Limited scale and fierce competition, Capital Securities may need significant discounts to attract customers

Capital Securities plans to become the fourteenth A+H listed securities stock, but market competition is fierce, and the company is of small to medium size, likely requiring a larger discount compared to A shares to attract investors. Key Points: Capital Securities' profit growth in the first half of this year was only 2.8% Small to medium-sized securities stocks are generally discounted by more than 40% compared to A shares Zheng Ruitang The competition in the mainland securities market is extremely fierce, with 42 securities companies listed on the A-share market. Among them, Capital Securities Co., Ltd. (601136.SH) is considered relatively small in scale. According to the prospectus submitted by the group to the Hong Kong Stock Exchange, its revenue and net profit for the fiscal year 2024 rank 28th among the 42 companies, but its growth performance ranks higher. The compound annual growth rates of revenue and net profit from 2022 to 2024 rank fifth and tenth, respectively; the average return on total assets ranks first. Capital Securities' profits for the years 2022, 2023, and 2024 are projected to be 550 million yuan, 701 million yuan, and 985 million yuan, respectively, showing steady growth. However, the profit for the half-year ending June 2025 was 490 million yuan, only a slight increase of 2.8% compared to the same period last year, mainly due to the impact of bond market fluctuations on asset management business, leading to a decline in performance fee income. On the other hand, investment income surged significantly due to a booming stock market. Outstanding Asset Management Capital Securities' revenue mainly comes from four major businesses: asset management, investment, investment banking, and wealth management, among which the asset management business has performed relatively well. In recent years, the scale of China's asset management business has shown a downward trend, with the net value of asset management products decreasing from 8 trillion yuan in 2020 to 5.5 trillion yuan in 2024. However, Capital Securities has grown against the trend, with its asset management scale increasing from 107.3 billion yuan at the end of 2022 to 165.5 billion yuan by the end of June this year. Revenue comes from management fees ranging from 0.45% to 0.55%, which is relatively stable, while performance fees ranging from 0.15% to 0.65% are influenced by investment performance. Among investment-related businesses, only fixed income investment trading has stable returns, with comprehensive returns of 8.85%, 7.92%, 9.14%, and 9.76% for 2022, 2023, 2024, and the first half of 2025, respectively. The performance of securities investments has been more volatile, with stock holdings of 405 million yuan, 281 million yuan, and 2.17 billion yuan for the years 2022, 2023, and 2024, respectively, and return rates of -3.73%, 0.5%, and -0.27%, indicating more losses than gains. By the end of June 2025, with a booming stock market, holdings increased significantly to 5.5 billion yuan, but the return rate was only 4.72%. However, as a small to medium-sized securities firm, Capital Securities participates less in the sponsorship and underwriting of new stock listings, with investment banking revenue accounting for only 5.1% of total revenue in the first half of this year, failing to gain a share in the recent hot new stock financing market Affected by A-share Atmosphere The performance of mainland securities stocks is greatly influenced by the trends in the stock market. In recent years, the performance of A-shares has been volatile, causing the scale of the mainland securities industry to stagnate. From 2020 to 2024, the compound annual growth rate of the mainland securities market size is only 0.1%. The Shanghai Composite Index soared earlier this year, starting from 3,400 points in mid-June and reaching 3,800 points by August, but has since been stuck at this level. Recently, it has been further affected by the shadow of the China-U.S. trade war, leading to a deeper adjustment in securities stocks compared to the broader market. Therefore, the IPO of Capital Securities may be influenced by the market atmosphere. If one believes that the A-share bull market is not over, there should still be room for speculation after the listing. Among the 42 securities companies currently listed on A-shares, 13 are listed in Hong Kong as H-shares. The last securities stock to be listed as A+H was Shenwan Hongyuan (6806.HK) in 2019, and Capital Securities is expected to become the 14th A+H listed securities stock. Capital Securities has experienced negative operating cash flow for several consecutive years. As of the end of June 2023, 2024, and 2025, the operating cash outflows were 313 million yuan, 1.971 billion yuan, and 120 million yuan, respectively. The cash value at the end of 2024 is 2.65 billion yuan, a year-on-year decrease of 12.6%, and by June 2025, the cash value is expected to further decline to 1.8 billion yuan. The funds raised from the Hong Kong stock market are believed to be able to expand asset scale, maintain sufficient liquidity, and continue to develop margin financing and securities lending business, thereby increasing the capital for competition in a highly competitive market. Market Value Doubled in Three Years Capital Securities was established in 2000, with the major shareholder being the state-owned Capital Group, a brokerage controlled by the Beijing State-owned Assets Supervision and Administration Commission. It was listed on the Shanghai Stock Exchange in December 2022, and the stock price surged 44% on the first day of listing, reaching a market value of 27.8 billion yuan. In less than three years, the market value has doubled to approximately 60 billion yuan. As of October 17, Capital Securities' stock price has risen 5.86% over the year, but has fallen 8.5% in the past month, with a price-to-earnings ratio of 59 times and a price-to-book ratio of 4.5 times