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Mon, 13 Mar 2017
Equi ty Research China Securities Sector Secur i t ies / China
A year for opportunists
Change is the only constant As history repeats itself in similar patterns, we
believe market volatility will increase in 2017, synchronizing the 10 year-cycle of
volatility spikes as occurred in 1987, 1997 and 2007. Driven by (1) the rising
protectionism in economic policies in US (2) potential new policies after the 19th
National Congress of CPC and (3) change in global liquidity after interest rate
hike by FED, we believe the brokerage sector is the best proxy to capture
opportunities in the shifting dynamics of the financial markets.
Market turnover is a lagging indicator In contrast to the general perception of
the strong link between market turnover and brokerage sector performance, we
have this other-worldly view that the market turnover is lagging behind the
actual sector performance. We believe the change in market turnover is more
about a result from, not a reason for, the change in the market performance and
volatility. Thus, as the brokerage sector normally offers higher than 1 beta
(relative change against market return) we think investing in market leaders of the
brokerage sector will offer investments with efficiency, leverage as well as
liquidity.
Exploiting the divergence Despite the market is building up momentum with
MSCI China up 10.1% YTD, the brokerage sector has been underperforming the
index by 8.1% since the average daily turnover (“ADT”) of A-shares market
dropped 30% yoy in 2M17 or 20% compared to the ADT of 2016. However, in
addition to a lagging indicator, we think ADT is only one of a few factors behind
the earnings of the brokerage sector, which is also dependent on market returns
and the bond market. With (1) the SHCOMP up 3.4% in 2M17 VS down -18.2% in
2M16, (2) robust growth in AUM (3) reactivation of IPO market and (4) liberation
of bond issuance, the brokerage sector's total revenue and net profits jumped
44% and 161% with higher income from asset management, investment banking
as well as net gains from investment in 2M17. By seeing through the market
concern on lower profitability of the brokerage sector in FY17E, we believe it
creates decent opportunities to invest in the brokerage sector to capture the
divergence between the market performance and the high beta of the sector.
What we pick In order to capture the opportunities from (1) higher adaptation of
mobile platform (2) robust growth in investable assets in China and (3)
reactivation of IPO market and development of bond market, we prefer brokers
with the core competitive advantages of (1) strength in technology integration (2)
high exposure in asset management business and (3) better client mix and
innovation in investment banking. Thus, we initiate our coverage on HTSC, GF
Securities and CITIC with BUY ratings and Haitong with a HOLD.
Bruce Yeung, CFA
+852 2135 0214
Daisy Wang
+852 2135 0212
Sector Report
Exhibit 1: Recommendations summary
Company Stock code Rating TP Close
FY17E
PE
FY17E
PB
FY17E
Yield
Upside
(%)
HTSC 6886 HK BUY HK$19.10 HK$15.30 14.2 1.12 2.1% +25%
GF Securities 1776 HK BUY HK$20.60 HK$16.90 10.6 1.32 2.8% +22%
CITIC Securities 6030 HK BUY HK$19.40 HK$16.50 14.1 1.19 2.1% +18%
Haitong Securities 6837 HK HOLD HK$14.80 HK$13.94 14.5 1.22 2.1% +6%
Galaxy Securities* 6881 HK NR n.a. HK$7.38 11.4 1.00 2.2% n.a.
Source: Bloomberg, OP Research, *Consensus estimate
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 2 of 68
Table of Contents
Table of Contents ......................................................................................................................................... 2
Investment summary .................................................................................................................................... 3
Why invest in brokerage sector? .................................................................................................................. 7
What makes a better broker to invest? ........................................................................................................16
HTSC (6886 HK) – Leading technology integration .....................................................................................25
GF Securities (1776 HK) – Leading in asset management ..........................................................................36
CITIC Securities (6030 HK) – Leading in investment banking .....................................................................46
Haitong Securities (6837 HK) – Leading in diversification ...........................................................................56
Investment risks ..........................................................................................................................................66
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 3 of 68
Investment summary
The art of differentiation
We initiate our coverage on the brokerage sector as we think the sector is the best
proxy to capture the opportunities arising from higher market volatility in 2017. We
expect this market volatility to increase in 2017 because of (1) higher international
political tensions after the US presidential election (2) potential new policies
announced after the 19th National Congress of CPC in China (3) change in
liquidity driven by the interest rate hike in FED and (4) 10-year cycle in market
sentiments where spikes in volatility occurred in 1987, 1997 and 2007.
Beta is more important than market turnover for brokers
The majority in the brokerage sector analysts is focusing on the change in
average daily turnover (“ADT”). However, in contrast to the mainstream opinion,
we believe market turnover is somehow a lagging indicator for the sector's market
returns. As the classic shift in market sentiments happened during 2015 – 2016,
Exhibit 8 clearly shows the sector performance always leads the change in
turnover. We believe that, as the investors always predicted the market
performance based on recent market momentum, market liquidity is always the
result of, but not the reason for, the change in the market performance. Thus,
even though both market turnover and market returns should have a positive
impact on broker earnings, we think correlation to the market returns (“beta”)
would be more crucial for investing in the brokerage sector. As shown in Exhibit 7,
when compared with the industry average market beta of 1.2, we believe the
market leaders in the brokerage sector with beta of 1.4 - 1.6 would offer higher
returns, liquidity as well as efficiency under positive market conditions, especially
in a higher volatility market in 2017E.
Differences in profit sensitivity
By breaking down the FY17E EPS sensitivity to the change of turnover and
returns in stock and bond markets, CITIC would have higher EPS sensitivity to
the change in market turnover as higher profitability through a client mix of more
institutional clients. Meanwhile, the profit of Haitong would have higher correlation
to the change in stock index as it has a higher investment proportion in equity.
However, in addition to the market angle, which only focuses on the stock market,
we believe bond markets have more significant impact on the brokerage sector's
profitability since brokers generally leverage up to invest in debt securities for
dividend income. The net gains from investments of brokers are generally more
sensitive to the change in the bond market index, while GF Securities showed
strong investment portfolio management capabilities by achieving higher
investment yields from financial assets held.
Exhibit 2:FY17E EPS sensitivity test
FY17E EPS change Stock turnover Stock index Bond turnover Bond index
+10% +5% +10% +1%
HTSC 2.9% 0.0% 0.0% 5.2%
GFS 2.4% 0.2% 1.9% 0.1%
CITIC 5.0% 1.2% -0.1% 6.0%
Haitong 3.4% 1.4% 0.7% 4.2%
Source: Company, OP Research
We initiate our coverage on the
brokerage sector as it is the best
proxy to capture the opportunities
arising from higher market
volatility in 2017
Beta is more important indicator
than market turnover for
brokerage sector performance
Bond market has greater
significant impact on brokerage
sector profitability
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 4 of 68
12%
22%19%
7%4%
9%10%8%
13%
5% 6%
16%
0%
5%
10%
15%
20%
25%
HTSC GFS CITIC Haitong Galaxy Sectoraverage
Asset Management Investment Banking
(%)
Looking for alpha
Except for the market dependency factors, we believe (1) capability to capture
market share through technology integration (2) development in asset
management business and (3) innovation in investment banking business are
three key areas for brokers to outperform the market.
As shown in Exhibit 35, major brokers generally lose market share to smaller
competitors in the wake of freeing of multiple accounts for individual investors.
Unlike other industry peers, HTSC gained higher market share to rank first in the
total trading value though effective technology integration and having over 6.5mn
active users for their mobile APP with strong user stickiness. By owning majority
stake in GF Fund and China AMC, GF Securities and CITIC Securities are
expected to have 22% and 19% of total revenue contribution generated from
asset management business respectively, much higher than the industry average
of 9%. We believe strength in asset management development would offer better
growth for brokers given over 60% CAGR in asset management fees income in
China. With the reactivation of IPO market and more liberal bond issuance,
innovation in investment banking, such as green bond underwriting, would
provide strong growth in the segment. After the market stabilised with the
correction in mid-2015, we believe further controls with the policies on investment
banking business would be limited in the near future, favoring CITIC and Haitong.
Exhibit 3: Segment revenue contribution for asset management and
investment banking in FY16E
Source: Company data, OP Research,*1H16 results
HTSC, GFS, CITIC and Haitong
have a competitive edge in
technology integration, asset
management, investment banking
and diversification respectively
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 5 of 68
Opportunities arising from the divergence in performance
Despite MSCI China and SHCOMP having built up momentum with 10.1% and
2.4% YTD performance, the brokerage sector's average YTD returns
underperformed the market by about 8.1%, which contrasts with the positive and
larger than 1x beta of the sector. We believe it is driven by the short term market
misperception of lower broker profits under lower market turnover, since the
A-share average daily turnover (“ADT”) in Jan-Feb 2017 dropped 30% and 20%
compared to the same period in 2016 and to the average in 2016 respectively.
According to the latest released financial results of the brokers in China for the
first two months of 2017, sector revenue jumped 44% despite the drop in market
turnover as we believe it was driven by (1) higher revenue from asset
management and (2) higher investment banking revenue from reactivation of IPO.
