Sector Note Financial Services│China│February 26, 2019
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Stockbroking & Exchanges Valuation normalization to continue ■ Surging daily turnover and the strong performance of the A-share index led to a
major upward revision in our earnings forecasts. ■ We raise our FY19E EPS for CITIC Securities, Haitong Securities and GF Securities
by 18%, 20% and 19%, respectively. Target prices are revised up accordingly. ■ Trading velocity and margin financing balance have stayed at a relatively healthy
level. ■ Maintain BUY on Haitong Securities and GF Securities. We expect the normalization
of their valuation to continue, as their PBR is still trading at a 18%–24% discount to the historical average.
■ Our latest average daily turnover assumption for 2019E is RMB500bn, which may see further upside if the market momentum remains strong.
Trading volume surged in February Although the A-share average daily turnover (ADT) YTD is only RMB374bn, we saw a sharp increase in February to RMB516bn (Figure 3). In particular, trading volume reached RMB1,040bn yesterday, the highest level since November 2015.
Strong index performance also helped The CSI300 has already surged 24% YTD, which helped securities companies in at least two respects: (i) the risk of the stock-pledged lending business and the margin financing business has become much lower compared with that of last year when the market was very weak; and (ii) investment gains are likely to rebound significantly after the poor performance last year.
Market activity not overheated at present Trading velocity has picked up on the back of surging trading volume. But the latest annualized figure is only 1.97x, still far below the level of about 2.4x in Q1 2018, when the CSI300 reached its peak last year. Meanwhile, the margin financing balance of the whole market yesterday was RMB765bn, well below the level of about RMB1,080bn in January 2018 (Figure 4).
Upward earnings revision We raise our 2019E ADT from RMB380bn to RMB500bn and 2019E year-end margin financing balance from RMB817bn to RMB949bn. We also expect the strong index performance to support investment gains. Therefore, we lift our FY19E EPS for CITIC Securities (6030.HK; CITICS), Haitong Securities (6837.HK; HTS) and GF Securities (1776.HK; GFS) by 18%, 20% and 19%, respectively.
Maintain BUY on HTS and GFS Our target prices for CITICS, HTS and GFS are revised up by 22%, 28% and 24%, respectively. As the 2018E EPS of HTS and GFS dropped about 40% YoY because of the unfavourable market conditions, their share prices were under heavy pressure last year and their latest PBR is still lower than the historical average by 24% and 18%, respectively.
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Figure 1: Peer valuation
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
Figure 2: Peer comparison
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
China
Overweight (no change)
Highlighted companies
CITIC Securities HOLD, TP HK$19.100, HK$20.400 close
We like CITIC Securities’ leading position in various business segments, but its PBR is higher than some tier-1 players by 30%–40%.
GF Securities BUY, TP HK$17.200, HK$14.020 close
After a 40% decline in EPS in 2018E, we expect its 2019E EPS to rebound by 44%, as the performance of the trading business should normalize. The latest PBR is still lower than the historical average by 18%.
Haitong Securities BUY, TP HK$13.300, HK$11.260 close
As Haitong is one of the largest players in the stock-pledged lending business, the recent market rally should mitigate concerns about the potential risk. Its PBR is still trading at a 24% discount to the historical average.
Summary valuation metrics
Insert
Analyst(s)
Wong Chi Man
T (852) 3698 6317 E [email protected]
Mark Lau T (852) 3698 6393 E [email protected]
Company Ticker RatingPrice
(HK$)
Market cap
(US$m)2017 2018E 2019E 2017 2018E 2019E 2017 2018E 2019E
CITIC Securities 6030 HK EquityHOLD 20.40 42,466 18.0 22.4 16.6 1.37 1.37 1.29 2.4 1.8 2.4
Haitong Securities 6837 HK EquityBUY 11.26 21,938 12.7 21.4 13.7 0.93 0.94 0.89 2.4 1.4 2.2
GF Securities 1776 HK EquityBUY 14.02 19,005 10.9 18.5 12.9 1.11 1.08 1.02 3.2 1.9 2.7
Simple average 13.9 20.8 14.4 1.14 1.13 1.07 2.7 1.7 2.4
PER (x) PBR (x) Dividend yield (%)
2017 -2019E
Company Ticker 2018E 2019E CAGR (%) 2017 2018E 2019E 2017 2018E 2019E
CITIC Securities 6030 HK Equity(17.6) 34.9 5.4 7.8 6.2 8.0 2.0 1.6 1.9
Haitong Securities 6837 HK Equity(38.9) 56.0 (2.4) 7.6 4.4 6.6 1.6 1.0 1.4
GF Securities 1776 HK Equity(40.9) 44.0 (7.8) 10.5 5.9 8.2 2.4 1.4 1.9
Simple average (32.5) 45.0 (1.6) 8.6 5.5 7.6 2.0 1.3 1.8
EPS Growth (%) ROAE (%) ROAA (%)
2
Financial Services│China
Stockbroking & Exchanges│February 26, 2019
Figure 3: Average daily turnover of the A-share market Figure 4: Margin financing balance of the A-share market
SOURCES: WIND INFO,CGIS RESEARCH SOURCES: WIND INFO,CGIS RESEARCH
Figure 5: Trading velocity of the A-share market
SOURCES: CGIS RESEARCH, BLOOMBERG
Figure 6: CSI300 Figure 7: Valuation assumptions
SOURCES: CGIS RESEARCH, CAPITAL IQ SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
Company HTS CITICS GFS
Ticker 6837.HK 6030.HK 1776.HK
Rating BUY HOLD BUY
Beta 1.15 1.20 1.20
Cost of equity 8.7% 8.9% 8.9%
Medium-term ROE 8.8% 9.6% 9.6%
Growth rate 6% 6% 6%
PBR = (ROE-g)/(COE-g) 1.05 1.23 1.23
Target price (HK$) 13.3 19.1 17.2
Upside 18.5% -6.3% 22.7%
3
Financial Services│China
Stockbroking & Exchanges│February 26, 2019
Figure 8: PBR of selected securities companies
SOURCES: CGIS RESEARCH, BLOOMBERG
Company Note Stockbroking & Exchanges│Hong Kong│February 26, 2019
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Insert Insert
CITIC Securities Proven market leader but unappealing valuation ■ CITIC Securities’ 2018E EPS dropped only 18% YoY based on its earnings pre-
announcement, much better than many of its peers’, showing its resilience as a market leader.
