Institutional Business and the Technology Financing Cycle Drive Broker Divergence; Leading Brokers Preferred

Overview

The report believes that Chinese brokers will see a pronounced divergence between retail and institutional businesses in 2H26. Declines in A-share turnover, margin financing balances, and commission rates will weigh on retail brokerage revenue, while policy support, an IPO recovery, derivatives development, and cross-border capital market activity will continue to drive institutional and investment banking businesses. Low valuations and upward earnings forecast revisions could support sector re-rating.

Core views

JPMorgan maintains a positive view on the brokerage sector but prefers full-service brokers with diversified revenue structures and leading institutional business and technology financing capabilities. CICC and Citic Sec are viewed as structural beneficiaries of technology financing and institutional business recovery; CMS may have stronger earnings upside elasticity in 3Q26 due to its relatively high investment exposure to CXMT. East Money, with a higher retail business weighting, faces downward pressure from turnover, margin financing, and commission rates.

Analysis framework

The core framework uses turnover, margin financing balances, commission rates, A/H-share IPO financing and project pipelines, business revenue mix, ROE gaps, valuations, and differences between earnings forecasts and market consensus to compare brokers' sensitivities to retail, institutional, technology financing, and overseas businesses.

Methodology notes

• Industry Cycle AnalysisRetail and Institutional Business Divergence Framework

  Compare changes in turnover, margin financing, and commission rates with institutional capital market activity

  Retail business is more affected by turnover and fee rates; institutional business is driven by IPOs, derivatives, policy, and cross-border business.

• Valuation AnalysisP/B and ROE Re-rating Framework

  Assess valuation re-rating potential using price-to-book ratios and ROE gaps

  The report believes that A-share and H-share broker valuations are not high; if earnings expectations continue to be revised upward, the ROE advantage of leading brokers can support valuation re-rating.

• Event-Driven AnalysisCXMT IPO Case Study

  Assess revenue and investment gains from underwriting, IPO cornerstone investment, and Pre-IPO holdings

  The CXMT listing is used to quantify potential broker underwriting fees, cornerstone investment, and Pre-IPO investment gains, and to assess the impact on 3Q26 earnings.

Asset mapping & comparison

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

• CICC-H

  Top pick and Overweight

  Strengths

  Leading market share and technology financing execution capabilities in A-share and H-share IPO markets; benefits from institutional business recovery and the technology financing cycle.

  Weaknesses

  Not specifically disclosed in the report.

  Comparison

  A joint top pick with Citic Sec and superior to retail-oriented brokers.

  Risks

  A slowdown in IPO activity, weaker-than-expected capital market activity, and regulatory changes.

• Citic Sec A&H

  Top pick and Overweight; CITIC Securities - H upgraded

  Strengths

  Diversified businesses, strong A/H-share IPO pipeline, and substantial growth potential in institutional and international businesses; brokerage revenue accounts for only approximately 20% of revenue, implying lower sensitivity to declining turnover.

  Weaknesses

  Still affected by capital market conditions, investment banking execution, and valuation volatility.

  Comparison

  Lower retail exposure than East Money; a structural beneficiary alongside CICC.

  Risks

  Weaker-than-expected IPO fundraising, weaker-than-expected institutional business recovery, and continued declines in market turnover.

• China Merchants Securities Company Ltd - A/H

  Overweight

  Strengths

  High Pre-IPO investment exposure to CXMT, with potential unrealized gains of approximately Rmb26.7bn and substantial investment-income upside elasticity in 3Q26.

  Weaknesses

  Earnings elasticity partly depends on the valuation of a single project and lock-up-period-related accounting treatment.

  Comparison

  Near-term CXMT catalysts may be stronger than for CICC and Citic Sec, but its long-term structural advantages are relatively weaker than those of the latter two.

  Risks

  CXMT share price volatility, liquidity discounts, lock-up periods, and lower-than-expected investment income recognition.