Besides, the sector profit also increased by 161% as we think there was a
turnaround in net investment gains since SHCOMP was up +3.4% in 2M17,
where it was down -18.2% in 2M16. Thus, as we said above, we think market
turnover would be a lagging indicator for the sector performance, where the
momentum in the market would trigger the sector to outperform in 2017E and the
short term divergence is raising investment opportunities.
Exhibit 4:FY17E PB band and YTD performance
Company FY17E PB Mean of forward PB band Std. dev. YTD Return Vs. MSCI China
HTSC 1.12 1.17 0.15 3.6% -6.4%
GFS 1.32 1.37 0.22 4.3% -5.8%
CITIC 1.19 1.42 0.46 4.7% -5.4%
Haitong 1.22 1.31 0.39 5.0% -5.1%
Galaxy 1.00 1.11 0.35 5.6% -4.5%
Sector average 1.17 n.a. n.a. 2.0% -8.1%
Source: Bloomberg, OP Research
Exhibit 5:Brokerage sector result summary in Jan- Feb 2017
(RMB mn) Revenue YoY Net profit YoY Net asset YoY
CITIC 2,273 102% 767 263% 125,038 4%
GFS 2,213 11% 968 15% 75,684 2%
HTSC 2,037 40% 878 78% 87,895 9%
Haitong 1,785 45% 793 189% 105,438 2%
Galaxy 1,570 -12% 582 -4% 62,177 9%
Sector total 22,262 44% 8,258 161% 1,026,996 12%
Source: Company, OP Research
Brokerage sector underperformed
the market because of lower ADT,
but we think there are
opportunities.
Brokerage sector has solid
revenue and net profit growth in
2M17
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 6 of 68
HTSC,8.1%, 1.12
GFS, 12.6%, 1.32
CITIC, 8.5%, 1.19
Haitong,8.0%, 1.22
Galaxy*, 9.2%, 1.00
Sector average* 9.6%, 1.17
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
6.0 8.0 10.0 12.0 14.0 16.0
PB (x)
ROE (%)
Our picks
We prefer HTSC (6886 HK) as the company has a strong edge in capturing new
retail accounts for higher market shares by leveraging the technology and mobile
app. Despite HTSC having high revenue contribution from brokerage business,
due to efficiency in operations, we believe the company is trading at a discount to
the industry average forward PB. Our TP represents FY17E 1.4x PB and 25%
upside.
We also prefer GF Securities (1776 HK) because of excellence in profitability and
attractiveness in business mix. With (1) higher contribution from the promising
asset management income (2) higher yield from financial assets held and (3) less
earnings sensitivity to the market, GFS has FY17E ROE of 13%, higher than the
industry average, and justifying a premium in valuation. Our TP represents
FY17E 1.6x PB and 22% upside.
We like CITIC Securities (6030 HK) as the company is the market leader with a
long history of development in institutional and professional clients. CITIC has a
well balanced exposure in asset management and investment banking segment
and its better client mix provides strong synergy through all segments of the
company. Our TP represents FY17E 1.4x PB and 18% upside.
Although Haitong Securities (6837 HK) has the most diversified income sources,
more innovation in investment banking and a well-developed overseas platform,
the company only achieved similar to average ROE even under higher leverage.
This may put a limit on the future growth of Haitong and our TP represents FY17E
1.3x PB and 6% upside.
Exhibit 6: Brokerage sectorFY17E ROE vs FY17E PB
Source: Company data, OP Research, *Consensus estimate
We initiate our coverage on
brokerage sector and prefer HTSC,
GFS and CITIC
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 7 of 68
1.42
1.25
1.54 1.58
1.74
1.251.32
1.18
1.40 1.45
1.61
1.15
0.830.77
0.89 0.880.98
0.850.78 0.71
0.77 0.80 0.840.73
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
HTSC GFS CITIC Haitong Galaxy Sector average
HSI Index MSCI China Index SHCOMP SZCOMP
(X)
Why invest in brokerage sector?
Direct proxy to the growth of investable wealth and securitization in
China
Brokerage companies generally have three major income streams, namely,
commission and fee income, interest income and investment gains. In addition to
the positive correlation to the A-share market turnover and higher beta, we
believe investing in brokerage industry will also offer a direct proxy to the growth
of investable wealth and securitization in China.
Brokerage sector performance is more related to market sentiment than
turnover
Commission and fee income generally contribute about half of the total revenue
of a broker and mainly generated from commission on securities, especially in the
A-share market. Although brokers' commissions are highly related to market
turnover, the stock performance of the brokerage sector is more related to market
conditions. As the market turnover usually increases with investors’ sentiment
and market performance, the brokerage sector offers higher than 1 beta for
investment in market recovery. When comparing to the historical stock
performance of the listed brokers to the change of market turnover, we believe
market turnover is somehow a lagging indicator for the sector. Thus, we think the
core difference between the betas of each broker would be linked with their
business nature and prospect of future development.
Exhibit 7: Beta of the brokerage sector
Source: Bloomberg, OP Research
Brokerage sector performance is
more related to the beta
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 8 of 68
17.116.4
13.1
9.8
8.1 8.1 8.1
7.1
5.3
4.2
0
2
4
6
8
10
12
14
16
18
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
(bps)
Exhibit 8: Brokers stock performance Vs A-share market turnover
Source: Bloomberg, OP Research
Brokers are profitable even under keen competition because of huge
market size
With the help of online trading platform, Chinese brokers can offer trading
executions through automatic and scalable operations. Due to the homogenous
nature of securities brokerage business in China, average commission rate has
decreased by nearly 80% over the past 10 years. With price sensitive retail
customers and liberation of multiple securities accounts, the decline in average
commission rate was accelerated in 2013, making a CAGR of -14.6% during
2007-2016. It is expected that the average commission rate will drop to 4.2 bps in
2016, which would be 21% lower than 5.3 bps in 2015. As some brokers are
offering commission rate promotions of 3 bps for new accounts, it is expected the
average commission rate will continue to go down.
Exhibit 9: Averagecommission rate in China
Source: AMC, CRSC, OP Research
-18%
76%
-5%
-23%
-3% -4%5%
-15.6%
143%
165%
-16.7%
-44.8%
-0.9%-16.7%
-100%
-50%
0%
50%
100%
150%
200%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
1H14 2H14 1H15 2H15 1H16 2H16 1H17 (YTD)
HTSC GFS CITIC
Haitong Galaxy Avg. broker return
Market T/O chg (RHS)
(hoh%) (hoh%)
Even under highly competitive
environments, Chinese brokers
still have decent profits given
massive market size
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 9 of 68
54.6 42.2 31.5 46.874.2
255.1
126.7-22.7% -25.4%
48.8%58.6%
243.6%
-50.3%
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
0
50
100
150
200
250
300
2010 2011 2012 2013 2014 2015 2016
A-share market T/O yoy%
(RMB tn) (yoy%)
225.5 172.8 129.5 196.7303.0
1,045.3
519.4
242
244
243
238
245
244 244
234
236
238
240
242
244
246
0
200
400
600
800
1,000
1,200
2010 2011 2012 2013 2014 2015 2016
ADT Trading days
(RMB bn) (No. of days)
However, the market turnover of A-share has increased dramatically in recent
years. Despite the average daily turnover (“ADT”) dropping 50% to RMB 519bn in
2016 given an exceptionally high base, it also represented a 3-Year CAGR of
38.5% as supported by higher total market cap and velocity in A-share market.
The market velocity in China was 2.6x in 2016, which was 288% higher than that
in Hong Kong as it is supported by a huge number of retail investors. Although the
fierce competition may persist, given the relatively high velocity and share
turnover rate of the stock market in China, income from low single digit
commission rate is still well enough to cover brokers' fixed overheads to generate
decent profits and cashflow.
Exhibit 10: Total market turnover of A-share
Source: SSE, SZSE, OP Research
Exhibit 11: Average daily trading value of A-share
Source: SSE, SZSE, OP Research
A-share market has high velocity
even after correction in mid-2015
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 10 of 68
2.64 2.38
1.58
2.05 1.83
5.25
2.60
0.82
1.74
0.61 0.64 0.68
1.06
0.67
0
1
2
3
4
5
6
2010 2011 2012 2013 2014 2015 2016
China HK
(x)
29 3750 59 68
79 9010246
54
6369
76
83
90
98
75
91
113
128
144
162
180
200
0
50
100
150
200
250
2013 2014 2015 2016E 2017E 2018E 2019E 2020E
High-net-wealth family Common family
(RMB tn)
Exhibit 12: Market velocity in China andHK
Source: Eastmoney, CSDC,HKEx, OP Research
Market velocity = Total annual market turnover / Tradable market cap in the year end
Robust growth in personal assets drives growth in asset management
With the rapidly increasing investable wealth of the middle class in China, asset
management fee income has been growing significantly in recent years. The total
number of China’s middle class and high-end affluent population with investment
assets per capita of more than RMB1.4 million will reach 12.3 million in 2016E.