■ After raising our 2019E EPS by 18%, we also lift our target price from HK$15.70 to HK$19.10, based on the Gordon Growth Model, equivalent to 1.23x 2019E PBR.
■ However, its valuation looks unappealing, with a premium of 30%–40% over some tier-1 players.
■ Trading at 1.29x 2019E PBR, it is near the high-end of the range in the past three years. Maintain HOLD.
2018 performance much better than most of its peers’ CITIC Securities’ (CITICS) 2018E EPS is expected to drop only 18% YoY, according to its earnings pre-announcement. The performance is impressive and much stronger than some tier-1 players, which reported a 30%–40% decline YoY, and even more in some cases. This shows the resilience of its business amid a challenging environment last year.
2019E EPS revised up by 18% We lift our 2019E average daily turnover forecast for the A-share market from RMB380bn to RMB500bn. We also raise our estimated 2019E year-end margin financing balance of the A-share market from RMB817bn to RMB949bn. Taking the much more favourable market conditions for the trading business into consideration, we raise our 2019E EPS by 18%. This implies ROE of 8%, higher than the level in 2016 (7.4%) and 2017 (7.8%).
Target price of HK$19.10; maintain HOLD We raise our target price from HK$15.70 (beta at 1.2, cost of equity at 8.9%, medium-term ROE at 9.1%) to HK$19.10 (beta at 1.2, cost of equity at 8.9%, medium-term ROE at 9.6%), based on Gordon Growth Model, equivalent to 1.23x 2019E PBR.
Good company but not cheap We like CITICS’ market leadership in various business segments. But trading at 1.29x 2019E PBR, the valuation is higher than some other tier-1 players by 30%–40%, which largely reflects its superior quality, in our view.
Valuation at the high end of the range in the past three years CITICS is trading at 1.29x 2019E PER, which is near the high end of the range in the past three years (Figure 1). Therefore, we believe Haitong Securities (6837.HK) and GF Securities (1776.HK) are more attractive, considering the risk and reward profile.
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
Hong Kong
HOLD Consensus ratings*: Buy 9 Hold 7 Sell 0
Current price: HK$20.40
Target price: HK$19.10
Previous target: HK$15.70 Up/downside: -6.4%
CGS-CIMB / Consensus: na
Reuters:
Bloomberg: 6030 HK
Market cap: US$42,181m
HK$331,068m
Average daily turnover: US$44.6m
HK$349.4m
Current shares o/s: 12,117m
Free float: 82.4% *Source: Bloomberg
Key changes in this note
FY19F Revenue increased by 5.3%.
FY19F EPS increased by 18%.
FY19F ROE increased by 1.2ppt.
Source: Bloomberg
Price performance 1M 3M 12M Absolute (%) 29.9 41.3 11.6
Relative (%) 24.9 29.6 19
Major shareholders % held CITIC Limited 16.5
Insert
Analyst(s)
Wong Chi Man
T (852) 3698 6317 E [email protected]
Mark Lau T (852) 3698 6393 E [email protected]
Financial Summary Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Turnover (RMB m) 69,384 45,273 48,185 45,887 53,911
Recurring net profit (RMB m) 19,798 10,363 11,433 9,422 12,710
Adjusted Net margin (%) 39 33 35 32 36Recurring EPS (RMB) 1.63 0.86 0.94 0.78 1.05
% Change 86 (48) 10 (18) 35 PER (x) 10.1 20.4 18.0 22.4 16.6
PBR (x) 1.44 1.48 1.37 1.37 1.29
ROAA (%) 3.7 1.8 2.0 1.6 1.9
ROAE (%) 16.6 7.4 7.8 6.2 8.0
79
88
97
106
115
124
11.000
13.000
15.000
17.000
19.000
21.000
Price Close Relative to HSI (RHS)
50
100
150
200
Feb-18 May-18 Aug-18 Nov-18
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Stockbroking & Exchanges│Hong Kong
CITIC Securities│February 26, 2019
Figure 1: PBR of CITICS Figure 2: PER of CITICS
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
3
Stockbroking & Exchanges│Hong Kong
CITIC Securities│February 26, 2019
BY THE NUMBERS
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
1
1
1
1
1
1
1
Jan-14A Jan-15A Jan-16A Jan-17A Jan-18F Jan-19F
P/BV vs ROE
Rolling P/BV (x) PageTwoROAE
-30%
-18%
-7%
5%
17%
28%
40%
10
12
14
16
18
20
22
Jan-14A Jan-15A Jan-16A Jan-17A Jan-18F Jan-19F
12-mth Fwd FD Core P/E vs FD Core EPS Growth
12-mth Fwd Rolling FD Core P/E (x) (lhs)
EPSgrFDNrm (lhs)
FD Core EPS Growth (rhs)
Profit & Loss
(RMB'000) Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Investment banking 4,563,090 5,470,917 4,320,427 3,337,580 4,715,590
Brokerage 22,713,891 12,574,497 11,523,441 9,988,669 12,721,551
Trading 287,057 407,164 150,314 195,408 224,719
Asset management 6,449,325 6,860,180 6,327,008 6,754,495 6,902,832
