Sector Note Financial Services│China│February 26, 2019 Powered by the EFA Platform 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. 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$11.260 close As Haitong is one of the largest players in the stock-pledged lending business, the recent market rally should mitigate concerns about the potential risk. Its PBR is still trading at a 24% discount to the historical average. Summary valuation metrics Insert Analyst(s) Wong Chi Man T (852) 3698 6317 E [email protected]Mark Lau T (852) 3698 6393 E [email protected]Company Ticker Rating Price (HK$) Market cap (US$m) 2017 2018E 2019E 2017 2018E 2019E 2017 2018E 2019E CITIC Securities 6030 HK HOLD 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 BUY 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 BUY 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 E (17.6) 34.9 5.4 7.8 6.2 8.0 2.0 1.6 1.9 Haitong Securities 6837 HK E (38.9) 56.0 (2.4) 7.6 4.4 6.6 1.6 1.0 1.4 GF Securities 1776 HK E (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 (%)
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Stockbroking & Exchanges China Overweight (no change ...€¦ · Sector Note Financial Services│China│February 26, 2019 Powered by the EFA Platform Stockbroking & Exchanges Valuation
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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$11.260 close
As Haitong is one of the largest players in the stock-pledged lending business, the recent market rally should mitigate concerns about the potential risk. Its PBR is still trading at a 24% discount to the historical average.
Figure 3: Average daily turnover of the A-share market Figure 4: Margin financing balance of the A-share market
SOURCES: WIND INFO,CGIS RESEARCH SOURCES: WIND INFO,CGIS RESEARCH
Figure 5: Trading velocity of the A-share market
SOURCES: CGIS RESEARCH, BLOOMBERG
Figure 6: CSI300 Figure 7: Valuation assumptions
SOURCES: CGIS RESEARCH, CAPITAL IQ SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG
Company HTS CITICS GFS
Ticker 6837.HK 6030.HK 1776.HK
Rating BUY HOLD BUY
Beta 1.15 1.20 1.20
Cost of equity 8.7% 8.9% 8.9%
Medium-term ROE 8.8% 9.6% 9.6%
Growth rate 6% 6% 6%
PBR = (ROE-g)/(COE-g) 1.05 1.23 1.23
Target price (HK$) 13.3 19.1 17.2
Upside 18.5% -6.3% 22.7%
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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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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.
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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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.
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
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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.
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