With total personal investable assets of RMB 113 trillion in 2015, the total size will
continue to grow at a CAGR of 12% to RMB 200 trillion by 2020E. As more needs
to be invested in securitized assets other than fixed assets, such as property, we
believe stock and bond markets will capture the growth of investable wealth in
China, which is shown by the robust growth in the total size of the AUM of the
asset management industry. With annualized CAGR of 59% in AUM, we think it
will favour the management fee income from asset management in the long term.
It is expected that asset management will contribute around 20% - 30% of the
total fee income of the brokerage sector in the near future.
Exhibit 13: Personal investable assets in China
Source: BCG Analysis, OP Research
Asset management provides
another core revenue stream to
brokers
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 11 of 68
7,946 8,794 10,247 10,967 11,895 13,729 15,003 15,767 17,578
10,420 12,202
16,167 16,866 20,995
22,112 24,422
26,226 26,045
2,130 2,795
3,892 4,774
5,210 5,702
6,827 6,659
7,891
20,508 23,818
30,348 32,688
38,203 41,683
46,480 48,920
51,794
0%
5%
10%
15%
20%
25%
30%
(5,000)
5,000
15,000
25,000
35,000
45,000
55,000
2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Broker AUM Fund AUM PE AUM Futures AUM QoQ%
(RMB bn) (QoQ%)
Exhibit 14: AUM amount and QoQ growth in China
Source: AMAC, OP Research
CAGR is calculated by annualized data
Higher demand in investment banking in spite of tighter bank lending
regime
Despite suspension of IPO approval after the market crash in mid-2015, the
underwritten amount of investment banking has kept on growing, especially in the
debt issuance and equity refinancing. Due to more stringent credit risk controls of
the banks in China, corporations have been switching to financing by investment
banking products. In order to improve the sentiment of retail investors, the IPO
approval was suspended from 2H15 to 1H16, decreasing the amount
underwritten by IPO by 15% to RMB 151 bn in 2016. However, as debt issuance
and equity refinancing are targeting professional investors, the amount
underwritten by debt issuance and equity refinancing increased by 49% and
102% to RMB 3.08 trillion and RMB 1.36 trillion in 2016 respectively, to provide a
growth driver for brokerage in a consolidating market.
Exhibit 15: Underwritten amount in China
Source: CRSC, OP Research
0 67 177 151 280 419
675
1,362
408 357
2,063
3,080
688 843
2,915
4,592
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2013 2014 2015 2016
IPO Refinancing Debt
(RMB bn)
Debt issuance and equity
refinancing increased
significantly in tighter credit
market conditions
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 12 of 68
Reactivation of IPO market in 2017
Although the IPO market has been re-activated since 2H16 after the market
stabilized, the huge number of IPO applications awaiting approval has formed an
IPO dam of “landslide proportions” (“IPO 堰塞湖”). Over 430 companies
have applied for IPO listing on the main board in China. We expect the total
amount for underwriting to be in the region of RMB 300 bn and it may represent a
pipeline of about 2 to 3 years of the capability of the market. Since the average
commission rate of IPO is much higher than debt issuance and equity refinancing,
we believe the reactivation of the IPO market will provide solid growth to the
brokers with strong investment banking business.
Exhibit 16: Re-activation of IPO market
Source: CFI data, OP Research
Interest income is related to the loan book as well as client deposit
For interest income, one-third is generated from interest received from the clients’
deposit and two-thirds generated by brokers’ loan book, which consists of
securities lending (margin financing) and stock resale agreement. Despite
brokers having to pay interests on clients’ money, the interest received from
banks for the clients deposit is usually much higher. Thus, by capturing new
accounts, the broker can not only gain from potential commission income from
trading, but also the interest spread generated from the deposits. The interest
spread would favor leaders in the brokerage industry which have more active
clients and higher amount of clients deposit for a stable stream of interest income.
38.9 43.5
146.4
12.528.9
121.852
73
187
32
61
166
0
20
40
60
80
100
120
140
160
180
200
0
20
40
60
80
100
120
140
160
1H14 2H14 1H15 2H15 1H16 2H16
Amount underwritten No. of IPO
(RMB bn) (No. of IPO)
A huge number of IPO
applications awaits approval
Interest income is generated from
the loans for leveraged trading
and client deposit
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 13 of 68
80
85
90
95
100
105
110
115
120
125
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
May-1
5
Jun
-15
Jul-1
5
Au
g-1
5
Se
p-1
5
Oct-
15
Nov-1
5
Dec-1
5
Jan
-16
Fe
b-1
6
Ma
r-16
Ap
r-16
Ma
y-1
6
Jun
-16
Jul-1
6
Au
g-1
6
Se
p-1
6
Oct-
16
Nov-1
6
Dec-1
6
Jan
-17
Newly added account Total investor account
(mn) (mn)
-100%
0%
100%
200%
300%
400%
500%
0
500
1,000
1,500
2,000
2,500
Jan
-13
Ma
r-13
Ma
y-1
3
Ju
l-1
3
Se
p-1
3
Nov-1
3
Jan
-14
Ma
r-14
Ma
y-1
4
Ju
l-1
4
Se
p-1
4
Nov-1
4
Jan
-15
Ma
r-15
Ma
y-1
5
Ju
l-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-16
Ma
y-1
6
Ju
l-1
6
Se
p-1
6
Nov-1
6
Jan
-17
Margin financing & securities lending balance yoy%
(RMB bn) (yoy%)
Exhibit 17: New accounts opened and total A-share accounts in China
Source: Eastmoney, OP Research
The bulk of interest income accrues from advances to customers, even though
total margin financing usually changes on market sentiment. After the market
correction from the bullish sentiment in mid-2015, the balance of margin financing
and leverage ratio have been stabilized. Due to relatively higher liquidity and
velocity of the A-share market compared to other developed countries, we believe
the loan book will still have an uptrend in the long term. Additionally, more and
more major stakeholders of listed companies have been adopting stock
repurchase agreements with brokers to secure innovative and flexible equity
financing solutions. Interest income from stock resale business has become a
fast growing trend.
Exhibit 18: Margin financing balance in China
Source: SSE, SZSE, OP Research
Brokers are offering flexible
equity financing solutions, such
as stock repurchase agreement
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 14 of 68
2.6%
2.0%
0.7%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Jan
-13
Ma
r-13
Ma
y-1
3
Jul-1
3
Se
p-1
3
Nov-1
3
Jan
-14
Ma
r-14
Ma
y-1
4
Jul-1
4
Se
p-1
4
Nov-1
4
Jan
-15
Mar-
15
Ma
y-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-16
Ma
y-1
6
Jul-1
6
Se
p-1
6
Nov-1
6
Jan
-17
China (SSE+SZSE) US (NYSE) HK (HKEx)
2.2%
3.3%
2.6%
n.a.
3.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
HTSC GFS CITIC* Haitong Galaxy
Exhibit 19: Leverage ratio in China, US and HK
Source: SSE, SZSE, HKEx, Bloomberg, OP Research
Our view: Investment gains are part of the core profit
Investment gain is not a one-off item. We believe it is a part of core earnings of
brokers because investment gains are, generally, derived from market making
activities and interests spread between the investment yield and financing costs.
Although the net returns of the holding position is related to market performance,
we think stock and bond market turnovers are another crucial factor for gains in
market making activities. Besides, brokers generally leverage up to receive a
significant amount of dividend income from the financial assets held, which are
generally high grade bonds. We think the strength in low cost financing has direct
impact on profitability in investment gains.
Exhibit 20: Investment yield of financial assets in 1H16
Source: Company data, OP Research (*yield on available-for-sales financial assets only)
Market making activities and
investment yield bring recurring
investment gains
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 15 of 68
2.8%
3.6%
4.5% 4.5%
5.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
HTSC GFS CITIC Haitong Galaxy
3.70
3.43
3.13
3.79
2.83
2.0
2.5
3.0
3.5
4.0
HTSC GFS CITIC Haitong Galaxy
(x)
Exhibit 21: Adjusted financing cost (exclude client money)in1H16
Source: Company data, OP Research
Exhibit 22: Adjusted leverage ratio (ex-client money) in1H16
Source: Company data, OP Research
Looking into the competitive edges of brokers
Therefore, in addition to the direct impact of average daily turnover (“ADT”) and
market performance (“beta”), we believe (1) development of asset management
business (2) strength in investment banking (3) ability to capture new accounts (4)
strength in financing costs (5) innovation on equity financing and (6) cost to
income ratio will directly impact on the broker’s earnings and valuation
Brokers are more than just ADT
and beta
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 16 of 68
159.2
266.2
575.2
328.0
23.0%
67.2%
116.1%
-43.0%
-80%
-40%
0%
40%
80%
120%
160%
0
100
200
300
400
500
600
2013 2014 2015 2016Brokerage commission Underwriting fee Asset management feeFinancial advisory Interest income Investment gainsOthers Total revenue yoy%
(RMB bn) (yoy%)
48%39%
47%
32%
8%
9%
7%
16%
4%
5%5%
9%
3%
3%2% 5%
12%17% 10% 12%
19% 27% 25% 17%
6%1% 4% 9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014 2015 2016
Brokerage commission Underwriting fee Asset management fee
Financial advisory Interest income Investment gains
Others
What makes a better broker to invest?
