How to view the performance of the non-banking financial sector in the context of a rapid rebound market?

On September 24, the State Council Information Office held a press conference to introduce the policy combination of "Financial Support for High-Quality Economic Development"; on September 26, a meeting of the Central Political Bureau further affirmed the positivity of the current policies. The meeting emphasized "efforts to boost the capital market, vigorously guide the entry of medium and long-term funds into the market, support the mergers and acquisitions of listed companies, and steadily promote the reform of public funds." This Political Bureau meeting deployed economic work in September for the first time, showing a growth stance beyond expectations, and a more positive attitude towards the capital market.

As a "bull market leader," with the rapid rebound of the market, the performance of the non-banking sector is outstanding. How should we view the future performance of the non-banking financial sector? During the National Day holiday, the Open Source Securities Research Institute launched the heavyweight "Industry Countermeasures" column. In this issue, Chief Analyst Wei Jixing of Open Source Securities Strategy interviewed Chief Analyst Gao Chao of the non-banking financial sector, interpreting the future development of the non-banking financial sector after the rapid rebound of the market.

Key Points

Strategy: In this current uptrend, we believe there are three major strong driving factors: first, the significant policy reversal, which is an important cornerstone of the overall expectation reversal; second, the rate of change in sentiment in the era of self-media; third, the speed of capital movement far exceeds that of other historical periods. The current policy, as a fulcrum, has leveraged an extreme reversal of risk appetite. In this context, the rapid improvement in the funding situation will bring a very strong market momentum, which the current market has already confirmed. In addition, the potential and capability of the funding situation are very strong, with a significant increase in residents' deposits in the previous period, and a relatively large space for residents' funds to enter the market. At the same time, overseas ratings of A-shares have shown a clear reversal, so it is expected that domestic funds will lead the way, with overseas funds continuing to follow. In this context, the beta attributes of the securities and insurance sectors are very prominent. Under the three major strong driving factors mentioned earlier, we believe that one of the main themes of the rebound in the future will be the non-banking financial sector.

Non-banking Financial Sector: The combination of growth stabilization and stock market stability policies has exceeded expectations. Market trading volume is expected to continue to increase, coupled with a low base. We expect a significant improvement in the performance of listed securities firms in the second half of the year on a year-on-year basis. We are optimistic about high-beta elastic internet securities firms (financial IT) targets, optimistic about securities firms with prominent wealth management advantages and still low valuations, and optimistic about the main themes of mergers and acquisitions and undervalued leading securities firms. Looking at the medium to long-term outlook, the prosperity of the life insurance liability side is improving, CSM is growing positively for the subsequent release of operating profits, the equity market rose significantly in the third quarter, coupled with a low base, it is expected that the growth rate of the life insurance sector in the second half of the year will expand on a year-on-year basis; the signal of growth stabilization is strong, long-term bond rates have stabilized at the bottom, and we continue to see excess opportunities in the life insurance sector.

Q: The current rebound market is in full swing, how do you view the future market of the non-banking financial sector?

A: For the current market, we believe that short-term impacts of funds and sentiment may be significant. We can analyze from three aspects: market trading heat, a review of the securities sector, and fund flows.

First, we can observe the trading heat of the securities sector. Historically, after exceeding a peak of 9%, the securities sector may reach a temporary high point. On the last trading day of this week, the turnover rate of the securities sector reached 8.2%, which has not been reached yet, so we can continue to observe in the future Secondly, looking back at the securities sector. Comparing the market performance of the securities sector in 2019, the entire market experienced a long period of downturn in 2018. Starting from October, the political bureau meeting stated the intention to strengthen the construction of the capital market to stimulate market vitality. In November 2018, the Sci-Tech Innovation Board was launched, and some financial policies at that time also focused on easing stock pledge issues. Subsequently, in January 2019, new social financing and credit significantly increased, broad credit easing took effect, and then the stock market rose significantly, with the non-banking sector leading the gains and the securities sector showing strong resilience. Comparing to the current situation, in the past week, the Shanghai and Shenzhen 300 Index has risen by about 25%, with the securities and insurance sectors rising by 39% and 29% respectively. If compared to the levels of 2019, the current increase may reach half of that at that time; if compared to the market trends of 2014-2015, there may be even greater room for future market trends.