Others 239,160 462,014 343,460 600,000 700,000
Commission and fee income 34,252,523 25,774,772 22,664,650 20,876,153 25,264,692
Interest income 15,621,547 11,232,779 12,806,665 13,091,766 13,982,162
Net investment gains 19,510,014 8,265,068 12,713,196 11,918,772 14,664,000
Total revenue 69,384,084 45,272,619 48,184,511 45,886,690 53,910,854
Other income and gains 3,537,585 4,792,153 8,774,471 9,000,000 9,000,000
Total revenue and other income 72,921,669 50,064,772 56,958,982 54,886,690 62,910,854
Staff cost (14,797,624) (11,507,497) (12,141,247) (12,184,882) (12,607,837)
Commission and fee expenses (4,621,076) (3,331,110) (3,707,615) (3,571,294) (4,289,755)
Interest expenses (12,830,544) (8,884,626) (10,402,063) (11,309,649) (12,951,596)
Others (14,033,038) (12,430,139) (15,139,062) (15,466,819) (16,215,903)
Operating expenses (46,282,282) (36,153,372) (41,389,987) (42,532,644) (46,065,091)
Operating profit 26,639,387 13,911,400 15,568,995 12,354,046 16,845,763
Share of profits of associates 664,352 349,849 602,957 800,000 900,000
Share of profits of JCEs (18,821) (438) 1,092 - -
Exceptional items 2,226 1,748 737 - -
Income before tax 27,287,144 14,262,559 16,173,781 13,154,046 17,745,763
Income tax expense (6,926,800) (3,281,419) (4,196,311) (3,288,511) (4,436,441)
Minority interests (560,551) (615,971) (544,205) (443,949) (598,919)
Net income 19,799,793 10,365,169 11,433,265 9,421,585 12,710,403
Recurring net income 19,797,567 10,363,421 11,432,528 9,421,585 12,710,403
EPS (RMB) 1.634 0.855 0.944 0.778 1.049
Recurring EPS (RMB) 1.634 0.855 0.944 0.778 1.049
DPS (RMB) 0.500 0.350 0.400 0.311 0.420
Balance Sheet
(RMB'000) Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Financial assets 264,784,357 268,476,963 321,175,151 312,500,000 354,500,000
Advances to customers 75,523,403 65,021,193 73,982,611 55,521,428 68,946,461
Others 17,930,312 28,051,520 27,651,731 61,550,000 61,650,000
Cash held on behalf of customers 143,553,897 129,876,778 92,386,338 91,263,827 126,050,400
Bank balances and cash 68,906,892 36,713,034 34,303,141 38,973,168 53,457,978
Total current assets 570,698,861 528,139,488 549,498,972 559,808,423 664,604,839
PPE, net 3,856,121 3,923,261 8,264,559 7,759,368 7,254,178
Financial assets 12,508,463 38,975,935 36,698,109 35,550,000 38,560,000
Others 29,044,797 26,400,155 31,113,004 31,951,622 32,951,622
Total non-current assets 45,409,381 69,299,351 76,075,672 75,260,990 78,765,800
Total assets 616,108,242 597,438,839 625,574,644 635,069,413 743,370,639
Accounts payable 150,456,676 134,397,672 99,854,891 96,263,827 131,050,400
Financial assets sold under repo 127,788,537 121,414,243 111,619,927 93,500,000 110,000,000
Due to banks and other financial institutions 18,033,000 19,550,000 9,835,000 10,000,000 10,500,000
Others 103,934,854 96,581,535 168,384,614 182,644,256 218,718,220
Total current liabilities 400,213,067 371,943,450 389,694,432 382,408,082 470,268,620
Bonds payable 67,835,803 69,752,175 77,641,633 85,000,000 95,000,000
Others 6,322,274 9,954,544 5,096,020 9,500,000 10,400,000
Total non-current liabilities 74,158,077 79,706,719 82,737,653 94,500,000 105,400,000
Total liabilities 474,371,144 451,650,169 472,432,085 476,908,082 575,668,620
Shareholders' equity 139,137,787 142,695,946 149,799,046 154,373,868 163,315,637
Minority interests 2,599,311 3,092,724 3,343,513 3,787,462 4,386,382
Book value per share (HK$) 13.89 13.54 14.59 14.65 15.50
4
Stockbroking & Exchanges│Hong Kong
CITIC Securities│February 26, 2019
BY THE NUMBERS… cont’d
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
Dupont Analysis (as % of average total assets)
Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Investment banking 0.8% 0.9% 0.7% 0.5% 0.7%
Brokerage 4.1% 2.1% 1.9% 1.6% 1.8%
Trading 0.1% 0.1% 0.0% 0.0% 0.0%
Asset management 1.2% 1.1% 1.0% 1.1% 1.0%
Others 0.0% 0.1% 0.1% 0.1% 0.1%
Commission and fee income 6.3% 4.2% 3.7% 3.3% 3.7%
Interest income 2.9% 1.9% 2.1% 2.1% 2.0%
Net investment gains 3.6% 1.4% 2.1% 1.9% 2.1%
Other income and gains 0.6% 0.8% 1.4% 1.4% 1.3%
Total revenue and other income 13.3% 8.3% 9.3% 8.7% 9.1%
Operating expenses -8.4% -6.0% -6.8% -6.7% -6.7%
Operating profit 4.9% 2.3% 2.5% 2.5% 1.8%
Income tax expense -1.3% -0.5% -0.7% -0.7% -0.5%
Recurring net profit (ROAA) 3.7% 1.8% 2.0% 1.6% 1.9%
Leverage (x) 4.6 4.3 4.2 4.1 4.3
Non-client asset/net asset (x) 3.3 3.2 3.4 3.4 3.7