Asset management, debt issuing and innovation in online platform
With the dramatic change in market volatility since mid-2015, the average market
daily turnover has decreased by about 50% to RMB519bn by the end of 2016.
Although the commission and fee income of brokers have dropped significantly in
2016, a few other segments have maintained robust growth. These are asset
management, debt underwriting and market share gains from online platform.
The industry total income dropped by about 43% in 2016, driven by decline in
brokerage commission. However, asset management fee, underwriting fee and
interest income are expected to maintain stable growth and increase the
contribution to 9%, 16% and 12% from 5%, 7%, 10% respectively.
Exhibit 23: Industry income of China brokers
Source: SAC, OP Research
Exhibit 24: Segment income contribution of China brokers
Source: SAC, OP Research
Some segments grew even ADT
dropped significantly
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 17 of 68
1.11.4
1.82.0
2.32.6
2.93.3
0.2
0.2
0.2
0.3
0.3
0.4
0.4
0.5
0.0
0.0
0.0
0.1
0.1
0.1
0.1
0.1
1.3
1.6
2.1
2.4
2.7
3.1
3.5
3.9
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2013 2014 2015 2016E 2017E 2018E 2019E 2020E
RMB5~30mn RMB30~100mn >RMB100mn
(mn)
75.9104.9
269.1
105.3
38.2%
156.4%
-60.9%-100%
-50%
0%
50%
100%
150%
200%
0
50
100
150
200
250
300
2013 2014 2015 2016
Brokerage commission fee income yoy%
(RMB bn) (yoy%)
Exhibit 25: Brokerage commission income in China
Source: SAC, OP Research
The tipping point for asset management
The rise of household wealth in China has driven a strong demand for wealth
management. It is reported China has over 2 million high net worth individuals
with total personal investable assets of RMB 113 trillion. It is expected the number
of high net worth individuals and total investable asset size will increase at a
CAGR of 13.4% and 12% to 3.88 million and RMB 200 trillion by 2020E
respectively. Given a strong rally in the property price and stringent control from
government in second house purchase, the Chinese middle class has a strong
desire to diversify its accumulated wealth into other areas for investment other
than the property market, which supports the growth of asset management
industry in China in recent years.
Exhibit 26: No. of high-net-wealth family in China
Source: BCG Analysis, OP Research
Increase in personal investable
assets drives growth in asset
management
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 18 of 68
5.2 8.0
11.9
17.6
7.0 12.4
27.5 29.6
0
5
10
15
20
25
30
35
2013 2014 2015 2016
Broker AUM (RMB tn) Asset management inocme (RMB bn)
(RMB tn/ RMB bn)
Total commission income from securities trading is expected to decrease by 61%
to RMB 105 bn given 50% drop in ADT and 26% drop in average commission rate.
However, fee income from asset management segment maintained a stable
growth of 8% to RMB 30 bn in 2016 due to 48% increase in total AUM size. The
total AUM size in China has tripled from RMB 5.2 trillion in 2013 to RMB 17.6
trillion in 2016, which represents a CAGR of 50%. We believe the number of
middle class and the personal investable assets size have reached a tipping point
for an explosive growth of asset management industry in China. With the sharp
correction of stock market in 2015, we believe individual investors have taken a
more conservative approach by investing in actively managed funds rather than
individual stocks, which cost a lot more effort in analysis. Besides, since managed
funds would provide better liquidity and stable returns than property in an
overheated property market, we believe Chinese investors will be keen to
diversify their exposure into stock and bond market after the correction in
mid-2015.
Exhibit 27: Broker AUM and asset management income in China
Source: AMAC, SAC, OP Research
Thus, by acquiring majority interests in GF Fund in 2014, we prefer GF Securities
(1776 HK) given this strong exposure in asset management business, which is
expected to contribute 22% of total revenue in FY16E Vs 9% of the industry
average. We also prefer CITIC Securities (6030 HK), which owns majority stake
of the largest asset management company in China - China AMC. We believe
asset management segment will contribute 19% of the total revenue of CITIC in
FY16E.
Asset management segment is
expected to see8% growth in
2016E
GF Securities (1776 HK) has the
highest contribution from asset
management
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 19 of 68
Exhibit 28: Asset management contribution of major listed brokers
Source: SAC, company data, OP Research
Higher penetration in debt issuance and equity refinancing
Under more liberal policies China has become the world’s third largest bond
market in terms of amount of bonds outstanding. The total amount of bonds
issued in China in 2016 jumped 42% to RMB 22,337 bn, representing a CAGR of
49% from 2013 to 2016E. As more bonds and securities are allowed to be issued
and offered to the public, corporates and enterprises are increasingly raising
funds through corporate bonds, financial bonds and asset-backed securities. With
easier access to bond markets for the individual investors, brokers have
increased bonds issuance market shares by 1.7pt to 21.1% in 2016, representing
RMB 4,710 bn, up 54% yoy. Total underwriting and sponsor fees of the industry
grew by 32% to RMB 52 bn in 2016, representing a CAGR of 59%. Thus, we
believe bond issuance may support brokers’ underwriting fee income in the near
future and more innovative brokers plus higher revenue contributions from bond
issues will outperform.
Due to tight credit control of the banks, we believe CITIC Securities (6030 HK) will
benefit from the robust growth of debt issuance and equity refinancing. CITIC has
the highest revenue contribution from investment banking business among other
competitors given their strong edge in institutional clients coverage, first mover
advantage and lower financing costs. With 13% of revenue from investment
banking in FY16E, we think CITIC may outperform its peers by capturing the
reactivation of IPO market and higher demand in debt issuance given more
restriction in equity refinancing
8%
16%
11%
15%
10%
12%
17%
21%
4%
9%
7%
13%
6%
11%
9%
4%
2% 2% 1%
4%
4% 5% 5%
10%
0%
5%
10%
15%
20%
25%
2013 2014 2015 1H16
CITIC GFS HTSC Haitong Galaxy Sector average
Brokers enjoy robust growth in
underwriting fees from bonds
issuance
CITIC Securities will benefit with
its strong edge in investment
banking
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 20 of 68
1,172
1,997
3,054
4,710
70.4%
52.9%54.2%
50%
55%
60%
65%
70%
75%
-
1,000
2,000
3,000
4,000
5,000
2013 2014 2015 2016E
Commercial papers Corporate bonds Enterprise bonds
Financial bonds Convertible bonds Government bonds
Asset-backed securities Private placement notes Bond by brokers yoy%
(RMB bn) (yoy%)
12.9
24.0
39.4
52.0
86.7%
63.8%
32.1%
0%
20%
40%
60%
80%
100%
0
10
20
30
40
50
60
2013 2014 2015 2016
(RMBbn) (yoy%)
Exhibit 29: Amount of bonds issued by brokers in China
Source: WIND, OP Research
Exhibit 30: 2016E percentage of bond issued by brokers in China
Source: WIND, OP Research
Exhibit 31: Total underwriting and sponsor fee income of brokers in China
Source: SAC, OP Research
3%
100% 100%
13%
72%
0%
55%
11%0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Commercialpapers
Corporatebonds
Enterprisebonds
Financialbonds
Convertiblebonds
Governmentbonds
Asset-backedsecurities
Privateplacement
notes
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 21 of 68
HTSC, 7.87%
CITIC, 5.70%
GTJA, 5.44%
Galaxy, 4.83%
GFS, 4.58%
Haitong, 4.50%
SWHY, 4.40%
CMS, 3.88%
Guosen, 3.44%CSC, 3.00%
Others, 52.4%
11%
9%
6%
12%
4%
11%
6%
10%10%
9%
5%
9%
7%7%
5%
7%
5%
8%
2%
6%8%
9% 7%
15%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2013 2014 2015 1H16
CITIC GFS HTSC Haitong Galaxy Sector average
Exhibit 32: Investment banking revenue contribution
Source: SAC, OP Research
Online platform and off-site accounts opening give edge in market share
Since brokerage business for securities trading in China is homogeneous in
nature, brokers compete fiercely on lower commission rates for higher market
share. However, in addition to commission rate, we believe online platform and
setting up off-site accounts have given some an edge in capturing market share
since this measure was approved in 2013. With more integrated online platforms,
brokers not only provide securities trading services, but also trading and
subscriptions for other investment products, such as funds and high yield
products. As individual investors are allowed to open multiple securities accounts
through off-site channels, like PC and smartphone, having more branches no
longer gives any significant competitive edge other than higher operating costs.
