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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


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



Figure 8: PBR of selected securities companies

SOURCES: CGIS RESEARCH, BLOOMBERG

Company Note Stockbroking & Exchanges│Hong Kong│February 26, 2019


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.


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



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

Vo

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2

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



BY THE NUMBERS


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


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


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


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



BY THE NUMBERS… cont’d


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


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


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


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%



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.


Hong Kong

BUY Consensus ratings*: Buy 10 Hold 5 Sell 0



Previous target: HK$13.90 Up/downside: 22.7%


Reuters:

Bloomberg: 1776 HK


HK$148,163m


HK$96.2m






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




Turnover (RMB m) 42,733 27,488 28,614 22,565 27,211


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


50

100

150


Vo

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2


GF Securities│February 26, 2019

Figure 1: PBR of GFS Figure 2: PER of GFS


3



BY THE NUMBERS


1

1

1

1

1

2

2


P/BV vs ROE


-50%

-37%

-23%

-10%

3%

17%

30%

10

12

14

16

18

20

22




EPSgrFDNrm (lhs)


Profit & Loss


Equities 13,803,088 5,338,243 4,252,901 3,417,912 4,420,977


Futures and options 320,170 341,544 336,928 300,000 350,000


Others 883,900 1,381,853 821,665 663,252 729,577


Interest income 12,336,200 7,830,720 8,017,630 7,793,895 7,994,820


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


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)


Others (4,898,877) (3,680,259) (3,194,603) (2,969,033) (3,316,701)



Non-recurrent items - - - - -



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


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




Others 42,709,314 32,711,110 30,614,269 21,528,229 27,860,046




PPE, net 1,579,745 1,761,438 2,128,222 2,300,370 2,465,683


Others 4,476,890 7,987,814 9,909,500 17,626,721 20,337,788


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



Others 57,975,624 69,690,417 73,408,527 74,259,388 83,190,883


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





Book value per share (HK$) 12.31 11.85 12.80 13.11 13.95

4







Equities 4.2% 1.4% 1.2% 1.0% 1.2%


Futures and options 0.1% 0.1% 0.1% 0.1% 0.1%


Others 0.3% 0.4% 0.2% 0.2% 0.2%


Interest income 3.7% 2.0% 2.2% 2.2% 2.1%


Other income and gains 0.0% -0.1% 0.1% 0.1% 0.2%





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


ROAE 22.5% 10.3% 10.5% 5.9% 8.2%

Key Ratios


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



ROAA (%) 4.01 2.06 2.40 1.43 1.91

ROAE (%) 22.5 10.3 10.5 5.9 8.2


Equities 32.3 19.2 15.0 15.5 16.6


Futures and options 0.7 1.2 1.2 1.4 1.3


Others 2.1 5.0 2.9 3.0 2.7


Interest income 28.8 28.2 28.3 35.3 30.0


Key Drivers



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


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%



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.


Hong Kong

BUY Consensus ratings*: Buy 11 Hold 3 Sell 1



Previous target: HK$10.40 Up/downside: 18.1%


Reuters:

Bloomberg: 6837 HK


HK$171,036m


HK$142.4m






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




Turnover (RMB m) 51,192 35,000 35,677 30,633 37,936


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


50

100


Vo

l m

2


Haitong Securities│February 26, 2019

Figure 1: PBR range of HTS Figure 2: PER range of HTS


3



BY THE NUMBERS


11111111112


P/BV vs ROE


-50%

-37%

-23%

-10%

3%

17%

30%

10

12

14

16

18

20

22




EPSgrFDNrm (lhs)


Profit & Loss


Equities 15,852,454 6,406,529 4,958,296 3,963,812 4,921,260



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


Interest income 18,322,037 16,180,548 15,124,317 17,610,981 19,716,376


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


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)


Others (9,409,814) (11,275,703) (9,616,250) (9,646,513) (10,292,853)



Share of profits of associates 481,445 200,435 708,487 217,306 244,090

Non-recurrent items - - - - -



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


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




Others 71,333,111 102,922,381 87,927,706 91,184,317 104,165,506




PPE, net 1,317,178 1,615,839 2,862,370 3,037,105 3,155,932


Others 67,842,816 72,595,616 76,943,449 85,594,278 95,960,824


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



Others 83,244,832 98,123,355 91,735,122 97,048,884 107,340,399


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





BVPS (HK$) 11.33 11.01 12.08 12.04 12.70

4







Equities 3.4% 1.1% 0.9% 0.7% 0.9%



Futures/derivatives 0.1% 0.1% 0.1% 0.1% 0.1%

Others 0.3% 0.3% 0.2% 0.2% 0.2%


Interest income 3.9% 2.8% 2.8% 3.3% 3.4%


Other income and gains 0.9% 1.3% 1.0% 1.1% 1.0%





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


ROAE 18.0% 7.4% 7.6% 4.4% 6.6%

Key Ratios


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



ROAA (%) 3.41 1.41 1.57 0.97 1.42

ROAE (%) 18.0 7.4 7.6 4.4 6.6


Equities 31.0 18.3 13.9 12.9 13.0



Futures/derivatives 0.9 1.6 1.4 1.8 1.6

Others 2.7 4.3 3.3 3.9 3.3


Interest income 35.8 46.2 42.4 57.5 52.0


Key Drivers


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%


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


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



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All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy International and/or the Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer.

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Analyst Certification The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report.

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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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