ROAE 16.6% 7.4% 7.8% 6.2% 8.0%
Key Ratios
Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
PER(x) 10.1 20.4 18.0 22.4 16.6
EPS growth (%) 86 48- 10 18- 35
Yield (%) 3.0 2.0 2.4 1.8 2.4
Payout ratio (%) 30.6 40.9 42.4 40.0 40.0
PBR(x) 1.44 1.48 1.37 1.37 1.29
Total asset/equity (x) 4.43 4.19 4.18 4.11 4.55
Non-client asset/net asset (x) 3.29 3.18 3.43 3.41 3.65
ROAA (%) 3.72 1.81 1.96 1.57 1.93
ROAE (%) 16.6 7.4 7.8 6.2 8.0
Revenue breakdown (%)
Investment banking 6.6 12.1 9.0 7.3 8.7
Brokerage 32.7 27.8 23.9 21.8 23.6
Trading 0.4 0.9 0.3 0.4 0.4
Asset management 9.3 15.2 13.1 14.7 12.8
Others 0.3 1.0 0.7 1.3 1.3
Commission and fee income 49.4 56.9 47.0 45.5 46.9
Interest income 22.5 24.8 26.6 28.5 25.9
Net investment gains 28.1 18.3 26.4 26.0 27.2
Key Drivers
Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
A-share average daily turnover (RMB'000) 1,045,302,582 519,090,730 460,911,926 370,064,754 500,000,000
Brokerage market share CITICS 6.3% 5.8% 5.6% 6.1% 6.2%
Margin financing balance (RMB'000) 74,010,000 62,639,640 70,935,900 52,521,428 65,946,461
Staff cost-to-income 26.7% 30.4% 28.3% 30.5% 27.6%
Cost-to-income 52.0% 63.2% 63.7% 69.1% 63.1%
Growth Rates:
Commission and fee income 81.1% -24.8% -12.1% -7.9% 21.0%
Interest income 99.0% -28.1% 14.0% 2.2% 6.8%
Net investment gains 91.2% -57.6% 53.8% -6.2% 23.0%
Total revenue and other income 95.3% -31.3% 13.8% -3.6% 14.6%
Recurring EPS 85.5% -47.7% 10.3% -17.6% 34.9%
Company Note Stockbroking & Exchanges│Hong Kong│February 26, 2019
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Insert Insert
GF Securities Strong earnings recovery in 2019E ■ After a poor performance in 2018E, with a 41% decline in EPS, we expect GF
Securities to report a huge EPS rebound of 44% YoY in 2019E. ■ The share price dropped 51% in the first three quarters of last year, which looked
over-bearish, in our view. ■ We raise 2019E EPS by 19% to reflect surging trading volume and a major rebound in
investment gains on the back of more favourable market conditions. ■ Reiterate BUY with a new target price of HK$17.20 (previous: HK$13.90). ■ At 1.02x 2019E PBR, the stock is still trading at an 18% discount to its historical
average.
2019E EPS estimated to rebound 44% YoY We expect GF Securities (GFS) to report a 41% decline in EPS in 2018E as a result of weak performance in the brokerage, investment banking and trading businesses. However, with a sharp increase in trading volume and the impressive performance of the CSI300 YTD, we forecast that GF Securities will record a 44% rebound in 2019E EPS.
Overly bearish share price performance in 2018 In the first three quarters of 2018, the share price of GF Securities dropped 51%, and its PBR reached a very low level of about 0.6x, much lower than the historical average of 1.25x. This is too bearish, in our view.
Upward revision of 2019E EPS by 19% We lift our 2019E average daily turnover forecast of the A-share market from RMB380bn to RMB500bn. We also lift our estimated 2019E year-end margin financing balance of the A-share market from RMB817bn to RMB949bn. In addition, taking the much more favourable market conditions for the trading business into account, we raise our 2019E EPS by 19%. This implies 2019E ROE of 8.2%, which is not an aggressive forecast compared with the ROE in 2016 and 2017 (>10%).
Target price at HK$17.20; reiterate BUY We raise our target price from HK$13.90 (beta at 1.2, cost of equity at 8.9%, medium-term ROE at 9.1%) to HK$17.20 (beta at 1.2, cost of equity at 8.9%, medium-term ROE at 9.6%), based on the Gordon Growth Model, equivalent to 1.23x 2019E PBR.
Valuation remains undemanding As a result of the deep correction last year, GFS is trading at 1.02x 2019E PBR, still much lower than the historical average of 1.25x (Figure 1). We see the potential for further catch-up of the PBR if the ROE recovery remains intact.
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
Hong Kong
BUY Consensus ratings*: Buy 10 Hold 5 Sell 0
Current price: HK$14.02
Target price: HK$17.20
Previous target: HK$13.90 Up/downside: 22.7%
CGS-CIMB / Consensus: na
Reuters:
Bloomberg: 1776 HK
Market cap: US$18,877m
HK$148,163m
Average daily turnover: US$12.26m
HK$96.2m
Current shares o/s: 7,621m
Free float: 54.0% *Source: Bloomberg
Key changes in this note
FY19F Revenue increased by 9.5%.
FY19F EPS increased by 19%.
FY19F ROE increased by 1.3ppt.
