Citic Securities in equity sweet spot as investors flock to Chinese stocks

China’s largest brokerage reported big jumps in its revenue and profit during the third quarter amid a bull run in Chinese stocks and a wave of Hong Kong IPOs

Key Takeaways:

• CITIC Securities’ net profit jumped 52% year-on-year in the third quarter as its revenue grew at a similar pace
• A Chinese stock rally fueled the company’s big increase in fee income from brokerage services, while a resurgence of IPOs drove up its investment banking revenues

By Warren Yang

Everything seems to be clicking for Citic Securities Co. Ltd. (6030.HK; 600030.SH) these days as Chinese stocks become hot commodities again after years as global laggards.

Fueled by that resurgence, China’s largest brokerage’s net profit jumped 52% year-on-year in the third quarter to 9.4 billion yuan ($1.3 billion), as its revenue grew 56% to 22.8 billion yuan, according to its latest financial results released last Friday. The lion’s share of the big revenue increase came from a near tripling of investment income that accounted for nearly 60% of the company’s total, up sharply from less than 30% a year earlier. But Citic Securities’ core operations improved significantly as well, with its net fee and commission income up 36% year-on-year.

Citic Securities’ revenue increased by a third year-on-year in the nine months to September, with its net profit rising 38%, which puts the company on course for two consecutive years of earnings growth after a similar period of declines. 

The results show how Citic Securities, the brokerage arm of one of the country’s top financial conglomerates, is benefitting from a rally in Chinese stocks fueled by growing optimism around the technology sector, even as the country’s broader economy remains wobbly. The bull equity market translates directly to more brokerage fees from investors trading stocks, as well as valuation gains on assets that the company owns.

At the same time, a renaissance of IPOs in Hong Kong is a boon to Citic Securities, which sits at the top of the investment banking pyramid in Asia. Equity sales are all the rage these days as Chinese companies race to capitalize on renewed optimism among Hong Kong’s more globally focused investors to raise new capital for business expansion, often overseas. And Citic Securities is in a pole position to rake in fees from the influx of IPOs as one of the best-connected investment banks for companies seeking equity funding.

A breakdown of Citic Securities’ fee income shows how the overall equity market boom in China and Hong Kong is helping the company across its well-diversified businesses. For starters, its net fee income from brokerage services increased 51% year-on-year to about 11 billion yuan in the third quarter, accounting for about half of its revenue.

Hot Chinese stocks

Such results are hardly surprising, given how hot Chinese stocks were in the July-September period, with the Shanghai Composite Index rising more than 12% and the more tech-heavy Shenzhen Component Index gaining more than 30% during that period. In a strong market, trading volume tends to jump, translating into more fee income for stock brokers. Citic Securities, in particular, has competitive advantages in luring average Joes to its stock-trading services because of its scale and reputation as the industry leader.    

The company’s fee income from investment banking also grew by a healthy 32% to 3.7 billion yuan as it rode the Hong Kong IPO resurgence that followed a long slump. A total of 66 companies raised some $23 billion from IPOs in the market in the first nine months of this year, up more than 200% from a year earlier. That sum puts Hong Kong far ahead of other international financial hubs, including New York, and positions it to reclaim the title of top IPO destination globally.

In October alone through Wednesday, 57 companies had filed new or updated IPO applications with the Hong Kong Stock Exchange, averaging more than four per work day, despite a lull at the start of the month during China’s weeklong national day holiday.

That IPO boom is a bonanza for Citic Securities, which ranks first in investment banking fee income in Asia-Pacific, excluding Japan. The company has worked on a third of IPO applications in Hong Kong this year. Companies that listed in Hong Kong with Citic Securities’ help this year include CATL (3750.HK; 300750.SZ). In May, the world’s largest maker of electric vehicle batteries raised more than $5 billion, the largest amount for an IPO in Hong Kong since 2021.

Most recently, excavator maker Sany Heavy Industry (6031.HK; 600031.SH) this week raised $1.6 billion in another mega Hong Kong IPO, with Citic Securities as an underwriter. 

The company’s asset management segment also saw its revenue rise 16% to 8.7 billion yuan. This income gain looks modest compared to increases for the other two businesses, but it’s still quite a feat in the current economic climate in China, with companies in many other sectors struggling to pull off any double-digit revenue growth.

Yet it remains to be seen whether the good times for Citic Securities will last. The current euphoria around Chinese stocks may prove fragile, given its disconnect from persistent vulnerabilities of the Chinese economy stemming from soft domestic consumption and a prolonged property downturn — not to mention trade tensions with the U.S. The country’s GDP grew 4.8% in the third quarter from a year earlier, the slowest pace in a year.

But such concerns are all material for another quarter down the road. For now, at least, investors are piling into not only Chinese equities, but also Citic Securities’ stock, probably because they see it as a proxy for the broader Chinese market. The company’s Hong Kong-listed shares have risen 56% this year to trade at a price-to-earnings (P/E) ratio of 17, higher than 14 for CICC (3908.HK; 601995.SH) and 7 for Guotai Haitong Securities Co., Ltd. (2611.HK; 601211.SH), two of its top rivals.

CITIC Securities is undoubtedly in a sweet spot for the moment. Now, the big question is whether it can stay there, or whether it will ultimately get undermined by a reality check if and when investors realize China’s economy may not support the current bullish sentiment. 

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