THE CONTEXT

• What a dramatic fall the Hang Seng Index suffered over the last 2 days. On Tuesday, it plummeted nearly 10% in its worst single-day performance since the 2008 financial crisis.

Then yesterday, it fell by 1.4%.

• The sharp drops were attributed to investor disappointment over the lack of new stimulus measures from Chinese officials and profit-taking after a recent robust rally.

• There was significant trading activity, of course, and that's good news for stock brokerages. That's why their stocks may make a good play on the market in turbulent times. 

• DBS Research's report yesterday said: "Brokers are typically front-runners during bull markets and heavily speculated by market participants."

The report recommended a "buy" on the following HK- and US-listed stocks with exposure to the Chinese investor (chart):


Alpha China10.24

• 
See excerpts of DBS's take below ...

 
Excerpts from DBS Research report

Analysts: Ken Shih & Edmond Fok

Next level awaits

• Revised up FY24F-26F earnings by 5%-104% on higher ADT (average daily trading) assumptions; our blue sky scenario suggests further 30% earnings upside

• Attractive entry point after correction with valuation near historical mean, given how HK/CN market is under-owned

• Favoring brokers with strong IB/institutional franchise to benefit from structural reforms and the M&A wave driving consolidation

 

Strong retail investing momentum set to last. Compared to Jul 23, we see

(1) a more concerted effort in the form of supportive policies for the economy & capital market;

(2) retail investing confidence restored;

(3) foreign capital are coming back to HK/China especially valuations in the US and other key markets are relatively high; and

(4) better market liquidity with the rate cuts.


With social media magnifying the FOMO sentiment, we expect momentum rather than mean reversion.

We estimate >Rmb4tn (5% of A-share free float) of potential new funds flowing into stock market via public funds, due to wealth re-allocation from cash and fixed income to equities.


Earnings outlook substantially improved. We forecast A-share ADT from now to FY25F of Rmb1.25tn, assuming a further 10% growth in the average market cap and turnover rate of 1.5%, slightly higher than the 10-year average (1.42%).

Our blue sky scenario assumes a turnover rate of 2.0% (FY15: 2.5%), suggesting a further 30% earnings upside and showcasing brokers’ high earnings elasticity.

Online brokers like Futu and Up Fintech are key beneficiaries too, as c.80% of their client trading volume comes from HK/China clients, per our estimate. 

Buy on pullback to tap on market momentum. History suggests China brokers typically are front-runners and outperformers during early stage of bull market.

Attractive entry opportunity re-emerged as valuation returned to near mean level after 20-30% correction in China brokers’ Hshares. We like CITICS and CICC, as both are

(1) backed by central-SOEs, and

(2) with strong investment banking/ institutional franchises that are rare in markets, thereby set to be ultimate winners from the expected wave of M&A driven consolidation.

Among online brokers, we like Futu for its stronger market share position in HK.



Full report here

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