Goldman Sachs Bullish on China Brokers: International Business and IPO Recovery Drive ROE Expansion

Overview

In this report, Goldman Sachs reiterates its constructive (bullish) stance on the Chinese brokerage sector. Against a backdrop of slowing loan growth in the banking sector, brokers demonstrate more attractive potential for cyclical earnings recovery and structural return improvement, driven by increased capital market activity and international business expansion. The robust recovery in the Hong Kong IPO market, high-return characteristics of offshore businesses, and trading volume growth fueled by AI themes collectively constitute the core drivers for the brokerage sector.

Core views

International business becomes the core engine for ROE expansion: Leading Chinese brokers are clearly shifting strategic focus toward expanding international operations (especially in the Hong Kong market), as structural returns in offshore markets exceed those in onshore markets. Through capital operations such as equity placements and refinancing, brokers are funding offshore balance sheet expansion. Data shows that the three covered brokers' offshore subsidiaries have an average leverage ratio of 11x (vs. group average of 6x) and average ROE of 16% (vs. group average of 9%). For example, CICC management has raised its mid-term ROE target to 13-15%, explicitly identifying capital deployment to Hong Kong as a primary driver. Hong Kong IPO cycle recovery provides strong fundamental support: Goldman Sachs Strategy team believes the Hong Kong IPO market has significantly recovered, with robust issuance volumes and strong post-listing performance; average first-month returns for new listings since 2025 are approximately 40%. This creates a favorable operating environment for brokers' core businesses including underwriting, financial advisory, and trading. Top brokers currently have over 180 IPO projects in their pipeline, demonstrating the depth and sustainability of the current cycle. AI theme drives structural growth in trading volume: High market attention to AI and related industries has boosted trading activity, with industry average daily turnover (ADTV) expected to grow significantly. Brokers benefit through higher brokerage commissions, increased derivatives activity, and rising demand for capital market services. As long as compelling investment themes like AI persist and the interest rate environment remains supportive, trading volumes are unlikely to decline materially. Earnings quality determines valuation premium: The report emphasizes the need to distinguish between different sources of broker earnings growth. While participating in IPO and STAR Market co-investments can boost reported earnings, these activities are highly volatile and subject to valuation fluctuations and lock-up restrictions. Historical experience indicates such investments tend to increase earnings volatility without corresponding uplift in valuation multiples. Therefore, the market will place greater value on structural ROE improvement from leverage expansion and capital allocation to high-return international businesses, rather than episodic investment gains.

Analysis framework

The analysis follows the main thread of 'fundamental driver switching.' First, by comparing macro fundamentals between banks and brokers, it highlights that during credit slowdown periods, brokers' pro-cyclical attributes and structural changes in capital markets are more attractive. Second, using ROE decomposition, it attributes broker ROE improvement to high leverage and high returns from international business, substantiated by comparing onshore vs. offshore subsidiary data. Finally, by reviewing historical data (e.g., the relationship between investment income volatility and valuation multiples from 2020-2023), it distinguishes the fundamental valuation differences between 'structural earnings improvement' and 'episodic investment gains,' thereby deriving the conclusion to prefer targets with high international business exposure and clear capital allocation strategies.

Methodology notes

• Company Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Linkage analysis of financial leverage and ROE

  By comparing leverage ratios (11x vs. 6x) and ROE (16% vs. 9%) between broker groups and offshore subsidiaries, the report reveals that allocating capital to high-return offshore businesses with moderate leverage can effectively lift overall ROE levels. This analysis helps investors understand the actual efficiency and earnings quality of broker capital expansion.

• Valuation MethodologyPE/PEG valuation

  Impact of earnings quality on valuation multiples (PE)

  The report notes that while episodic investment gains (e.g., STAR Market co-investments) may temporarily boost profits, their high volatility means the market will not award higher PE multiples; only sustainable structural ROE improvement can support upward re-rating of valuation centers. This reminds investors analyzing financial stocks to exclude one-off gains and focus on core business earnings stability.

Asset mapping & comparison

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

• CICC (3908.HK / 601995.SS)

  One of the top picks, benefiting from leading position in HK IPO market and high international business contribution.

  Strengths

  Offshore business contributes >40% of revenue and profit, highest among Chinese brokers; management explicitly drives ROE expansion through capital reallocation and potential M&A.

  Comparison

  Leads peers in international business contribution; significant advantage in HK IPO underwriting.

  Risks

  China capital market underperformance, OTC derivatives losses, decline in AUM and fee rates, rising cost-to-income ratio.

• CITIC Securities (600030.SS / 6030.HK)

  One of the top picks, benefiting from proactive capital replenishment and international business expansion.

  Strengths

  Proactively financing to expand international footprint; post-RMB16bn refinancing, international business leverage will decrease from 16.6x to 10.6x, creating ample room for subsequent expansion.

  Comparison

  Strong capital base; refinancing provides sufficient room for optimizing international business leverage.

  Risks

  Slowing revenue growth due to weak capital markets, decline in AM AUM and fee rates, slowing investment income growth, increased operating expenses.

• Futu Holdings (FUTU)

  Benefits from increased retail participation and AUM growth, but weighed down by regulatory uncertainty.

  Strengths

  Leading internet broker, benefiting from current capital market environment and long-term wealth management opportunities.

  Weaknesses

  Near-term uncertainty arising from regulatory developments related to cross-border capital flows and normalization of mainland client activities.

  Comparison

  Limited risk-reward profile compared to traditional brokers with stronger institutional business franchises; rated Neutral.

  Risks

  Regulatory impact above/below expectations, capital market volatility, challenges in new market expansion, and suboptimal cost structure optimization.

Key data

• Avg. Leverage of Offshore Subsidiaries11xSignificantly higher than group average of 6x, reflecting higher capital efficiency in international business
• Avg. ROE of Offshore Subsidiaries16%Significantly higher than group average of 9%, serving as the core driver of overall returns
• Avg. First-Month Return of HK IPOs Since 2025~40%Indicates strong recovery in HK IPO market with attractive subscription returns
• IPO Pipeline of Top Brokers>180 ProjectsEnsures sustainability of investment banking revenue
• CICC Mid-Term ROE Target13-15%Management explicitly identifies capital deployment to Hong Kong as primary driver

Impact & implications

The report suggests that as industry fundamental drivers shift from pure scale expansion to capital efficiency and international business positioning, leading brokers with strong institutional business franchises, high international business contribution, and clear capital allocation strategies will command valuation premiums. In contrast, internet brokers reliant on single markets or significantly affected by regulatory uncertainty face relatively limited risk-reward profiles.

Risks

• Weaker-than-expected China capital market performance leading to decline in core business revenue.
• Contraction in Assets Under Management (AUM) and decline in management fee rates.
• Losses in OTC derivatives business.
• Rising cost-to-income ratio eroding profitability.
• Changes in cross-border regulatory policies targeting internet brokers.

What to watch

• Issuance pace and sustainability of post-listing performance in the Hong Kong IPO market.
• Progress of capital allocation and leverage changes in top brokers' international businesses.
• Sustained catalytic effect of tech themes like AI on market Average Daily Turnover (ADTV).
• Actual results of brokers' cost control and efficiency enhancement initiatives.