China Broker Stocks Crashing Still Have Double Goldman Valuation

The rout in Chinese equities has darkened the earnings prospects for once high-flying brokerage stocks, dragging their valuations to the lowest in seven months. There may be more room to fall.

A Bloomberg Intelligence index of 21 yuan-denominated Chinese brokerage shares has fallen 17 percent in the past week. It still trades at a price-to-book ratio of 3.35, more than double Goldman Sachs Group Inc.’s valuation and almost triple that of Morgan Stanley, data compiled by Bloomberg show.

“The decline is not over yet,” Castor Pang, head of research at Core Pacific Yamaichi in Hong Kong. “Their valuations will very likely drop further, at least until the level in October and November when people started realizing there was a bull market coming.”

The Bloomberg Intelligence index’s price-to-book ratio averaged 2.4 times in those two months, or about 28 percent lower than its current level.

Following a 152 percent rally in the year through June 12, the Shanghai Composite Index has slumped 32 percent as traders unwound the record margin bets that had bolstered brokerage profits. The firms’ shares had surged along with equities, driving the biggest brokerages, Citic Securities Co. and Haitong Securities Co., up more than 180 percent.

Government efforts to arrest the stocks swoon in the past week only served to undermine investor confidence in securities firms. The brokerage index plummeted 11 percent since initial public offerings were halted at the weekend and firms including Citic Securities were tapped for a 120 billion yuan ($19 billion) market-support fund.

Priciest Stocks

The rout caught some analysts off guard. Judy Zhang, a BNP Paribas SA analyst, upgraded her ratings on Citic and Haitong to “buy” and “hold,” respectively, on Friday, saying the government will do “whatever it takes” to restore investor confidence. She issued another report Monday saying there was “no need to panic” on brokerages, and wasn’t able to comment when reached by Bloomberg on Wednesday.

Citic and Haitong traded for about 2.5 times book on Wednesday, more than New York-based Goldman Sachs’s 1.2 the previous day, data compiled by Bloomberg show. Eight of the world’s 10 priciest brokerage stocks measured against book value are Chinese, according to data compiled by Bloomberg on firms with a market value greater than $5 billion.

Book value is a measure of what would be left over for shareholders if all assets could be sold at current valuation and all liabilities paid off.

The recent drop in the Bloomberg Intelligence index’s valuation is the steepest since the first half of 2010, when government measures to curb surging property prices dragged the Shanghai Composite Index down by 27 percent. The brokerage index lost 44 percent in that period.

The pressure on Chinese brokerages “would last until the stock market is stabilized,” said Edmond Law, a Hong Kong-based analyst with UOB-Kay Hian Holdings Ltd. “Share movement is pretty much sentiment-driven now.”

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