On the other hand, more innovative brokers have been capturing market shares
by leveraging the online channel to offer innovative services and promotions at
lower costs. We believe the brokers with more active users of their online
platforms will keep on gaining market shares, while brokers burdened with higher
number of branches will suffer from lower financial performance.
Exhibit 33: Market shares of top 10 brokers in China in 2016
Source: WIND, OP Research
Penetration in online platform has
crucial impact on the change of
market share
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 22 of 68
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
HTSC CITIC GTJA Galaxy GFS Haitong SWHY CMS Guosen CSC
(ppt)
During 2013 – 2016 HTSC gained 1.8ppt in market shares with its aggressive
development of an online platform. The mobile APP “ZhangLe Fortune Path” of
HTSC, ranked first and had over 6.5mn active users by the end of 2016. Besides,
there were also market share gains for GTJA and GF Securities given the keen
development of online platform to generate synergy with their edge products,
such as overseas investments and investment funds. Except HTSC, GTJA and
GF Securities, the top ten brokers lost market shares to smaller brokers, such as
Eastmoney, due to the development of mobile trading platforms. Eastmoney has
gained 1.0 ppt market shares by integrating innovations in their online trading
platform. The mobile platform of Eastmoney, Eastmoney.com, embeds a
discussion forum for individual stocks (股吧) and an investment portfolio follower
system (發現高手), which fits the appetite of Chinese investors to facilitate the
trading activities. Besides, as a pure online broker, their business can also
expand at a lower cost. Thus, we believe HTSC (6886 HK) and GF Securities
(1776 HK) have equipped themselves with a competitive edge over their peers by
becoming first movers in mobile APP development.
Exhibit 34: Online platform allows better promotion and operation
efficiency
Source: HTSC, OP Research
Exhibit 35: Market shares change from 2013 to 2016 for top 10 brokers
Source: WIND, OP Research
HTSC (6886 HK) has strong edge
in integrating different functions
into their mobile trading platform
to capture market share
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 23 of 68
23.4
10.2
8.3
6.5
3.2 3.2 3.1 3.1 3.0 2.8 2.4 2.1 2.1
0
5
10
15
20
25(mn of active users)
Exhibit 36: No. of active APP users for major brokers by the end of 2016
Source: analysys, OP Research (*trading platform as channel only)
Exhibit 37: Investment funds
Source: GFS, OP Research
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 24 of 68
Exhibit 38: IPO and money market fund subscription
Source: HTSC, OP Research
Exhibit 39: Discussion forum and follower system
Source: Eastmoney, OP Research
Mon, 13 Mar 2017
HTSC (6886 HK)
Page 25 of 68
HTSC (6886 HK) –Leading technology integration HTSC has captured the leading position through integrated financial
services with its trading platform and mobile app
HTSC achieves lower financing costs through use of investment products
Initiate a BUY rating with TP of HK$19.1 or 25% upside
Capturing market share to become leader By total trading value of stock,
HTSC is expected to increase its market share by 0.6 ppt to 7.9% to keep the No.
1 rank in the industry in 2016. We believe the core competitive edge of HTSC is
the successful integration of financial services with their trading platform,
especially in the mobile APP. Through (1) first mover advantage (2) easy access
of off-site account opening (3) wide range of investment products subscriptions
and (4) effective marketing and promotion, HTSC has leveraged on the mobile
platform to increase customer loyalty to differentiate itself in a homogeneous
market.
Competitive edge in financing costs By capturing higher market shares,
HTSC can capture more deposits from active customers. With a higher amount of
deposits, HTSC would generate higher interest income and profit from the
interest spread in the deposits. Besides, by offering money market investment
products to clients, HTSC has secured lower financing costs than its peers in the
industry. We believe some 50% of the total debts of HTSC is secured through
yield enhancing financing products, giving it significant advantage in financing
costs.
Initiate a BUY with TP of HK$19.1 HTSC is trading at FY17E 1.12x PB or 4%
discount to the industry average. We believe the current valuation is
undemanding given the leading position and rising trend of market share of HTSC.
We initiate our coverage on HTSC with target price of HK$19.1 based on FY17E
1.4x PB. We think HTSC is our top pick of the sector and our TP represents 25%
upside.
Initial Coverage
BUY
Close price: HK$15.30
Target Price: HK$19.10 (+25%)
Key Data
HKEx code 6886
12 Months High (HK$) 19.20
12 Month Low (HK$) 14.52
3M AvgDail Vol. (mn) 5.22
Issue Share (mn) 1,719.05
Market Cap (HK$mn) 134,943.32
Fiscal Year 12/2016
Major shareholder (s) Jiangsu Guoxin Investment (17.46%)
Source: Company data, Bloomberg, OP Research
Closing price are as of 10/03/2017
Price Chart
1mth 3mth 6mth
Absolute % -1.4 -8.6 -13.2
Rel. MSCI CHINA % -2.6 -14.7 -13.4
Forward PB Band
Company Profi le Huatai Securities Co., Ltd. provides financial
company. The Company provides securities
brokerage services, research consulting
services, investment banking and direct
investment services, fixed-income services
and asset management services.
Exhibit 40: Forecast and Valuation Year to Dec (RMBmn) FY14A FY15A FY16E FY17E FY18E
Revenue 15,656.9 38,851.3 24,491.3 25,590.9 27,330.9
Growth (%) 75.4 148.1 (37.0) 4.5 6.8
Net Profit 4,486.3 10,696.9 6,382.8 7,024.7 7,688.4
Growth (%) 102.1 138.4 (40.3) 10.1 9.4
Diluted EPS (HK$) 1.001 1.822 0.980 1.079 1.181
EPS growth (%) 102.1 81.9 (46.2) 10.1 9.4
Change to previous EPS (%)
0.0 0.0 0.0
Consensus EPS (HK$)
1.008 1.269 1.579
ROE (%) 11.4 17.3 7.7 8.1 8.3
P/E (x) 15.3 8.4 15.6 14.2 13.0
P/B (x) 1.7 1.1 1.2 1.1 1.1
Yield (%) 4.1 3.9 1.9 2.1 2.3
DPS (HK$) 0.625 0.591 0.294 0.324 0.354
Source: Bloomberg, OP Research
12.0
13.0
14.0
15.0
16.0
17.0
18.0
19.0
Mar/16 Jun/16 Sep/16 Dec/16 Mar/17
HK$6886 HK MSCI CHINA
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
Jun/15 Dec/15 Jun/16 Dec/16
Forward P/B Ratio
+1std.
avg.
-1std.
Mon, 13 Mar 2017
HTSC (6886 HK)
Page 26 of 68
65%74%
66% 67% 67%
9%
5%10% 10% 10%
9%7% 12% 11% 11%
14% 12% 10% 10% 9%
3% 4% 3% 3% 3%
-50%
0%
50%
100%
150%
200%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY14 FY15 FY16E FY17E FY18EBrokerage and wealth management Investment bankingAsset management Investment and tradingOverseas business and others YoY (%)
(RMB mn) (%)
6,423
17,947
8,324 9,131
9,854 10,254
28,569
16,069 17,083
18,272
50%
179%
-44%
6% 7%
-100%
-50%
0%
50%
100%
150%
200%
0
5,000
10,000
15,000
20,000
25,000
30,000
FY14 FY15 FY16E FY17E FY18E
Securities brokerage and advisory Segment revenue YoY (%)
(RMB mn) (%)
Leading technology integration
Flying high on a smart device
Although revenue from securities brokerage and advice are highly dependent on
market behaviour, HTSC has been consistently capturing market share from
other competitors in recent years. Since market trading value is expected to drop
some 50% in 2016, it is likely that income from brokerage wealth management of
HTSC will fall 44% to RMB 16.1bn in FY16E. However, with (1) higher mobile app
penetration and (2) new account opening promotion, HTSC has been gaining
market shares and benefiting from the synergy generated in other areas.
Exhibit 41: HTSC revenue contribution by segment
Source: Company, OP Research
Exhibit 42: HTSC brokerage income and segment revenue
Source: Company, OP Research
HTSC is consistently capturing
higher market share
Mon, 13 Mar 2017
HTSC (6886 HK)
Page 27 of 68
HTSC is ramping up the number of mobile APP users to about 10 million by the
end of 2016, which is nearly 100% higher than that in two years ago. HTSC has
been leading other major brokers in terms of mobile app users as (1) first mover
advantage (2) integrated functions to streamline investment transactions by
mobile device and (3) flexible promotion and marketing scheme offered through
mobile platform.
Exhibit 43: HTSC mobile app
Source: Company, OP Research
HTSC is one of the few major brokers to gain market share in the past three years.