• East Money - A

  Neutral; downgraded

  Strengths

  The report recognizes that the overall outlook for the brokerage industry remains positive.

  Weaknesses

  Has the highest brokerage revenue exposure among covered brokers and is vulnerable to declines in turnover, margin financing, and commission rates; its ROE advantage versus peers is expected to narrow.

  Comparison

  Its revenue mix is more concentrated in retail business than Citic Sec's, resulting in weaker resilience to declining turnover.

  Risks

  Continued deterioration in retail trading activity, margin financing growth, and fee rates, leading to valuation de-rating.

• Galaxy-H

  Overweight

  Strengths

  Forecast 2026 P/B of approximately 0.6x, among the lower levels for covered H-share brokers.

  Weaknesses

  High retail business exposure and limited exposure to IPO cornerstone investment and Pre-IPO investments; 3Q earnings may slow quarter on quarter.

  Comparison

  Low valuation, but weaker fundamental catalysts than CMS and leading brokers.

  Risks

  Continued declines in turnover and margin financing, and weak retail business.

Key data

• 2H26 industry profit growth forecastApproximately 17% year-on-year growthJPMorgan forecast.
• 2026 earnings forecast relative to consensus12 percentage points higherRefers to the difference between the industry's 2026 forecast and market consensus.
• Average daily A-share turnoverApproximately Rmb2.4tnExpected to stabilize at this level for the remainder of 2026; Rmb2.74tn in 1H26.
• Change in margin financing balanceDown 11% quarter-to-date in 3Q26Recently declined from Rmb3.0tn at the end of June to approximately Rmb2.68tn.
• July A-share IPO fundraisingRmb97.6bnThe highest monthly level since January 2022.
• July H-share IPO fundraisingUS$13.4bnA high level in recent years.
• CXMT IPO underwriting feesApproximately Rmb227mn to Rmb240mnThe latter assumes full exercise of the overallotment option.
• Potential investment gains related to CXMTApproximately Rmb65bnIncludes estimated unrealized gains from IPO cornerstone investment and Pre-IPO investments.
• Brokerage sector valuationA-shares 1.03x P/B; H-shares 0.67x P/BThe report states that both are at low levels since the market rally of September 2024.

Impact & implications

Investment positioning should shift from brokers with high retail business weightings toward leading brokers with stronger institutional, investment banking, technology financing, and cross-border business capabilities. Although a further decline in turnover would weigh on brokerage revenue, downside risks on the retail side may be limited if turnover stabilizes at approximately Rmb2.4tn; continued IPO recovery, technology company financing, and policy support could provide upside catalysts for institutional business and investment income.

Risks

• A-share turnover falls below the expected stable level, placing further pressure on retail brokerage revenue.
• Tighter regulation of margin financing, securities lending, and options businesses affects retail-oriented brokers.
• Continued compression of industry commission rates prevents trading-volume growth from fully translating into revenue.
• IPO approvals, issuance, and fundraising activity fall short of expectations, weakening investment banking and investment income.
• The technology financing cycle, policy support, or cross-border capital market activity is weaker than expected.
• Uncertainty surrounding the share price, liquidity discount, lock-up period, and gain recognition of projects such as CXMT.
• A decline in overall market risk appetite and continued pressure on broker valuations.

What to watch

• Whether average daily A-share turnover stabilizes at approximately Rmb2.4tn.
• Subsequent trends in margin financing balances, commission rates, and retail trading activity.
• A/H-share IPO fundraising scale, filing volumes, and realization of broker project pipelines.
• Implementation of regulatory policies related to derivatives, cross-border listings, ETFs, and institutional business.
• The actual contribution of CXMT investment gains to CMS and related brokers' 3Q26 earnings.
• Progress in upward earnings forecast revisions, ROE improvement, and target-price realization for CITIC Securities - H.
• Changes in East Money's retail business, ROE gap, and valuation premium.