Thirdly, looking at the capital side. We believe that compared to new account opening data, the incremental funds from existing individual investors are larger, and the age profile of new account users tends to be younger. In terms of the volume of residents' existing financial assets, the total savings of residents is about 145 trillion yuan, and bank wealth management is about 28 trillion yuan, indicating a large scale. Looking at the incremental data, the increment of residents' deposits in 2022 and 2023 has significantly increased, with a large excess savings volume, indicating potential room for release in the future. Subsequently, attention will be paid to the improvement of investor confidence and risk appetite.

Q: How do you view the guidance of financial policies on the fundamentals and stock prices of the non-banking financial sector?

A: Indeed, we have seen many policies recently, especially the issuance of guidance to promote the entry of medium and long-term funds into the market. The policies to promote the entry of medium and long-term funds into the market have been hinted at by regulators before and after the release of the new nine national policies, which overall meet expectations. The impact on the market and industry is more medium to long-term, belonging to long-term mechanism optimization.

Marginally, the tone set by the political bureau meeting in September this year towards the capital market is more positive, mentioning "efforts to boost the capital market," providing an opportunity for cross-departmental policy coordination in the future. Specific policies on the entry of medium and long-term funds into the market in the pension, insurance, and public fund sectors are worth looking forward to. Firstly, in the pension sector, the equity allocation ratio of domestic pensions is still relatively low compared to developed markets; secondly, for insurance funds, some are restricted by solvency pressure and other factors, and the future promotion of the reform of the 3-year long-term assessment mechanism is expected to increase the upper limit of equity allocation for insurance companies; in the public fund sector, regulators have proposed to increase the issuance of equity funds and support the development of index funds. Subsequently, attention will be paid to changes in demand and the promotion of comprehensive fee reform in public funds.

Q: What are the bright spots in the fundamentals of securities stocks at present? What are the opportunities for reversal in the future?

A: Looking back at 2014-2015, securities firms had greater expansion in various businesses, with outstanding elasticity in brokerage and margin financing businesses, driving ROE to historical highs; from 2019 to 2021, during the overall slow bull trend in the market, the central ROE of securities firms has decreased compared to 2015. Industry competition intensification and tightening regulatory policies still bring certain pressure on the "value" of securities business this year. Subsequently, attention will be paid to the recovery strength of "quantity" and changes in policies In addition, compared to before, the overall scale of directional proprietary trading business of securities firms has been somewhat reduced, weakening the impact on the performance of securities firms. However, some top securities firms have brought about greater exposure flexibility through direct investment in primary equity and follow-up business in the science and technology innovation board, which may be one of the highlights bringing elasticity to the performance of securities firms.

We have selected directions with highlights within the securities industry: one is the top securities firms. Top securities firms have good advantages in wealth management, asset management, derivatives, investment banking, and overseas business, which we believe have long-term growth potential. The second is securities firms with strong advantages in large wealth management business lines. This includes targets with prominent advantages in public fund management, distribution business, and buyer-side advisory services with high profit contributions. The third is in terms of the main theme of mergers and acquisitions. Regulatory support allows top securities firms to become stronger through mergers and acquisitions. This year, the industry's merger and acquisition trend has significantly accelerated, and opportunities in the main theme of mergers and acquisitions are expected to continue.

Another type is atypical securities firms, which we refer to as internet securities firms or financial IT. We believe that the elasticity of profitability and valuation of such targets is more prominent. The profitability elasticity of the two businesses, 2C financial information services and internet securities brokerage business, is closely related to trading activity. At the same time, the industry's competitive landscape is good, showing a Matthew effect. In addition, in recent years, with the support of new media and new technologies, the leading companies in 2C financial information services have continuously enhanced their product and customer service capabilities, with long-term increases in penetration rates. Against the backdrop of significantly increased market activity, the profitability elasticity of this business is expected to be significantly unleashed.

Q: Regarding insurance, how do we view the bright spots in the fundamentals in the future?

