A standout was Pacific Securities, which posted a 232% gain in net earnings.

As a result, according to the official Shanghai Securities Journal, 2014 finished with the brokerage sector at the top of the most active stocks trading for the year in Shanghai. Leading the pack were CITIC Securities, Sinolink Securities, Pacific Securities, Societe Generale and Soochow Securities.

If the Shanghai market continues on its current trajectory, as the country’s most bullish brokers think will happen, non-Chinese investors still have time to buy into mainland-business brokerages. These brokerages are riding into the new year with confidence after a long bear market, and their shares appear poised to ride higher with them.

Rumors that the government may soon expand the Shanghai-Hong Kong program to include the mainland’s Shenzhen Stock Exchange has fanned this optimism as well.

Perhaps the celebration has only begun.

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