In terms of stock turnover, HTSC gained 0.5 ppt, 0.8 ppt and 0.6 ppt market
shares in FY14, FY15 and FY16E respectively. It is expected HTSC will rank first
with 7.9% market share in 2016E. Through developing mobile app, HTSC gained
early bird advantage by offering off-site account opening through PC or mobile
device in 2013 to capture new accounts after the relaxation of multiple accounts
for individual investors. Besides, the mobile app has also integrated different
financial products into one platform for more streamlined transactions. Investors
can easily switch their investments between stocks, investment funds, money
market funds, yield enhancement products and IPO subscription. Moreover, with
the flexibility to offer product promotion in online platform, HTSC would boost
their investment products subscription by offering discounts in a limited time and
limited quota. We believe the handiness of a mobile platform is an important
factor in gaining market share in a competitive market.
HTSC has about 10 million mobile
app users
HTSC ranked first in market share
in 2016
Mon, 13 Mar 2017
HTSC (6886 HK)
Page 28 of 68
5.18
3.97
3.40
3.20
3.00 6.5%
7.3%
7.9%
8.3%
8.6%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
FY14 FY15 FY16E FY17E FY18E
Commission rate (bps) Market share (%)
(bps) (%)
Exhibit 44: HTSC number of mobile app user
Source: Company, OP Research
Exhibit 45: HTSC commission rate and market share
Source: Company, OP Research
Synergy from more active clients
As stated earlier, interest income is one of the major revenue streams of a broker,
and is generated from deposits, margin financing and resale agreement. However,
interest income generated from margin financing is expected to drop by 41% to
RMB 4.1 bn in FY16E due to lower loan book balance and drop in market
sentiment. But HTSC has captured more new accounts through active marketing
and promotion so the level of cash held is expected to remain stable at about
RMB 171bn even the market turnover dropped 50% in 2016. With more cash in
hand, the interest generated from deposits would bring a stable income to HTSC
and lessen impact of changes in the market. In addition to the commission
income, we believe further growth in number of clients would make for higher
profitability and sharpen the competitive edge for HTSC.
5.6
7.2
8.3
9.1
10.0
4
5
6
7
8
9
10
11
2H14 1H15 2H15 1H16 2H16E
(mn of mobile APP user)
More client deposits bring higher
and more stable interest income
Mon, 13 Mar 2017
HTSC (6886 HK)
Page 29 of 68
1,458
3,907 3,175 3,218 3,170
2,467
6,888
4,081 4,369 4,914
497
1,052
1,462 1,645
1,810
4,851
11,894
8,764 9,278
9,940
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
FY14 FY15 FY16E FY17E FY18E
Deposits Margin financing Resale agreement Others YoY (%)
(RMB mn) (%)
107.5
168.7 171.3 167.5 166.2
1.9%
1.7%
1.9% 1.9% 1.9%
1.55%
1.60%
1.65%
1.70%
1.75%
1.80%
1.85%
1.90%
1.95%
50
70
90
110
130
150
170
190
FY14 FY15 FY16E FY17E FY18E
Interest receiving cash Yield on cash (%)
(RMB bn) (%)
Exhibit 46: HTSC interest income
Source: Company, OP Research
Exhibit 47: HTSC interest receiving deposits
Source: Company, OP Research
Strong edge on investment products
Apart from the stock trading function, the mobile app of HTSC has integrated a
wide range of investment products in one platform. Since investors in China are
more risk-averse, investing in stocks on a shorter term and focusing on market
conditions, they may sometimes have idle cash in their accounts in-between
investments. HTSC has been capturing new accounts by offering short term
yield-enhancing money market investment products. The mobile app also offers a
streamlined method for investors to complete the transactions easily. Besides,
the online platform can also allow HTSC to boost the number of active users by
offering more promotion of newly launched products.
HTSC has successfully leveraged
on investment products
Mon, 13 Mar 2017
HTSC (6886 HK)
Page 30 of 68
50.8
89.2 90.0 90.0 90.0
148.3
200.0 174.1 174.1 174.1
2.4%
4.2%
2.8% 2.8% 2.8%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
0
50
100
150
200
250
FY14 FY15 FY16E FY17E FY18E
Payables of consolidated investment products Total debts Financing costs (%)
(RMB bn) (%)
Exhibit 48: HTSC money market investment products
Source: Company website, OP Research
A major portion of the other payables of HTSC are payables of consolidated
structured entities, which we believe is mostly about yield-enhancing investment
products. We include the payables as a part of the total debt since it provides a
large part of the working capital to HTSC. We expect 52% or RMB 90 bn of the
total debt of HTSC is secured through issuance of the investment products. As
the interest paid to the investors of money market is generally lower, it would
lower the average financing cost and provide a huge competitive edge to HTSC.
Exhibit 49: HTSC total debt, payables of consolidated investment products
and financing costs
Source: Company, OP Research
With higher working capital provided, HTSC can re-invest in other financial assets
to receive dividend income. On one hand, HTSC may allow retail investors to
invest in yield-enhancing products in a smaller nominal amount. On the other
hand, the financial assets held would provide a stable interest spread for HTSC to
profit from. With less outsourcing of the money market investment products,
HTSC would provide better yield to investors, and would attract more active
brokerage clients, thus forming a positive cycle.
Money market products would
lower financing cost of HTSC
HTSC have more working capital
to invest in financial assets for
dividend income
Mon, 13 Mar 2017
HTSC (6886 HK)
Page 31 of 68
1,306
2,973
3,831 3,569 3,569
10%
128%
29%
-7%0%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
FY14 FY15 FY16E FY17E FY18E
Dividend income YoY (%)
(RMB mn) (%)
65
169
132 132 132
2.7%
2.8%
2.7% 2.7% 2.7%
2.55%
2.60%
2.65%
2.70%
2.75%
2.80%
0
20
40
60
80
100
120
140
160
180
FY14 FY15 FY16E FY17E FY18E
Financial assets held Yield from financial assets (%)
(RMB bn) (%)
Exhibit 50: HTSC dividend income from financial assets
Source: Company, OP Research
Exhibit 51: HTSC total financial assets held
Source: Company, OP Research
Initiating BUY rating with TP of HK$20.2
With (1) strong edge in technology integration (2) leader in market shares and (3)
utilization in investment products, we think HTSC would maintain the leading
position in the market in the near future. As the stock is trading at FY17E 1.12x
PB, 4% discount to industry average. Since HTSC has a strong record in
capturing higher market share than other peers, we believe HTSC a deserve
higher valuation based on higher growth. Our TP is based on FY17E 1.4x PB,
representing 2 standard deviations above the historical mean and 25% upside.
Mon, 13 Mar 2017
HTSC (6886 HK)
Page 32 of 68
Management profiles
Exhibit 52: Management profiles
Name Age Position Role and responsibilities Description
Mr. Zhou Yi 47 Chairman, Executive
Director
Overall business operations
and strategies
Mr. Zhou joined the group in 2007.
Mr. Zhou has over 15 years’ experience in the finance industry and
extensive experience in telecommunication industry. Before joining
the group, Mr. Zhou worked on technology management in several
telecommunication and mobile communication companies in
Jiangsu. Mr. Zhou holds Bachelor’s degree in computer
communications and taught at Jiangsu Posts &
Telecommunications School.
Ms. Pu Baoying 53 Non-executive Director,
Senior Accountant
Supervising the strategic
planning and financial
management
Ms. Pu was appointed to be the Chief accountant since 2015.
Before the appointment, Mr. Pu worked as the general manager of
the finance department of JaingsuGuoxin Assets Management.
Ms. Pu has over 30 years’ experience in accounting and finance
management.
Ms. Pu holds Master’s degree in accounting.
Mr. Sun Hongning 55 Non-executive Director General management of the
group’s business
Mr. Sun joined the group in 2007.
Mr. Sun had been working in Jiangsu Secrets Protection Bureau
and Jiangsu Provincial Party Committee as secretary and general
manager before he joined the group.
Mr. Sun holds MBA degree.
Mr. Zhou Yong 50 Non-executive Director,
Principal senior economist
Business operation and
management, mainly
responsible for investment
business
Mr. Zhou was joined the group in 2015.
Mr. Zhou has over 25 years’ experience in international investment
management. Before appointed as director in 2015, Mr. Zhou had
been working in Jiangsu Holly International Group for 17 years and
worked as the chairman of Jiangsu Holly Futures Brokerage Co.
Ltd. and general manager of Jiangsu Holly International Investment
Management Co. Ltd.
Mr. Zhou holds post-doctoral degree.
Mr. Gao Xu 52 Non-executive Director Strategies planning and
management of the asset
management business
Mr. Gao was appointed to be the director of the group and served
as a supervisor in 2013.
Before joining the group, Mr. Gao worked as general management
in the asset management department of Jiangsu Guoxin
Investment Group for 6 years and served in several State-owned
assets operation enterprises in Jiangsu for over 20 years.
Mr. Gao holds Bachelor’s degree.
