China's Tightening Regulatory Framework And Fintech Pressures Will Curtail Expansion

Key Takeaways

• Aggressive regulatory tightening and rising competition threaten to cap revenue growth and squeeze profitability across brokerage and asset management operations.
  
• Increasing geopolitical risks and heavy exposure to volatile markets jeopardize international growth ambitions and elevate the chances of financial downturns impacting returns.
  
• Strong growth in digital, international, and asset management segments, coupled with leadership in capital markets, positions the company for durable profitability and robust shareholder returns.

Catalysts

Provides various financial products and services in Mainland China and internationally.

• Ongoing and potentially escalating regulatory tightening in China's financial sector could severely restrict CITIC Securities' most profitable activities across brokerage, asset management, and cross-border services, placing a long-term ceiling on revenue growth and limiting the firm's expansion, regardless of its current scale and diversification.
  
• Accelerating digital disruption and emergence of advanced fintech competitors may lead to the rapid commoditization of key securities services, compressing already thin trading commissions and fee-based income, putting severe downward pressure on net margins and structurally challenging earnings power.
  
• Rising geopolitical tensions and further decoupling between China and Western markets threaten to impede CITIC Securities' internationalization ambitions, undermining recent overseas revenue and profit gains while diminishing future cross-border advisory and asset management fee pools.
  
• Intense competition from both traditional rivals and aggressive newcomers, combined with possible margin compression due to regulatory pricing, could erode CITIC's market share and severely restrict profitability even as headline revenues appear to expand through inorganic growth.
  
• Heavy exposure to volatile capital market activities and proprietary investment risks, coupled with rapid balance sheet expansion and increased leverage, raises the possibility of substantial credit losses or investment write-downs in a downturn, which would undermine net income growth and shareholder returns over the long run.

CITIC Securities Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on CITIC Securities compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming CITIC Securities's revenue will grow by 8.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 34.7% today to 34.5% in 3 years time.
• The bearish analysts expect earnings to reach CN¥28.6 billion (and earnings per share of CN¥1.93) by about July 2028, up from CN¥22.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.1x on those 2028 earnings, down from 19.6x today. This future PE is lower than the current PE for the CN Capital Markets industry at 27.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.16%, as per the Simply Wall St company report.

CITIC Securities Future Earnings Per Share Growth

Risks

• The sustained increase in assets under management, with client asset custody surpassing CN¥12 trillion and total asset management scale growing by 18%, positions CITIC Securities to achieve strong, recurring fee-based revenue and rising net margins over the long term.
  
• The rapid growth of international business, with overseas profit share rising from 3% to 17% and new highs in both revenue and profit, indicates successful globalization and diversification that could drive revenue and earnings expansion in the years ahead.
  
• CITIC Securities' leadership in underwriting, particularly in innovative finance, green bonds, and equity/bond markets, as well as its consistent top market share rankings, suggests the company will benefit from secular capital market growth, supporting long-term revenue streams and profitability.
  
• The accelerating adoption of digital finance, demonstrated by initiatives like the AI Plus Platform, increasing digital financial products, and improved risk management, indicates enhanced operational efficiency and the potential for stable or improving net margins.
  
• Consistent, industry-leading dividend payouts with a 22-year stable record and plans to maintain payout ratios above 35% indicate robust capital returns and earnings resilience, which are likely to underpin share price strength over the long run.

Valuation

• The assumed bearish price target for CITIC Securities is CN¥25.42, which represents two standard deviations below the consensus price target of CN¥34.0. This valuation is based on what can be assumed as the expectations of CITIC Securities's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CN¥38.8, and the most bearish reporting a price target of just CN¥22.5.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥82.8 billion, earnings will come to CN¥28.6 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 13.2%.
• Given the current share price of CN¥29.78, the bearish analyst price target of CN¥25.42 is 17.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.