Source: Bloomberg
Price performance 1M 3M 12M Absolute (%) 22.1 23.9 -8.6
Relative (%) 17.1 12.2 -1.2
Major shareholders % held Liaoning Cheng Da 16.4
Insert
Analyst(s)
Wong Chi Man
T (852) 3698 6317 E [email protected]
Mark Lau T (852) 3698 6393 E [email protected]
Financial Summary Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Turnover (RMB m) 42,733 27,488 28,614 22,565 27,211
Recurring net profit (RMB m) 13,201 8,030 8,595 5,078 7,310
Adjusted net margin (%) 41 40 43 38 44Recurring EPS (RMB) 1.73 1.05 1.13 0.67 0.96
% Change 104 (39) 7 (41) 44 PER (x) 6.8 11.7 10.9 18.5 12.9
PBR (x) 1.15 1.20 1.11 1.08 1.02
ROAA (%) 4.0 2.1 2.4 1.4 1.9
ROAE (%) 22.5 10.3 10.5 5.9 8.2
71
80
89
97
106
8.000
10.000
12.000
14.000
16.000
Price Close Relative to HSI (RHS)
50
100
150
Feb-18 May-18 Aug-18 Nov-18
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Stockbroking & Exchanges│Hong Kong
GF Securities│February 26, 2019
Figure 1: PBR of GFS Figure 2: PER of GFS
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
3
Stockbroking & Exchanges│Hong Kong
GF Securities│February 26, 2019
BY THE NUMBERS
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
1
1
1
1
1
2
2
Jan-14A Jan-15A Jan-16A Jan-17A Jan-18F Jan-19F
P/BV vs ROE
Rolling P/BV (x) PageTwoROAE
-50%
-37%
-23%
-10%
3%
17%
30%
10
12
14
16
18
20
22
Jan-14A Jan-15A Jan-16A Jan-17A Jan-18F Jan-19F
12-mth Fwd FD Core P/E vs FD Core EPS Growth
12-mth Fwd Rolling FD Core P/E (x) (lhs)
EPSgrFDNrm (lhs)
FD Core EPS Growth (rhs)
Profit & Loss
(RMB'000) Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Equities 13,803,088 5,338,243 4,252,901 3,417,912 4,420,977
Investment banking 1,441,856 2,169,565 2,170,361 1,838,149 2,342,590
Futures and options 320,170 341,544 336,928 300,000 350,000
Asset management 3,597,426 4,159,583 3,982,627 4,101,268 4,914,901
Others 883,900 1,381,853 821,665 663,252 729,577
Commission and fee income 20,046,440 13,390,788 11,564,482 10,320,580 12,758,044
Interest income 12,336,200 7,830,720 8,017,630 7,793,895 7,994,820
Net investment gains 10,396,215 6,510,790 8,733,919 3,950,587 5,857,810
Total revenue 42,778,855 27,732,298 28,316,031 22,065,063 26,610,673
Other income and gains (46,040) (244,375) 298,303 500,000 600,000
Total revenue and other income 42,732,815 27,487,923 28,614,334 22,565,063 27,210,673
Staff costs (10,913,683) (6,586,871) (6,836,367) (5,291,780) (5,689,115)
Commission and fee expenses (461,441) (375,942) (336,255) (330,259) (408,257)
Interest expenses (8,942,914) (6,542,655) (7,064,048) (7,812,079) (8,662,747)
Others (4,898,877) (3,680,259) (3,194,603) (2,969,033) (3,316,701)
Operating expenses (25,216,915) (17,185,727) (17,431,273) (16,403,150) (18,076,821)
Operating profit 17,515,900 10,302,196 11,183,061 6,161,913 9,133,853
Non-recurrent items - - - - -
Income before tax 17,805,712 10,705,060 11,644,026 6,808,900 9,802,602
Income tax expense (4,193,359) (2,295,738) (2,560,655) (1,463,914) (2,107,559)
Minority interests (411,339) (379,215) (487,972) (267,249) (384,752)
Net income 13,201,014 8,030,107 8,595,399 5,077,737 7,310,290
Recurring net income 13,201,014 8,030,107 8,595,399 5,077,737 7,310,290
EPS (RMB) 1.732 1.054 1.128 0.666 0.959
Recurring EPS (RMB) 1.732 1.054 1.128 0.666 0.959
DPS (RMB) 0.800 0.350 0.400 0.233 0.336
Balance Sheet
(RMB'000) Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Financial assets 174,926,020 154,742,292 169,069,612 184,058,248 211,146,702
Advances to customers 68,969,706 58,186,338 61,395,697 46,563,720 57,187,847
Others 42,709,314 32,711,110 30,614,269 21,528,229 27,860,046
Cash held on behalf of customers 88,640,516 67,251,310 48,356,454 40,648,858 55,872,096
Bank balances and cash 17,609,937 13,046,174 8,389,754 18,202,214 9,637,550
Total current assets 392,855,493 325,937,224 317,825,786 311,001,270 361,704,241
PPE, net 1,579,745 1,761,438 2,128,222 2,300,370 2,465,683
Financial assets 20,184,887 24,114,878 27,041,131 24,682,461 26,062,461
Others 4,476,890 7,987,814 9,909,500 17,626,721 20,337,788
Total non-current assets 26,241,522 33,864,130 39,078,853 44,609,552 48,865,931
Total assets 419,097,015 359,801,354 356,904,639 355,610,822 410,570,173
Accounts payable to brokerage clinets 118,137,085 85,726,525 65,026,117 53,027,290 72,137,312
Financial assets sold under repo 85,395,761 50,549,266 55,475,158 55,000,000 60,000,000
Due to banks and other financial institutions 1,750,000 10,606,395 4,953,656 4,953,656 4,953,656
Others 57,975,624 69,690,417 73,408,527 74,259,388 83,190,883
Total current liabilities 263,258,470 216,572,603 198,863,458 187,240,334 220,281,851
Bank and other borrowings 72,270,186 58,274,033 62,147,878 72,000,000 87,000,000
Others 3,747,530 3,601,382 7,267,721 5,448,354 6,448,354
Total non-current liabilities 76,017,716 61,875,415 69,415,599 77,448,354 93,448,354
Total liabilities 339,276,186 278,448,018 268,279,057 264,688,688 313,730,205
Shareholders' equity 77,519,274 78,530,210 84,854,203 86,883,506 92,416,588
Minority interests 2,301,555 2,823,126 3,771,379 4,038,628 4,423,380