Source: Company, OP Research
Mon, 13 Mar 2017
HTSC (6886 HK)
Page 33 of 68
4.78%
Public
2.45% 1.45% 59.53%
6.26%
17.46%
Jiangsu High
Hope
International – A
shs
Jiangsu
Communication
Holdings – A shs
Jiangsu Guoxin
Investment
Group – A shs
China Securities
Finance Corp. –
A shs
Blackrock Inc. –
H shs
Govtor Capital
Group – A shs
Jiangsu SOHO
Holdings – A shs
3.22%
2.86%
National Social
Security Fund –
H shs
1.99%
Appendix
Exhibit 53:Shareholding structure
Source: Company, OP Research
Exhibit 54: Core assumptions
FY16E FY17E FY18E
Securities brokerage and advisory 8,324 9,131 9,854
Avg. comm. Rate (bps) 3.4 3.2 3.2
ADT (RMB bn) 517.2 569.0 625.9
Stock market share (%) 7.9 8.3 8.6
Underwriting and sponsorship 1,477 1,569 1,666
Equity underwritten amount (RMB bn) 69.6 73.5 77.7
Comm. Rate (%) 1.1 1.1 1.1
Debt underwritten amount (RMB bn) 114.5 120.2 126.3
Comm. Rate (%) 0.45 0.45 0.45
Asset management 477.5 578.9 661.5
Asset mgmt AUM (RMB bn) 879.5 1,059.9 1,177.2
Asset mgmt fee (%) 0.22 0.20 0.20
Interest from financial institutions 3,175.5 3,218.0 3,169.7
Deposits (RMB bn) 171.3 167.5 166.2
Interest rate (%) 1.9 1.9 1.9
Interest from margin account 4,080.6 4,368.8 4,914.0
Margin financing (RMB bn) 56.4 65.0 71.5
Interest rate (%) 7.2 7.2 7.2
Interest from securities-back lending 1,461.7 1,645.2 1,809.7
Stock resale balance (RMB bn) 44.8 49.2 54.2
Interest rate (%) 3.5 3.5 3.5
Net gains from financial assets (573.5) 945.7 945.7
Stock market T/O (RMB tn) 126.7 139.4 153.3
SHCOMP change (%) (12.3) 5.0 5.0
Bond market T/O (RMB tn) 238.4 262.2 288.5
T-bond change (%) 3.4 3.0 3.0
C-bond change (%) 6.0 5.0 5.0
Dividend income from financial assets 3,830.8 3,569.4 3,569.4
Financial assets held (RMB bn) 132.2 132.2 132.2
Yield (%) 2.7 2.7 2.7
Net gains from derivatives 1,304.9 (530.2) (530.2)
Sensitivity to stock market return (106.0) (106.0) (106.0)
Source: Company, OP Research
Mon, 13 Mar 2017
HTSC (6886 HK)
Page 34 of 68
Financial Summary–HTSC(6886 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E
Year to Dec FY14A FY15A FY16E FY17E FY18E
Income Statement (RMB mn)
Ratios
Fee and commission income 8,127 20,200 11,165 12,328 13,406
Gross margin (%) n.a. n.a. n.a. n.a. n.a.
Interest income 4,851 11,894 8,764 9,278 9,940
Operating margin (%) 51.7 55.7 56.8 56.1 55.8
Net investment gains 2,679 6,757 4,562 3,985 3,985
Net margin (%) 28.7 27.5 26.1 27.5 28.1
Turnover 15,657 38,851 24,491 25,591 27,331
Staff cost/Sales (%) 24.7 21.0 22.7 22.8 23.1
YoY% 75 148 (37) 4 7
Admin exp/Sales (%) n.a. n.a. n.a. n.a. n.a.
Other income 322 564 363 368 388
Payout ratio (%) 62.4 32.4 30.0 30.0 30.0
Fee & commission exp (1,650) (5,676) (2,851) (3,146) (3,417)
Effective tax (%) 24.4 25.0 25.0 25.0 25.0
Staff costs (3,875) (8,141) (5,555) (5,844) (6,303)
Total debt/equity (%) 353.5 245.3 206.0 193.8 182.0
Dep. & Amort. (312) (333) (337) (343) (354)
Net debt/equity (%) 267.6 200.2 133.5 129.8 123.3
Business taxes & surcharges (660) (1,723) (735) (640) (683)
Current ratio (x) 1.3 1.5 1.3 1.4 1.4
Other opex (1,367) (1,815) (1,384) (1,531) (1,620)
Quick ratio (x) 1.3 1.5 1.3 1.4 1.4
Total opex (7,865) (17,687) (10,862) (11,504) (12,377)
Inventory T/O (days) 0 0 0 0 0
Impairment loss (18) (73) (90) (90) (90)
AR T/O (days) 8 6 6 6 6
Operating profit (EBIT) 8,096 21,656 13,902 14,365 15,251
AP T/O (days) 0 0 0 0 0
Operating margin 51.7% 55.7% 56.8% 56.1% 55.8%
Cash conversion cycle (days) 8 6 6 6 6
Finance costs (2,466) (7,812) (5,655) (5,261) (5,261)
Asset turnover (x) 0.1 0.1 0.1 0.1 0.1
Profit after financing costs 5,630 13,843 8,248 9,104 9,991
Financial leverage (x) 4.9 5.9 5.2 4.8 4.6
Associated companies & JVs 285 420 399 419 440
EBIT margin (%) 51.7 55.7 56.8 56.1 55.8
Pre-tax profit 5,915 14,263 8,647 9,523 10,431
Interest burden (x) 0.7 0.7 0.6 0.7 0.7
Tax (1,375) (3,466) (2,062) (2,276) (2,498)
Tax burden (x) 0.8 0.7 0.7 0.7 0.7
Minority interests (54) (101) (202) (222) (245)
Return on equity (%) 11.4 17.3 7.7 8.1 8.3
Net profit 4,486 10,697 6,383 7,025 7,688
ROIC (%) 5.6 8.1 4.7 5.3 5.4
YoY% 102 138 (40) 10 9
Net margin 28.7% 27.5% 26.1% 27.5% 28.1%
Year to Dec FY14A FY15A FY16E FY17E FY18E
EBITDA 8,408 21,988 14,240 14,708 15,605
Balance Sheet (RMB mn)
EBITDA margin 53.7% 56.6% 58.1% 57.5% 57.1%
Fixed assets 3,304 3,379 3,683 3,993 4,319
EPS (RMB) 0.801 1.493 0.891 0.981 1.073
Intangible assets & goodwill 453 476 405 343 290
YoY% 102 82 (46) 10 9
Associated companies & JVs 1,874 2,674 2,933 3,206 3,492
DPS (HK$) 0.625 0.591 0.294 0.324 0.354
Long-term financial assets 4,969 26,824 29,200 29,200 29,200
Other non-current assets 7,850 11,450 12,017 11,937 11,857
Year to Dec FY14A FY15A FY16E FY17E FY18E
Non-current assets 18,450 44,804 48,238 48,680 49,158
Cash Flow (RMB mn)
EBITDA 8,408 21,988 14,240 14,708 15,605
Margin account 64,637 67,432 56,355 65,000 71,500
Chg in working cap (15,445) (61,150) 43,370 (8,883) (6,876)
Short-term financial assets 60,307 142,532 103,000 103,000 103,000
Others (2,059) (1,079) 0 0 0
Repurchase agreements 18,310 21,791 26,945 26,945 26,945
Operating cash (9,095) (40,241) 57,610 5,825 8,730
Cash held for customers 71,536 131,945 110,000 110,000 110,000
Tax (1,195) (2,360) (2,193) (2,062) (2,276) Other current assets 2,985 7,404 7,739 8,087 8,637
Interests paid (884) (3,817) (2,827) (2,630) (2,630)
Cash 36,002 36,707 61,258 57,480 56,173
Net cash from operations (11,173) (46,418) 52,590 1,133 3,823
Current assets 253,777 407,811 365,297 370,512 376,254
Capex (658) (837) (490) (512) (547)
Payable to brokerage client 70,228 128,367 110,000 110,000 110,000
Investments 2,180 (24,688) (2,881) 0 0
Repurchase agreements 44,668 22,392 25,740 25,740 25,740
Dividends received 101 135 140 147 154
Tax 359 2,193 2,062 2,276 2,498
Sales of assets 15 4 0 0 0
Accruals & other payables 5,978 10,150 8,000 8,000 8,000
Interests received 0 0 0 0 0
Bank loans & leases 0 813 900 900 900
Others 687 4,264 0 0 0
Bonds, CBs& other debts 77,111 96,222 121,500 121,500 121,500
Investing cash 2,325 (21,122) (3,231) (365) (393)
Other current liabilities 2,481 19,748 4,449 4,559 4,733
FCF (8,849) (67,540) 49,358 768 3,430
Current liabilities 200,825 279,885 272,651 272,975 273,371
Issue of shares 0 30,588 0 0 0
Buy-back 0 0 0 0 0
Bank loans & leases 139 360 300 300 300
