Key takeaway

Soochow Securities has three expectation gaps that have not been fully priced in by the market: First, ROE leads peers while PB ranks at the bottom. Fundamentals have already recovered, but valuation recovery has lagged as the market continues to price the company based on an outdated narrative; second, proprietary trading appears highly beta-driven, but the company actually has very low equity exposure and one of the most stable returns among peers. In addition, its dividend yield has ranked first among listed brokers for consecutive years, creating a value mismatch between high dividends and low PB; third, the acquisition of Donghai Securities will integrate Soochow Securities' research capabilities into Donghai Securities' channel network in southern Jiangsu, where it has deep regional penetration. Brokerage market share is expected to increase significantly, with clear room for cost reduction and efficiency improvement. The gradual market recognition of these three expectation gaps is the core driver for valuation recovery.

PB-ROE mismatch: Fundamentals recovered first, while valuation recovery lagged. Soochow Securities's ROE ranked third, third, second, and thi rd among seven comparable brokers from 2023 to 2026, respectively. Its profitability exceeds that of brokers of similar size, but its PB valuation has long ranked at the bottom. Currently, its valuation remains below the average of comparablecompanies. Even after factoring in the 72% proportion of freely tradable market capitalization, the discount magnitude still exceeds the range that can be reasonably explained. Reviewing the evolution of its valuation since listing, the 2017 rights issue proposal triggered a discount, while two additional rights issues during 2019-2021 further deepened it. However, from 2H23 onward, ROE has gradually recovered and surpassed the sector average, yet valuation has remained stuck in the discount range as the market continues to price the company using the old narrative.

Expectation gap in proprietary trading capability and dividend yield. Soochow Securities' proprietary trading income accounted for 43% of total revenue, while capital-intensive businesses accounted for 58%, both ranking in the highest range among peers. As a result, the market assigns the company a cyclical discount. However, from 2020 to 2025, the company's average annualized proprietary trading return reached 5.97%, ranking second among peers, while the fluctuation range was only 5.9 pcts, indicating stronger stability than most comparable brokers. This is because directional equity exposure is extremely low, while OCI account exposure is higher than peers, limiting the impact of profit volatility. Meanwhile, the company's dividend yield climbed from 14th in the industry in 2020 to rank first among 43 listed brokers for consecutive years. The current TTM dividend yieldis approximately4%-5%, forming a significant expectation gap withsub-1x PB.

Thesis

Expected gap from the acquisition of Donghai Securities: Opening a second growth curve for the brokerage business. Soochow Securities plans to acquireRMB11.519bnfor83.68%equity interest in Donghai Securities. Donghai Securities is the only municipally owned state-backed brokerage in Changzhou. In 2025,brokerage business revenue accounted for46%. The company operates8branches in Changzhou and63branches nationwide, serving3.65mn accounts. Its channel network carries significant value. Currently, Donghai Securities'ROEis only1.33%, dragged down by rigid expenses, losses from international business, and historical regulatory penalties. After Soochow Securities takes control, its research, asset management, and investment banking capabilities will be fully integrated. Improved client asset conversion efficiency and cost reduction through integration are expected to unlock potential profits. The branch networks of the two firms are complementary across Suzhou, Wuxi, and Changzhou——Soochow Securities has a deep presence in Suzhou but relatively few branches in Changzhou, while Donghai Securities provides an established regional entry point through its Changzhou outlets.

Earnings forecast: The company is expected to generate operating revenue of RMB8.771bn, RMB11.311bn, and RMB12.617bn in 2026-2028, with net profit attributable to shareholders of the parent company of RMB3.124bn, RMB4.036bn, and RMB4.521bn, respectively. Profit in 2026 is expected to face pressure mainly because the administrative expense ratio will rise from 47% to 53% due to post-merger integration. From 2027 onward, revenue growth is expected to drive earnings elasticity. Using the PB valuation method, the average PB of six comparable companies, including Guolian Minsheng, Zheshang, Caitong, Zhongtai, Changjiang, and Industrial Securi ties, is estimated at 1.03x, 0.98x, and 0.92x for 2026-2028, respectively; the company's2026-2028BPSis expected to reachRMB12.25, RMB12.78, and RMB13.16, respectively. Using the averagePBof comparable companies as the targetPB, the company's target price is estimated atRMB12.14toRMB12.62.

Risks: Risks related to uncertainty in the pace of valuation recovery; risks that the stability of proprietary trading business may not be sustainable; and risks that merger integration may fall short of expectations.