Aug. 14 (Bloomberg) -- Citic Securities Co., poised to overtake Nomura Holdings Inc. as Asia's biggest brokerage, said first-half profit jumped more than fivefold as a surging Chinese stock market fueled share trading and underwriting fees.

Net income rose to 4.2 billion yuan ($554 million), or 1.41 yuan per share, from last year's 775.8 million yuan, or 0.26 yuan per share, the Beijing-based company said in a statement e- mailed to Bloomberg today. Last year's profit was 855.5 million yuan when including earnings from units such as China Asset Management Co.

China's benchmark CSI 300 Index has more than doubled this year, fueling $21 billion in share sales by the nation's companies. The market value of Citic Securities has surpassed that of Lehman Brothers Holdings Inc. and Bear Stearns Cos. as investors bet the Chinese rally still has some way to go.

``Citic Securities has many deals this year and I expect second-half earnings to be even better than the first half,'' said Leo Gao, who helps to manage the equivalent of $2.3 billion at APS Asset Management Ltd. in Shanghai, including Citic Securities shares.

Citic Securities' shares, which have tripled this year, jumped 8.5 percent today to a record 82.48 yuan on the Shanghai stock exchange, valuing the brokerage at $32.4 billion. Among securities firms in Asia, that trails only the $33.6 billion of Japan's Nomura.

``I am very positive on Citic Securities,'' Victor Wang, a Hong Kong-based analyst at UBS AG, said before the results were announced. ``The fundamentals of the company are strong.''

`Buy' Ratings

Wang recommended the stock to investors for the first time on July 25 with a target price of 93 yuan, 13 percent higher than today's close of 82.48 yuan. Eight of the nine analysts who cover the stock rate it a ``buy.''

Citic's brokerage commissions jumped sixfold to 6.6 billion yuan in the first half.

Chinese individuals are putting more of their $2.2 trillion of savings into the stock market to beat inflation. Consumer prices rose 5.6 percent in July, the biggest gain in more than a decade, while benchmark one-year deposit rates are at 3.3 percent.

Investors opened 375,000 accounts to buy mainland shares and mutual funds on Aug. 13, compared with a daily July average of 122,000, according to the China Securities Depository & Clearing Corp. Trading of yuan-denominated shares on the Shanghai Stock Exchange averaged 3.7 billion yuan a day this year, up from last year's 1.7 billion yuan average, according to data compiled by Bloomberg.

IPO Advisory Fees

Citic Securities made 473 million yuan, or 4.4 percent of its revenue, from arranging share sales in the first half. Industrial & Commercial Bank of China Ltd. and Air China Ltd. are among mainland companies that have sold shares on the domestic market in the past year as the government seeks to improve the quality of mainland stocks.

Citic Securities' investment banking division, led by former Daiwa Securities Co. banker Ted Tokuchi, is the leading underwriter this year, with 20.1 percent of the market. Domestic share sales may top $53 billion in 2007, PricewaterhouseCoopers LLP estimates.

``Citic Securities has many deals this year and I expect second-half earnings to be even better than the first half,'' said APS Asset Management's Leo Gao.

Citic Securities trades at 85 times last year's earnings, compared with 7.7 times for Lehman Brothers and 22 times for Nomura. Still, Citic's net income growth is more than 27 times as fast, Bloomberg data show.

`All About Growth'

``Chinese stocks have higher valuations, but the high price-to-earning ratios are all about growth,'' Gao said.

Still, brokerages remain vulnerable to any decline in the stock market.

``The market rally since last year has been misleading,'' said Fraser Howie, co-author of book ``Privatizing China: the Stock Markets and Their Role in Corporate Reform.'' ``The Chinese brokerage industry is heavily dependent on the stock trading commissions. If the market turns down, they may be making losses.''

Unlike global counterparts such as Goldman Sachs Group Inc. and Merrill Lynch, Citic is unable to profit from a falling market. China doesn't yet allow short-selling, where an investor sells a borrowed security, aiming to buy it back when the price falls and pocket the difference.

Network Expansion

Under Citic Chairman Wang Dongming, the company since 2004 bought Huaxia Securities Co., Kington Securities Co. and Wantong Securities Co. Wang, who once worked at China's failed Huaxia Securities and Southern Securities Co., increased its branch network at a time the brokerage industry was posting losses and embroiled in scandals over the misuse of client funds.

``They've been farsighted, buying brokers when the market was depressed,'' UBS's Wang said. ``Now they are all generating cash.''

Citic and its units have 165 branches and more than 5,000 employees. The company also controls China Securities Co.

Wang and his team also expanded into fund management, taking control of China Asset Management and Citic Fund Management Co. in two years.

Citic is expanding overseas to diversify earnings further.

The company's Hong Kong unit, Citic Securities International Co., aims to advise mainland companies on raising funds in the international market, especially through arranging share sales in Hong Kong, according to its Web site. The firm helped affiliate China Citic Bank arrange its $5.95 billion dual Hong Kong and Shanghai initial public offering in May.

To contact the reporter on this story: Zhao Yidi in Beijing at yzhao7@bloomberg.net

Last Updated: August 14, 2007 08:09 EDT