Book value per share (HK$) 12.31 11.85 12.80 13.11 13.95
4
Stockbroking & Exchanges│Hong Kong
GF Securities│February 26, 2019
BY THE NUMBERS… cont’d
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
Dupont Analysis (as % of average total assets)
Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Equities 4.2% 1.4% 1.2% 1.0% 1.2%
Investment banking 0.4% 0.6% 0.6% 0.5% 0.6%
Futures and options 0.1% 0.1% 0.1% 0.1% 0.1%
Asset management 1.1% 1.1% 1.1% 1.2% 1.3%
Others 0.3% 0.4% 0.2% 0.2% 0.2%
Commission and fee income 6.1% 3.4% 3.2% 2.9% 3.3%
Interest income 3.7% 2.0% 2.2% 2.2% 2.1%
Net investment gains 3.2% 1.7% 2.4% 1.1% 1.5%
Other income and gains 0.0% -0.1% 0.1% 0.1% 0.2%
Total revenue and other income 13.0% 7.1% 8.0% 6.3% 7.1%
Operating expenses -7.7% -4.4% -4.9% -4.6% -4.7%
Operating profit 5.3% 2.6% 3.1% 1.7% 2.4%
Income tax expense -1.3% -0.6% -0.7% -0.4% -0.6%
Recurring net income (ROAA) 4.1% 2.2% 2.5% 1.5% 2.0%
Leverage (x) 5.6 5.0 4.4 4.1 4.3
Non-client asset/net asset (x) 3.8 3.4 3.3 3.3 3.5
ROAE 22.5% 10.3% 10.5% 5.9% 8.2%
Key Ratios
Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
PER(x) 6.7 11.6 10.8 18.3 12.7
EPS growth (%) 104 39- 7 41- 44
Yield (%) 6.9 2.9 3.3 1.9 2.8
Payout ratio (%) 46 33 35 35 35
PBR(x) 1.14 1.18 1.09 1.07 1.01
Total asset/equity (x) 5.3 4.4 4.0 3.9 4.2
Non-client asset/net asset (x) 3.8 3.4 3.3 3.3 3.5
ROAA (%) 4.01 2.06 2.40 1.43 1.91
ROAE (%) 22.5 10.3 10.5 5.9 8.2
Revenue breakdown (%)
Equities 32.3 19.2 15.0 15.5 16.6
Investment banking 3.4 7.8 7.7 8.3 8.8
Futures and options 0.7 1.2 1.2 1.4 1.3
Asset management 8.4 15.0 14.1 18.6 18.5
Others 2.1 5.0 2.9 3.0 2.7
Commission and fee income 46.9 48.3 40.8 46.8 47.9
Interest income 28.8 28.2 28.3 35.3 30.0
Net investment gains 24.3 23.5 30.8 17.9 22.0
Key Drivers
Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
A-share average daily turnover (RMB'000) 1,045,302,582 519,090,730 460,911,926 370,064,754 500,000,000
Brokerage market share of GFS (%) 4.7 4.3 4.2 4.3 4.4
Net commission rate of GFS (%) 0.051 0.041 0.038 0.035 0.033
Margin financing balance (RMB'000) 66,951,690 54,085,000 56,002,610 41,563,720 52,187,847
Staff cost-to-income (%) 32.7 32.0 32.2 36.7 31.4
Cost-to-income (%) 47.4 49.9 47.3 57.3 49.6
Growth Rates:
Commission and fee income 144% -33% -14% -11% 24%
Interest income 185% -37% 2% -3% 3%
Net investment gains 188% -37% 34% -55% 48%
Total revenue and other income 164% -36% 4% -21% 21%
Operating profit 178% -41% 9% -45% 48%
Recurring net income 163% -39% 7% -41% 44%
Recurring EPS 104% -39% 7% -41% 44%
Company Note Stockbroking & Exchanges│Hong Kong│February 26, 2019
Powered by the EFA Platform
Insert Insert
Haitong Securities Stock-pledged lending risk largely mitigated ■ The CSI300 is up 24% YTD, which should largely mitigate Haitong Securities’ risk in
the stock-pledged lending business. ■ We expect its 2019E EPS to rebound by 56% YoY thanks to surging trading volume
and much more favourable market conditions, after a 39% decline in EPS in 2018E. ■ After raising our 2019E EPS by 20%, we also raise our target price from HK$10.40 to
HK$13.30 based on the Gordon Growth Model, equivalent to 1.09x 2019E PBR. ■ Trading at 0.89x 2019E PBR, the valuation is still lower than the historical average by
24%, which provides a lot of room for the PBR to return to a more normalized level on the back of ROE recovery.
Risk of stock-pledged lending business much smaller One of the main reasons for the share price weakness of Haitong Securities (HTS) in 2H2018 was its high exposure to the stock-pledged lending business. At end-1H18, the scale of the its stock-pledged lending business was RMB73.4bn, one of the highest among its peers and equivalent to 62.4% of the Company’s equity. After a rebound of about 24% in the CSI300 YTD, the potential risk of the stock-pledged lending business should be largely mitigated.
Strong earnings rebound in 2019E Based on the Company’s earnings pre-announcement, its 2018E EPS is expected to drop 39% YoY, partly because of a sharp fall in investment gains last year. On the back of the surging trading volume and the strong index performance, we expect the Company’s 2019E earnings to rebound by 56% YoY.
2019E EPS raised by 20% We raise our 2019E average daily turnover forecast of the A-share market from RMB380bn to RMB500bn. The 2019E year-end margin financing balance of the A-share market is also lifted from RMB817bn to RMB949bn. In addition, taking the much more favourable market conditions for the trading business into account, we raise our 2019E EPS by 20%. This is not aggressive, in our view, as the implied ROE is only 6.6%, still lower than the level in 2016 and 2017 (>7%).
Target price of HK$13.30; maintain BUY We revise up our target price from HK$10.40 (beta at 1.15, cost of equity at 8.7%, medium-term ROE at 8.3%) to HK$13.30 (beta at 1.15, cost of equity at 8.7%, medium-term ROE at 8.8%), based on the Gordon Growth Model, equivalent to 1.05x 2019E PBR.
