China brokerages’ 54 percent stock surge may be running out of steam

China’s brokerages are on pace for their best quarter since 2014, though a rare sell call is a sign the rally may be topping out.

CSC Financial Co.’s rating was cut to sell from accumulate by Huatai Securities Co. on March 8, based on the risk that the stock was “overvalued” following its almost 220 percent surge this year. Its valuation as measured by the price to book ratio is 4.97, outstripping the 1.78 measure for a broader Bloomberg gauge of China-listed brokerages, which in turn has risen to align with its 1.73 three- year average.

“I don’t see this wild surge going too far,” said Vincent Hsu, a Taipei-based fund manager at Fuh-Hwa Securities Investment Trust Co. “The prices of some brokers have reached the peak of 2015, and they’re not that cheap.”

Shares of Chinese securities firms were bashed in 2018, amid concern that authorities’ crackdown on risky financing and the trade war with the U.S. would hurt business. They saw a turnaround this year, however, as the government took steps to spur demand for local stocks and on speculation that policy makers are pushing for consolidation.

The sector has risen 54 percent this year, more than the Shanghai Composite Index’s 21 percent advance. CSC Financial paces gains on the domestic CSI 300 Index and Chinese brokerages dominate the top 10 spots on Bloomberg’s gauge of Asia Pacific financial companies.

The surge has swelled the market cap of 34 China-listed securities firms to USD367 billion, nearly five times the value of Goldman Sachs Group Inc., according to data compiled by Bloomberg. Yet, the group’s combined profit for the past 12 months is only about 11 percent bigger than Goldman’s.

Risks are also building up as the sector prepares for an influx of new competition as China opens its market to foreign companies.

UBS Group AG was the first overseas firm to win approval to raise its ownership in a local securities venture to 51 percent under new rules. Nomura Holdings Inc. and JPMorgan Chase & Co. have also filed applications for majority ownership in securities ventures. BNP Paribas SA plans to expand its China operations to include brokerage, futures trading and wealth-management ventures. MDT/Bloomberg