A: The insurance sector has shown significant excess returns from January to August this year. We attribute this to three factors. Firstly, the liability side of insurance companies has exceeded expectations, with the continuous effectiveness of channel transformation. Benefiting from the policy of unifying banking and insurance, actively optimizing product structures has significantly increased the value of new business, thereby driving good growth in NBV. Secondly, the net profit growth of listed insurance companies in the interim report exceeded expectations year-on-year, mainly benefiting from floating profits brought about by dividend assets and the rise in the bond market. Thirdly, from a trading perspective, the insurance sector itself has relatively stable dividends and high dividend yields, leaning towards a dividend style. Some institutions are also paying attention to the pro-cyclical properties of insurance companies during the economic recovery phase.

Looking ahead, we believe that the prosperity of the insurance industry will continue. On the one hand, the continued effectiveness of channel transformation and quality improvement will persist. Individual insurance channels are stabilizing in terms of manpower, with capacity improvements expected to continue. Bancassurance channels are expected to benefit from the relaxation of restrictions on the "1+3" network, and driven by the unification of banking and insurance and the continuous optimization of product structures, we believe there is still room for improvement in the value of insurance companies.

Furthermore, from the product side, dividend insurance is expected to become an important growth point next year, especially with the good performance of the equity market this year. The performance of dividend-type products is expected to be good, especially as traditional insurance products become less cost-effective than dividend-type products after further reductions in predetermined interest rates. With active promotion by insurance companies, dividend-type products are expected to experience high growth. We continue to see investment opportunities in the life insurance sector.

Q: How do we view the future space for securities firms and insurance stocks?

A: From a medium to long-term perspective, we mainly consider two aspects. One is to assess how much the improvement in profitability is, that is, the extent of improvement in fundamentals. The other is to judge the potential for valuation to increase by looking at the current valuation level From the perspective of profit improvement, this round may be different from 2019. In this round, the insurance sector's profit elasticity may be more prominent. On the one hand, new accounting standards have been used, amplifying the equity elasticity of insurance; on the other hand, the beta elasticity of securities firms has decreased.

According to our sensitivity analysis, in a scenario where the market rises by 20%, the performance improvement of the securities sector may be in the range of 30-40%, while the life insurance sector's performance improvement may exceed 50%. The financial IT sector also has strong beta properties. Overall, under the same market increase, the profit elasticity of insurance and financial IT may be stronger than that of securities firms.

In terms of valuation levels, the PB valuation percentile of securities and insurance sectors in the past 5 years is around 50%/60%, with some targets in the financial IT sector exceeding 70%.

Considering the profit improvement space and valuation levels, the life insurance sector currently has a relatively high valuation cost-effectiveness. Financial IT targets may have stronger elasticity, while looking for undervalued securities firms with high profit ceilings in the securities sector.

Q: Which market, A-share or Hong Kong stock, will have greater elasticity for non-bank financial stocks?

A: From a historical review, Hong Kong financial stocks tend to follow fundamental logic more closely, with institutional fund pricing being more apparent and also affected by liquidity issues. We recommend focusing on some Hong Kong-listed life insurance targets and some undervalued securities targets.

Q: Recommendations for the non-bank financial industry and the recommended order of sub-sectors?

A: Currently, institutions are still relatively underweight on the non-bank sector, and we recommend actively increasing allocation to the non-bank financial sector. From a short-term heat index perspective, there is still room for improvement. Looking at the medium to long term, policy reversals have opened up industry growth prospects by changing investor expectations. Looking ahead, focus on policy sustainability and the effectiveness of broad credit.

The non-bank financial sector has prominent beta properties, and a rising stock market is expected to have an immediate impact on third-quarter performance. Considering the profit improvement space and valuation levels, the life insurance sector currently has relatively high valuation cost-effectiveness, financial IT targets may have stronger elasticity, while looking for undervalued securities firms with high profit ceilings in the securities sector.

Source: Open Source Securities Research Institute Original Title: "Open Source Research · Industry Countermeasures | Strategic Dialogue on Non-Bank Financials: How to View Non-Bank Financials in a Rapid Rebound Market?" Host: Wei Jixing Chief of Open Source Securities Strategy Certificate Number: S0790524030002 Guest: Gao Chao Non-bank Financial Chief Analyst

Certificate Number: S0790520050001