UPDATE 1-China's CITIC Securities Q1 profit falls 40 pct

* Q1 net profit falls 40.3 percent, more than expected

* Profit in 2008 slumps 41 percent due to weak markets

* Stands to benefit from second board, IPO resumption (Adds analyst comment, more details)

By Samuel Shen and Jacqueline Wong

SHANGHAI, April 30 (Reuters) - CITIC Securities Co (600030.SS), China's biggest listed brokerage, posted a worse-than-expected 40.3 percent drop in first-quarter profit despite a recent rebound in the local stock market.

Chinese brokerages are suffering from thinner margins, a lack of initial public offerings and lower investment returns from propriety trading as the benchmark Shanghai Composite Index .SSEC tumbled 65 percent last year, although it rebounded 30 percent in the first quarter.

January-March net profit fell to 1.50 billion yuan ($219.8 million) from 2.52 billion yuan a year earlier, the Beijing-based broker said in a statement to the Shanghai Stock Exchange.

Revenue fell 40.2 percent to 3.46 billion yuan, in part reflecting an 80 percent slide in securities underwriting income to 117.8 million yuan, as well as an 86 percent drop in investment income to 285.5 million yuan.

"The results are very disappointing, given the strong market rebound," said Liang Jing, analyst at Guotai Junan Securities Co, who had forecast a 20 percent drop in CITIC Securities' first-quarter earnings. "Now, we're not so optimistic on the brokerage's second-quarter earnings."

However, CITIC Securities still stands to benefit from the launch of a Nasdaq-style second board in the second half of this year and a possible resumption of IPOs, Liang added. The company's newly set up private equity investment arm is also likely to contribute to earnings in the long run.

CITIC Securities, the broking arm of China's largest financial conglomerate, said its 2008 profit tumbled 41 percent to 7.31 billion yuan, largely in line with preliminary full-year figures released on Jan. 21.

The brokerage faces tougher competition from overseas rivals including Goldman Sachs (GS.N), Morgan Stanley (MS.N) and Credit Suisse (CSGN.VX), which have set up joint ventures in China.

A widening business scope for Chinese banks, such as being able to provide loans for mergers and acquisitions, also poses a threat to the company as it erodes the role of securities firms in corporate financing, CITIC Securities said.

CITIC Securities shares dropped nearly 5 percent in early trading on Thursday and are up around 40 percent this year, beating the benchmark index's gain of about 36 percent.

CITIC Securities said last month that China Life Insurance Co (601628.SS) and its parent had cut their combined stake in the brokerage to 12.32 percent from 17.32 percent. In February, shirt-maker Youngor Group Co (600177.SS) said it sold 175 million shares in CITIC Securities.

"We think that CITIC Securities is still worth long-term investment," said Tian Liang, analyst at Ping An Securities Co. "Its share price is expected to rise after the impact from China Life and Youngor's share sales fades." ($1=6.823 Yuan) (Editing by Ian Geoghegan)