Open Source Securities: Probability of Fed rate cut in September increases, focus on non-bank sector beta catalysts

According to the information from Wisdom Finance APP, Open Source Securities released a research report stating that the probability of a rate cut by the Federal Reserve in September has increased, focusing on the beta catalyst of the non-bank sector. The life insurance sector has good prospects on the liability side and performance side, with prominent performance beta attributes, making it the top choice for opportunities in the life insurance sector. The brokerage sector has experienced a nearly 1-year adjustment, with valuations and institutional holdings at the bottom, and the period of the worst performance decline gradually passing. Three stock selection strategies are being watched.

Recommended and Benefiting Portfolio

Recommended Portfolio: China Pacific Insurance (601601.SH), China Life Insurance (601628.SH), Ping An Insurance (601318.SH), Hong Kong Exchanges and Clearing (00388); Lakala (300773.SZ), Jiangsu Rentai (600901.SH), AIA Group Limited (01299), Guolian Securities (601456.SH); PICC P&C, East Money Information (300059.SZ), Caitong Securities (601108.SH).

Benefiting Portfolio: Tonghuashun (300033.SZ), Zhinanzhen (300803.SZ), Guotai Junan Securities (601211.SH), Zheshang Securities (601878.SH), Founder Securities (601901.SH); New China Life Insurance (601336.SH).

Key Points from Open Source Securities:

Weekly View: Trading volume improves on a month-on-month basis, focusing on the beta catalyst of the non-bank sector

This week, the insurance and brokerage sectors rose by +3.24% and +0.75% respectively. Market trading volume improved on a month-on-month basis, regulatory suspension of securities lending and borrowing reflects a market-friendly attitude, the probability of a rate cut by the Federal Reserve in September has increased, focusing on the beta catalyst of the non-bank sector. The life insurance sector has good prospects on the liability side and performance side, with prominent performance beta attributes, making it the top choice for opportunities in the life insurance sector. The brokerage sector has experienced nearly 1 year of adjustment, with valuations and institutional holdings at the bottom, and the period of the worst performance decline gradually passing. Three stock selection strategies are being watched:

(1) Tonghuashun, East Money Information, and Zhinanzhen, which benefit from improved trading volume and have financial IT attributes, are expected to benefit;

(2) Merger and acquisition theme;

(3) Undervalued top brokerage firms. Positive on Jiangsu Rentai with high dividend yield and expanding mid-year performance prospects, and watching the payment industry for improved mid-year performance prospects brought by price increases.

Insurance: Mid-year liability side and net profit are expected to maintain good prospects, focusing on asset-side catalysts

(1) The official website of the China Banking and Insurance Regulatory Commission disclosed that the current period is the main flood season, and flood prevention in many southern provinces has entered a critical stage. As of July 11th, insurance institutions nationwide have received a total of 95,000 claims, with estimated losses amounting to 3.21 billion yuan, and payouts and prepayments exceeding 1.1 billion yuan. Beijing Business Daily reported that on July 12th, Luo Yanjun, director of the Life Insurance Department of the China Banking and Insurance Regulatory Commission, stated that from the perspective of the "separation of sales and underwriting" execution, the average commission level of all industry-related channels (bank-insurance channels) has decreased by 30% compared to before. Next, the China Banking and Insurance Regulatory Commission will comprehensively strengthen the requirements of "separation of sales and underwriting", including deepening the reform of bank agency channels, cracking down on illegal activities, and maintaining risk control (2) Looking at the mid-year report outlook, the improvement in value rate is expected to drive a good growth rate for life insurance NBV in 2024H1 despite a high base, with the second quarter performance in the A-share and H-share markets outperforming the same period in 2023. The improvement in investment income is expected to support a positive year-on-year growth rate for the net profit of some insurance companies in 2024H1.

(3) The liability side of life insurance is relatively strong, and the net profit is expected to improve quarter by quarter due to a low base. The industry's liability costs are expected to continue to decline, and the interest rate spread loss on the asset side is expected to improve in stages. The outlook for the life insurance sector remains positive, focusing on mid-year reports, long-term interest rates, and policy catalysts in July.

Brokerage: Some brokerages have disclosed mid-year performance forecasts, with trading volume improving month-on-month, focusing on sector beta catalysts

(1) This week, the average daily stock trading volume in A-shares was 694.4 billion, up 13.7% month-on-month. The new issuance of equity/non-monetary funds this week was 9/33 billion shares, down 17%/+30% month-on-month, and down 68%/-83% year-on-year; this week's Hong Kong stock ADT was 101.2 billion Hong Kong dollars, down 2% month-on-month and up 13% year-on-year.

(2) On July 10th, the CSRC approved the suspension of securities lending and margin trading business, while the exchanges further raised the margin ratio for securities lending. The regulatory intent is to counter-cyclically regulate and protect the market. With a securities lending scale of 30 billion, an annualized cost of securities lending of 2.5%, and a securities lending yield of 7%, the net interest income from securities lending is estimated to be 1.35 billion, and the net profit contribution is estimated to be 680 million based on a 50% net profit margin, accounting for 0.54% of the net profit of 40 listed securities firms in 2023.

(3) Several brokerages disclosed mid-term performance forecasts this week, with most expecting a year-on-year decrease. Among them, Haitong Securities expects a net profit attributable to shareholders of 0.919 to 1.167 billion in the mid-year report, a decrease of 69.5% to 76.0% year-on-year, while Guolian Securities expects a net profit attributable to shareholders of 0.83 billion, down 86.2% year-on-year.

(4) The brokerage sector's holdings and valuations are at historical lows, focusing on beta catalysts, and optimistic about internet brokerages (financial IT), merger themes, and undervalued top brokerage opportunities.

Risk Warning: Stock market and macroeconomic fluctuations have uncertain impacts on brokerage and insurance profitability; insurance liability growth may fall short of expectations; brokerages are subject to regulatory policy uncertainties