CICC’s Q1 Report Meets Expectations, Increased Leverage in Hong Kong Business Drives a Significant ROE Recovery

Overview

Goldman Sachs has released a review of CICC’s Q1 2026 results, concluding that the company’s performance was largely in line with expectations. Although investment banking revenue came in slightly below forecasts, strong gains in investment income and brokerage growth offset these weaknesses. The central argument is that CICC has successfully restored its return on equity (ROE) through highly leveraged operations in Hong Kong, validating the effectiveness of its strategic transformation. Based on this, Goldman Sachs has modestly raised its earnings forecasts for the next three years and maintained a Buy rating on H-shares.

Core views

Performance and Revenue Mix: In Q1 2026, CICC reported revenue of Rmb8.8 billion, up 54% year-on-year—6% above Goldman Sachs’ estimate—and net profit of Rmb3.6 billion, up 76% y-o-y, placing it near the upper end of the company’s 65%–90% guidance range and matching Goldman Sachs’ 73% growth forecast. By revenue segment, the quarter exhibited a mixed profile of “weak investment banking, strong investing.” Brokerage commission income totaled Rmb2.0 billion, up 54% y-o-y, consistent with a 20% sequential increase in average daily trading volume (ADTV). However, investment banking revenue stood at Rmb1.545 billion, though up 283% y-o-y (due to a low base last year), it fell 26% sequentially and lagged Goldman Sachs’ forecast by 16%. In contrast, investment income emerged as a bright spot, reaching Rmb4.2 billion—an increase of 23% y-o-y and 29% sequentially—13% above Goldman Sachs’ projection, largely driven by a rebound in bond-market yields, which lifted investment returns from 4% to 5%. Leverage Strategy and ROE Recovery: The report emphasizes that CICC’s Q1 performance further confirms that shifting its strategic focus to the Hong Kong business is a key catalyst for value creation. The company’s active leverage ratio (excluding client deposits) rose from 4.8x in Q1 2025 to 5.4x, in line with Goldman Sachs’ projections. This increase in leverage proved particularly effective in the high-return Hong Kong market, propelling annualized ROE from 7.0% in the same period last year to 11.2%. The cost-to-revenue ratio held at 48.8%, slightly better than Goldman Sachs’ 49.5% forecast, indicating some cost-control capability. Valuation and Rating Adjustments: Given the in-line results and the validation of the ROE recovery thesis, Goldman Sachs has raised its revenue and net-profit forecasts for 2026–2028 by an average of 2%–3%. Based on 2027 price-to-earnings (P/E) multiples of 11x for H-shares and 18x for A-shares, Goldman Sachs has raised the H-share target price from HK$29.70 to HK$30.45 and the A-share target from Rmb44.58 to Rmb45.72. The current H-share rating is “Buy,” implying a 46% upside, while the A-share rating is “Neutral,” with a 33% upside potential.

Analysis framework

Goldman Sachs’ analytical framework follows a “results breakdown–attribution analysis–valuation reassessment” path. First, it compares actual data with estimates (GSe) to quantify the contributions of each business line (brokerage, investment banking, asset management, investment) and identifies investment income as the primary source of outperformance. Next, it delves into the balance sheet, focusing on the “active leverage ratio” as a key metric and linking it to changes in ROE to demonstrate the effectiveness of the company’s strategy (focusing on high-return markets in Hong Kong and increasing leverage). Finally, based on updated earnings forecasts and unchanged valuation multiples (P/E), it recalculates the target price and outlines four key issues investors should monitor going forward (M&A, capital deployment, investment strategy, cost optimization) to assess the sustainability of its reasoning.

Methodology notes

• Company Fundamentals and Financial FrameworkDuPont analysis

  Decomposing ROE (return on equity) to identify driving factors

  The report uses the rise in the ‘active leverage ratio’ to explain the increase in ROE from 7.0% to 11.2%, a typical application of DuPont analysis that leverages financial leverage to amplify shareholder returns.

• Valuation MethodPE/PEG valuation

  Relative valuation based on projected P/E multiples

  Goldman Sachs calculates the target price by multiplying fixed 2027 P/E multiples (11x for H-shares, 18x for A-shares) by projected earnings per share—a common relative valuation approach for securities firms.

• Financial Industry-Specific Metric

  Active Leverage Ratio Analysis

  The report specifically distinguishes between the ‘active leverage ratio’—calculated after excluding client deposits—to measure the efficiency of the company’s use of its own capital and its risk appetite, a unique indicator for assessing a securities firm’s capital-management capabilities.

Asset mapping & comparison

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

• CICC-H (3908.HK)

  Beneficiary asset; Goldman Sachs believes its high-leverage strategy in Hong Kong effectively boosts ROE, and the current valuation appears attractive.

  Strengths

  ROE has rebounded significantly to 11.2%, active leverage has increased, investment income has outperformed expectations, and the H-share valuation is relatively low (2027E P/E 11x).

  Weaknesses

  Investment banking revenue remains volatile, showing a sequential decline.

  Comparison

  Compared with A-shares, H-shares carry a higher recommendation (Buy vs. Neutral) and greater implied upside (46% vs. 33%).

  Risks

  Underperformance of China’s capital markets, losses in OTC derivatives, and declining management fees.

• CICC-A (601995.SS)

  Rated Neutral; although fundamentals have improved, the valuation is relatively high, leaving less upside compared with H-shares.

  Strengths

  Benefits from the broader industry recovery, with steady growth in brokerage business.

  Weaknesses

  Higher valuation multiple (2027E P/E 18x), and investment banking revenue has fallen short of expectations.

  Comparison

  Compared with H-shares, A-shares trade at a premium, hence the Neutral rating.

  Risks

  Rising cost-to-revenue ratio and volatility in the A-share market.

Key data

• 2026 Q1 RevenueRmb8.8 billionUp 54% y-o-y, 6% above forecast
• 2026 Q1 Net ProfitRmb3.6 billionUp 76% y-o-y, at the upper end of guidance, 3% above forecast
• Annualized ROE11.2%A significant 4.2-percentage-point increase from 7.0% in Q1 2025
• Active Leverage Ratio5.4xAn increase from 4.8x in Q1 2025, calculated after excluding client deposits
• Investment IncomeRmb4.2 billionUp 23% y-o-y, 13% above forecast, with yields rising to 5%
• Investment Banking RevenueRmb1.545 billion16% below forecast, down 26% sequentially

Impact & implications

The report suggests that CICC’s results confirm the effectiveness of its strategy to enhance capital efficiency through its Hong Kong operations. For investors, this means CICC is no longer reliant solely on traditional investment-banking underwriting fees but is generating returns through more aggressive balance-sheet management. If the company can sustain elevated leverage levels while managing risks, its valuation should remain supported. Meanwhile, the divergence in ratings between A-shares and H-shares reflects their differing liquidity, investor bases, and valuation premiums.

Risks

• Weaker-than-expected performance of China’s capital markets
• Losses in over-the-counter (OTC) derivative transactions
• Decline in assets under management (AUM) and falling fee rates
• Rising cost-to-revenue ratio (especially amid compensation pressures accompanying the Hong Kong IPO boom)

What to watch

• Progress on pending M&A deals, particularly following the second board meeting in May
• Detailed capital-deployment plans, with a focus on sustaining growth in the high-leverage, high-ROE Hong Kong business
• Portfolio strategy and outlook, given its increasingly important contribution to overall revenue
• Potential for further cost optimization, especially amid rising compensation pressures