Galaxy Securities Q1 Net Profit Rises 10% but Lags Peers; UBS Cuts Target Price to HK$9.40

Overview

UBS issued a research report reviewing China Galaxy Securities' Q1 2026 results. The company reported Q1 revenue of RMB7.4 billion and net profit of RMB3.3 billion, up 16% and 10% YoY respectively, broadly in line with market expectations, but net profit growth significantly lagged the average of listed securities-firm peers (39%). Although market sentiment improved somewhat in April, the company's core businesses such as investment banking and asset management remained weak, and brokerage was unable to fully benefit from higher market turnover due to declining commission rates. Based on this, UBS lowered its earnings forecasts for the next three years and cut the target price from HK$11.60 to HK$9.40, maintaining a 'Neutral' rating.

Core views

Performance compared with peers: China Galaxy Securities' Q1 recurring net profit grew 10% YoY, with non-annualized ROE of 2.5%. Although the absolute figure was in line with Bloomberg consensus, it clearly lagged the 39% YoY growth in Q1 recurring net profit for listed securities firms on average as compiled by Wind. This gap mainly stems from the business structure: the company's exposure to high-elasticity investment banking and asset management is relatively small or underperforming, while the more stable brokerage and interest income businesses improved but were insufficient to drive overall high growth. Detailed breakdown by business line: In brokerage, net income rose 41% YoY and 6% QoQ, but this growth still lagged the 79% YoY increase in A-share daily average turnover (ADT). UBS attributes this primarily to the continued decline in commission rates. However, as fund issuance across the market accelerates (Q1 new hybrid fund issuance grew 5.6x YoY), financial product distribution should provide support. Investment banking was the main drag, with net income falling 30% YoY and 70% QoQ; Q1 IPO underwriting amount was zero (vs RMB430 million in the same period last year). Asset management net income fell 12% YoY, and proprietary AUM growth (6.5%) also lagged the industry average for securities firms (9%). Investment business revenue fell slightly by 5% YoY, but rebounded 1.9x QoQ due to a turnaround in fair-value gains. Interest income was a bright spot, surging 41% YoY thanks to expansion of margin financing balances, with the company's share of ending margin financing balances rising to 5.8%. Valuation and outlook: UBS notes that although Galaxy Securities ranks among the top in margin financing scale and capital strength, giving it the ability to capture an industry upturn, it lags behind leading brokers in core moat businesses such as investment banking, wealth management and derivatives, leading to weaker earnings stability and persistent valuation pressure. The H-shares currently trade at 0.6x 2026E P/B, reflecting market concerns about earnings volatility. UBS expects the strong industry momentum to continue in Q2, but Galaxy Securities' outperformance may materialize more in the medium to long term, constrained in the near term by business weaknesses.

Analysis framework

UBS's analytical logic follows a 'top-line validation - structural breakdown - peer comparison - valuation revaluation' path. First, by comparing the company's actual results against market consensus and peer averages, it qualitatively assesses relative competitiveness (finding NPAT growth lagged peers). Second, it uses a volume-price decomposition to examine each business line: brokerage is split into trading volume (Beta) and commission rate (Alpha/competitive landscape); investment banking is split into IPO underwriting scale and fee rates; and investment business is split into disposal gains and fair-value changes. This decomposition reveals the specific reasons for 'revenue growth without profit growth' or 'growth lagging peers' (e.g., lower commission rates, zero IPO contribution). Finally, combining macro market sentiment (CSI 300 trend, geopolitical easing) and industry conditions (margin financing balances, fund issuance), UBS adjusts future earnings assumptions and re-calculates the target price using a Dividend Discount Model (DDM), reflecting the full transmission from fundamentals to valuation.

Methodology notes

• Valuation MethodDDM Dividend Discount

  Dividend Discount Model (DDM)

  UBS uses the DDM model to value Galaxy Securities. This method determines the target price by forecasting the company's future dividend payments and discounting them back to present value. For brokerage stocks with relatively stable dividends but growth constrained by cycles, the DDM better reflects shareholder-return value.

• Industry / Sector Analysis FrameworkVolume-price decomposition

  Brokerage Business Volume-Price Decomposition

  When analyzing brokerage revenue, UBS decomposes it into 'trading volume' (market Beta) and 'commission rate' (competitive Alpha). The report notes that although market turnover rose sharply, the company's brokerage revenue growth lagged because the decline in commission rates offset the volume increase. This method helps identify the true driver of revenue.

• Competition and Strategy FrameworkMoat / competitive advantage

  Comparison of Core Business Capabilities

  By comparing Galaxy Securities' market share and capabilities in investment banking, asset management, derivatives and other businesses with those of leading brokers, the report identifies its structural weaknesses. This framework explains why the company cannot command the same valuation premium as industry leaders during an upturn, i.e., it lacks a deep moat.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Galaxy Securities (6881.HK)

  Covered entity in the report; directly benefits or is hurt by performance in each business

  Strengths

  Margin financing balance ranks among the top five in the industry; strong capital base; widest branch coverage; large retail customer base

  Weaknesses

  Core capabilities in investment banking, asset management and wealth management lag behind leading brokers; OTC derivatives platform is second-tier; investment income is volatile

  Comparison

  Compared with internet brokers such as East Money or top-tier comprehensive brokers such as CITIC Securities, Galaxy has a structural gap in institutional and high value-added businesses

  Risks

  Further declines in commission rates due to intensifying competition, investment income losses from market volatility, regulatory policy changes

Key data

• Q1 Operating RevenueRMB7.4 billionYoY +16%
• Q1 Recurring Net ProfitRMB3.3 billionYoY +10%, lagging peers' average 39% growth
• Q1 Investment Banking Net IncomeDown 30% YoYQ1 IPO underwriting amount was zero
• Margin Financing Market Share5.8%Up 0.3 percentage points YoY
• Target PriceHK$9.40Lowered from HK$11.60, corresponding to 0.7x 2026E P/B
• EPS Forecast AdjustmentCut by 6%-18%For 2026-2028 forecast values

Impact & implications

The report believes that, as one of the industry's leading firms, China Galaxy Securities has extensive branch coverage and leading customer asset scale, giving it medium-to-long-term upside potential under regulatory support and merger optionality. However, in the near term, its earnings elasticity is limited by a lack of investment banking project pipelines, weak asset management scale growth and high volatility in investment income. In terms of valuation, the market awards it a low price-to-book multiple, reflecting a discount for the instability of its business structure as a small-to-mid-sized broker. Investors should watch its progress in wealth management transformation and derivatives business to assess whether it can close the gap with leading brokers.

Risks

• Competition in China's securities industry is intense, which may lead to loss of market share or lower commissions/fees
• Brokerage revenue is highly dependent on stock market conditions; a decline in market turnover will directly hit brokerage income
• Market volatility may cause the value of the company's financial assets to shrink, thereby reducing book value
• If geopolitical tensions escalate again, market sentiment and capital flows may be affected

What to watch

• Recovery of A-share/H-share IPO underwriting amounts in Q2
• Sustainability of overall stock daily average turnover (ADT)
• Growth trend of margin financing balances and changes in the company's market share
• Progress in new fund sales and wealth management transformation