PBR still below historical average by 24% Due to the sharp correction last year, HTS is trading at 0.89x 2019E PBR, still far below the historical average of 1.18x (Figure 1). There is a lot of room for the PBR to return to a more normalized level if the ROE improvement remains on track.
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
Hong Kong
BUY Consensus ratings*: Buy 11 Hold 3 Sell 1
Current price: HK$11.26
Target price: HK$13.30
Previous target: HK$10.40 Up/downside: 18.1%
CGS-CIMB / Consensus: na
Reuters:
Bloomberg: 6837 HK
Market cap: US$21,792m
HK$171,036m
Average daily turnover: US$18.17m
HK$142.4m
Current shares o/s: 11,502m
Free float: 83.7% *Source: Bloomberg
Key changes in this note
FY19F Revenue increased by 4.4%.
FY19F EPS increased by 20%.
FY19F ROE increased by 1ppt.
Source: Bloomberg
Price performance 1M 3M 12M Absolute (%) 26.9 39.4 -1.6
Relative (%) 21.9 27.7 5.8
Major shareholders % held China Securities Finance Corp. 4.9
Insert
Analyst(s)
Wong Chi Man
T (852) 3698 6317 E [email protected]
Mark Lau T (852) 3698 6393 E [email protected]
Financial Summary Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Turnover (RMB m) 51,192 35,000 35,677 30,633 37,936
Recurring net profit (RMB m) 15,819 8,043 8,618 5,264 8,213
Adjust net margin (%) 50 43 44 37 43Recurring EPS (RMB) 1.38 0.70 0.75 0.46 0.71
% Change 71 (49) 7 (39) 56 PER (x) 6.8 14.0 12.7 21.4 13.7
PBR (x) 0.99 1.02 0.93 0.94 0.89
ROAA (%) 3.4 1.4 1.6 1.0 1.4
ROAE (%) 18.0 7.4 7.6 4.4 6.6
68
81
95
108
5.800
7.800
9.800
11.800
Price Close Relative to HSI (RHS)
50
100
Feb-18 May-18 Aug-18 Nov-18
Vo
l m
2
Stockbroking & Exchanges│Hong Kong
Haitong Securities│February 26, 2019
Figure 1: PBR range of HTS Figure 2: PER range of HTS
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
3
Stockbroking & Exchanges│Hong Kong
Haitong Securities│February 26, 2019
BY THE NUMBERS
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
11111111112
Jan-14A Jan-15A Jan-16A Jan-17A Jan-18F Jan-19F
P/BV vs ROE
Rolling P/BV (x) PageTwoROAE
-50%
-37%
-23%
-10%
3%
17%
30%
10
12
14
16
18
20
22
Jan-14A Jan-15A Jan-16A Jan-17A Jan-18F Jan-19F
12-mth Fwd FD Core P/E vs FD Core EPS Growth
12-mth Fwd Rolling FD Core P/E (x) (lhs)
EPSgrFDNrm (lhs)
FD Core EPS Growth (rhs)
Profit & Loss
(RMB'000) Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Equities 15,852,454 6,406,529 4,958,296 3,963,812 4,921,260
Investment banking 1,644,980 2,619,300 2,467,057 2,476,269 2,992,549
Asset management 2,465,127 1,641,855 2,098,349 2,126,722 2,170,294
Futures/derivatives 479,974 551,135 511,907 557,106 594,549
Others 1,370,081 1,492,474 1,189,474 1,191,331 1,261,627
Commission and fee income 21,812,616 12,711,293 11,225,083 10,315,240 11,940,278
Interest income 18,322,037 16,180,548 15,124,317 17,610,981 19,716,376
Net investment gains 11,057,133 6,107,923 9,327,622 2,706,548 6,279,813
Total revenue 51,191,786 34,999,764 35,677,022 30,632,770 37,936,467
Other income and gains 4,093,767 7,492,492 5,647,480 6,000,000 6,000,000
Total revenue and other income 55,285,553 42,492,256 41,324,502 36,632,770 43,936,467
Staff costs (7,829,712) (6,168,040) (6,400,066) (5,117,581) (5,483,122)
Commission and fee expenses (3,842,160) (1,746,284) (1,668,884) (1,576,141) (1,929,661)
Interest expenses (13,566,443) (12,340,937) (11,458,392) (12,741,019) (14,353,862)
Others (9,409,814) (11,275,703) (9,616,250) (9,646,513) (10,292,853)
Operating expenses (34,648,129) (31,530,964) (29,143,592) (29,081,255) (32,059,499)
Operating profit 20,637,424 10,961,292 12,180,910 7,551,515 11,876,969
Share of profits of associates 481,445 200,435 708,487 217,306 244,090
Non-recurrent items - - - - -
Income before tax 21,118,869 11,161,727 12,889,397 7,768,821 12,121,058
Income tax expense (4,277,553) (2,231,209) (3,013,794) (1,786,829) (2,787,843)
Minority interests (1,022,465) (887,184) (1,257,180) (717,839) (1,119,986)
Net income 15,818,851 8,043,334 8,618,423 5,264,153 8,213,229
Recurring net income 15,818,851 8,043,334 8,618,423 5,264,153 8,213,229
EPS (RMB) 1.375 0.699 0.749 0.458 0.714
Recurring EPS (RMB) 1.375 0.699 0.749 0.458 0.714
DPS (RMB) 0.450 0.220 0.230 0.137 0.214
Balance Sheet
(RMB'000) Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Financial assets 162,916,629 155,947,857 174,328,168 190,923,811 207,923,811
Advances to customers 76,324,967 63,212,920 61,560,953 36,273,792 45,545,757
Others 71,333,111 102,922,381 87,927,706 91,184,317 104,165,506
Cash held on behalf of customers 112,066,661 87,496,620 70,213,569 57,518,425 78,568,000
Bank balances and cash 51,124,559 31,721,171 29,144,760 48,719,423 41,650,337
Total current assets 473,765,927 441,300,949 423,175,156 424,619,767 477,853,412
PPE, net 1,317,178 1,615,839 2,862,370 3,037,105 3,155,932
Financial assets 33,522,971 45,353,442 31,725,358 31,875,000 33,750,000
Others 67,842,816 72,595,616 76,943,449 85,594,278 95,960,824
Total non-current assets 102,682,965 119,564,897 111,531,177 120,506,383 132,866,756
Total assets 576,448,892 560,865,846 534,706,333 545,126,151 610,720,168
Accounts payable to brokerage clients 129,026,336 104,059,287 83,774,388 69,270,267 92,424,800
Financial assets sold under repo 90,951,854 43,638,525 32,645,727 36,155,292 38,405,292
Due to banks and other financial institutions 32,799,527 49,884,220 51,255,180 53,000,000 63,500,000
Others 83,244,832 98,123,355 91,735,122 97,048,884 107,340,399
Total current liabilities 336,022,549 295,705,387 259,410,417 255,474,443 301,670,491
Bank and other borrowings 9,330,007 14,489,442 15,810,543 16,500,000 18,000,000
Others 114,168,665 128,712,616 129,791,069 140,120,803 150,264,803
Total non-current liabilities 123,498,672 143,202,058 145,601,612 156,620,803 168,264,803
Total liabilities 459,521,221 438,907,445 405,012,029 412,095,246 469,935,294
Shareholders' equity 107,694,545 110,130,127 117,755,479 120,374,241 127,008,224
Minority interests 9,233,126 11,828,274 11,938,825 12,656,664 13,776,650
BVPS (HK$) 11.33 11.01 12.08 12.04 12.70
4
Stockbroking & Exchanges│Hong Kong
Haitong Securities│February 26, 2019
BY THE NUMBERS… cont’d
SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
Dupont Analysis (as % of average total assets)
Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Equities 3.4% 1.1% 0.9% 0.7% 0.9%
Investment banking 0.4% 0.5% 0.5% 0.5% 0.5%
Asset management 0.5% 0.3% 0.4% 0.4% 0.4%
Futures/derivatives 0.1% 0.1% 0.1% 0.1% 0.1%
Others 0.3% 0.3% 0.2% 0.2% 0.2%
Commission and fee income 4.7% 2.2% 2.0% 1.9% 2.1%
Interest income 3.9% 2.8% 2.8% 3.3% 3.4%
Net investment gains 2.4% 1.1% 1.7% 0.5% 1.1%
Other income and gains 0.9% 1.3% 1.0% 1.1% 1.0%
Total revenue and other income 11.9% 7.5% 7.5% 6.8% 7.6%
Operating expenses -7.5% -5.5% -5.3% -5.4% -5.5%
Operating profit 4.4% 1.9% 2.2% 1.4% 2.1%
Income tax expense -0.9% -0.4% -0.6% -0.3% -0.5%
Recurring net income (ROAA) 3.6% 1.6% 1.8% 1.1% 1.6%
Leverage (x) 5.3 5.2 4.8 4.5 4.7
Non-client asset/net asset (x) 3.8 3.7 3.5 3.6 3.7
ROAE 18.0% 7.4% 7.6% 4.4% 6.6%
Key Ratios
Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
PER(x) 6.8 14.0 12.7 21.4 13.7
EPS growth (%) 71 49- 7 39- 56
Yield (%) 4.8 2.2 2.4 1.4 2.2
Payout ratio (%) 33 31 31 30 30
PBR(x) 0.99 1.02 0.93 0.94 0.89
Total asset/equity (x) 5.4 5.1 4.5 4.5 4.8
Non-client asset/net asset (x) 3.8 3.7 3.5 3.6 3.7
ROAA (%) 3.41 1.41 1.57 0.97 1.42
ROAE (%) 18.0 7.4 7.6 4.4 6.6
Revenue breakdown (%)
Equities 31.0 18.3 13.9 12.9 13.0
Investment banking 3.2 7.5 6.9 8.1 7.9
Asset management 4.8 4.7 5.9 6.9 5.7
Futures/derivatives 0.9 1.6 1.4 1.8 1.6
Others 2.7 4.3 3.3 3.9 3.3
Commission and fee income 42.6 36.3 31.5 33.7 31.5
Interest income 35.8 46.2 42.4 57.5 52.0
Net investment gains 21.6 17.5 26.1 8.8 16.6
Key Drivers
Dec-15A Dec-16A Dec-17A Dec-18E Dec-19E
Commission and fee income 129% -42% -12% -8% 16%
Interest income 138% -12% -7% 16% 12%
Net investment gains 94% -45% 53% -71% 132%
Total revenue and other income 134% -23% -3% -11% 20%
Operating profit 101% -47% 11% -38% 57%
Recurring net income 105% -49% 7% -39% 56%
Recurring EPS 71% -49% 7% -39% 56%
A-share average daily turnover (RMB'000) 1,045,302,582 519,090,730 460,911,721 370,064,754 500,000,000
Brokerage market share of Haitong (%) 5.0 4.7 4.6 4.6 4.6
Net commission rate of Haitong (%) 0.044 0.035 0.029 0.026 0.023
Margin financing balance (RMB'000) 60,659,240 44,707,720 48,009,027 36,273,792 45,545,757
Staff cost-to-income (%) 20.7 21.7 22.7 22.9 19.8
Cost-to-income (%) 45.5 61.4 56.8 66.2 57.0
5
Financial Services│China
Stockbroking & Exchanges│February 26, 2019
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Explanation on Equity Ratings BUY : share price will increase by >20% within 12 months in absolute terms
SELL : share price will decrease by >20% within 12 months in absolute terms
HOLD : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL
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