Minority interests 0 51 0 0 0
Bonds, CBs& other debts 21,345 69,374 25,000 25,000 25,000
Dividends paid (850) (2,800) (3,581) (1,915) (2,107)
Deferred tax & others 7,972 21,467 31,052 31,052 31,052
Net change in bank loans 28,284 28,800 (18,398) 0 0
Non-current liabilities 29,456 91,201 56,352 56,352 56,352
Others (975) (2,805) (2,827) (2,630) (2,630)
Financing cash 26,460 53,833 (24,807) (4,545) (4,738)
Total net assets 41,944 81,529 84,532 89,864 95,690
Net change in cash 17,611 (13,707) 24,551 (3,778) (1,307)
Shareholder's equity 41,944 81,529 84,532 89,864 95,690
Exchange rate or other Adj 1,210 14,412 0 0 0
Share capital 5,600 7,163 7,163 7,163 7,163
Opening cash 17,180 36,002 36,707 61,258 57,480
Reserves 35,699 73,622 76,424 81,533 87,114
Closing cash 36,002 36,707 61,258 57,480 56,173
MI 646 744 946 1,168 1,413
CFPS (HK$) (2.494) (7.906) 8.076 0.174 0.587
BVPS (HK$) 9.22 13.76 12.84 13.62 14.48
Segment Revenue (RMB mn)
Total debts 148,263 199,961 174,140 174,140 174,140
Brokerage and wealth
management
10,254 28,569 16,069 17,083 18,272
Net cash/(debts) (112,262) (163,254) (112,882) (116,660) (117,967)
Investment banking 1,389 1,897 2,393 2,482 2,627
Asset management 1,374 2,540 2,829 2,879 3,101
Adj. leverage ratio (ex-client
money)
4.78 3.93 3.59 3.44 3.30
Investment and trading 2,230 4,483 2,391 2,432 2,594
Overseas business and others 410 1,362 809 714 736
Source: Company, OP Research
Mon, 13 Mar 2017
HTSC (6886 HK)
Page 35 of 68
Exhibit 55: Peer Comparison
Company Ticker Price
Mkt cap
(US$m)
3-mth
avg t/o
(US$m)
PER Hist
(x)
PER FY1
(x)
PER
FY2
(x)
EPS
FY1
YoY%
EPS
FY2
YoY%
3-Yr EPS
Cagr (%) PEG (x)
DivyldHist
(%)
Divyld
FY1
(%)
P/B
Hist
(x)
P/B
FY1
(x)
EV/
EbitdaHist
EV/
Ebitda
Cur Yr
Net
gearing
Hist
(%)
Gross
margin
Hist
(%)
Net
margin
Hist
(%)
ROE
Hist
(%)
ROE
FY1
(%)
Shpx
1-mth
%
Shpx
3-mth
%
HuataiSecurit-H 6886 HK 15.30 17,382 10.5 8.4 15.6 14.2 (46.2) 10.1 (13.5) (1.16) 3.9 1.9 1.11 1.19 12.4 15.6 200.2 n.a. 27.5 17.3 7.7 (4.7) (8.9)
HSI 23,568.67 13.0 11.8 10.8 10.2 9.4 10.7 1.10 3.5 3.5 1.23 1.16 9.4 9.8 (0.0) 3.5
HSCEI 10,069.10 8.3 8.2 7.5 1.1 9.0 9.9 0.83 3.6 3.6 1.00 0.92 12.0 11.2 (0.6) 2.0
CSI300 3,427.89 15.3 13.0 11.4 17.8 13.8 10.5 1.24 2.0 2.2 1.86 1.59 12.1 12.2 0.4 (1.9)
Adjusted sector avg* 8.5 14.6 12.4 (52.0) 18.7 (10.1) 0.62 3.2 2.4 1.28 1.21 6.9 18.9 59.8 N/A 32.0 11.3 8.7 (1.0) (3.8)
Citic Sec-H 6030 HK 16.50 27,944 21.4 8.6 16.2 12.8 (46.8) 25.9 (7.8) N/A 3.5 1.9 1.28 1.25 5.6 15.2 0.0 N/A 27.8 8.6 7.7 (1.8) (3.7)
HaitongSecuri-H 6837 HK 13.94 24,257 20.0 8.4 16.1 13.0 (48.0) 23.9 (9.5) N/A 3.7 2.0 1.36 1.27 6.3 20.9 50.2 N/A 28.8 9.6 8.1 (2.2) (3.2)
HuataiSecurit-H 6886 HK 15.30 17,382 10.5 8.3 14.9 11.8 (44.5) 26.0 (4.5) N/A 3.8 2.2 1.19 1.17 2.0 5.0 59.4 N/A 27.1 8.6 7.9 (4.7) (8.9)
Gf Securities-H 1776 HK 16.90 18,485 6.8 8.1 14.5 12.1 (43.8) 19.1 (6.3) N/A 5.5 2.4 1.56 1.45 7.8 19.5 90.7 N/A 31.0 12.1 10.1 (2.0) (4.9)
China Merchan-H 6099 HK 11.98 15,264 2.4 5.7 12.4 10.5 (54.1) 17.4 (12.3) N/A N/A 2.4 1.26 1.19 6.3 20.5 75.4 N/A 31.3 12.8 9.6 0.0 (2.6)
Dfzq-H 3958 HK 7.88 12,475 1.7 4.8 16.6 14.5 (71.0) 14.7 (25.7) N/A N/A 1.9 1.06 1.06 9.2 N/A 105.6 N/A 35.8 27.5 6.7 1.8 (3.2)
Everbright Sec-H 6178 HK 12.30 10,029 1.2 5.1 14.2 12.3 (63.9) 15.8 (18.7) N/A N/A 2.0 1.08 1.05 3.6 N/A 112.2 N/A 32.8 9.6 7.3 (2.4) 4.8
Csc Financial-H 6066 HK 6.90 6,439 2.9 4.3 8.4 7.6 (48.1) 9.5 (12.0) N/A N/A 2.1 1.25 1.20 1.3 N/A 0.0 N/A 35.4 36.9 15.6 (0.9) 1.3
China Internat-H 3908 HK 11.14 3,309 3.5 8.9 18.2 14.9 (51.3) 22.4 (9.5) N/A N/A 0.5 1.34 1.33 7.0 N/A 0.0 N/A 20.6 10.2 7.0 0.9 1.3
Cc Securities-H 1375 HK 4.15 4,905 2.8 7.5 14.6 14.2 (48.4) 2.8 (19.6) N/A 8.8 3.4 1.53 1.36 13.6 N/A 27.7 N/A 29.6 9.8 8.3 2.0 (8.4)
Kingston Financi 1031 HK 3.19 5,593 3.8 32.6 N/A N/A N/A N/A N/A N/A 0.6 N/A 2.31 N/A 22.1 N/A 53.5 N/A 54.6 8.2 N/A (7.5) (11.9)
HaitongInt'L 665 HK 4.55 3,127 9.0 14.3 9.6 8.3 49.6 15.8 26.6 0.36 2.5 4.7 1.14 1.00 12.9 14.1 72.1 N/A 43.2 5.6 10.1 (1.9) (6.0)
GuotaiJunan 1788 HK 2.56 2,299 7.5 18.2 13.3 11.5 36.9 15.5 15.1 0.88 2.7 3.8 2.18 1.77 21.6 22.8 130.1 N/A 40.7 13.0 13.1 (8.2) (3.0)
* Outliners and "N/A" entries are in red and excl. from the calculation of averages
Source: Bloomberg, OP Research
Mon, 13 Mar 2017
GF Securities (1776 HK)
Page 36 of 68
GF Securities (1776 HK) –Leading in asset management GFS has higher revenue contribution from asset management
segment to capture the rising investable assets in China
GFS has better management to generate stable profit from balance sheet
Initiate a BUY rating with TP of HK$20.6
Higher contribution from asset management By consolidating the income
from GF Fund, we expect segment revenue contribution from asset management
of GFS would increase to 22% of total revenue in FY16E, much higher than the
industry average of 9%. With robust growth of investable asset in China, we
expect the growth in AUM would drive the asset management fee income of GFS
to increase by 35% to RMB 4.8bn in FY16E. With higher contribution from asset
management, GFS has the competitive advantage for higher valuation as their
growth is less dependent on the market turnover.
Solid management in financial assets investment GFS has substantial
capital injected from IPO to leverage on the balance sheet to generate stable
dividend income. With the stringent control in financial assets, GFS achieved
much less sensitivity in earnings against market volatility in the investment. We
expect GFS EPS change to be only 0.2% and 0.1% with 5% and 1% change in
stock market and bond market return respectively. With solid balance sheet, we
expect GFS to see 30% growth in dividend income to RMB 5.6 bn in FY16E. We
believe it would be one of the crucial factors for higher ROE in GFS.
Initiate with a BUY with TP of HK$20.6 Although GFS is trading at FY17E
1.32x PB or 12% premium to industry average, we believe the premium is
justified as GFS has (1) the highest exposure from the stable growth of asset
management business (2) the lowest earnings sensitive against the change in
market return and (3) the highest ROE among our coverage. GFS is our top pick
of the sector and we initiate coverage on GFS with a BUY rating. Our target price
of HK$20.6 is based on FY17E 1.6x PB, representing 22% upside.
Initial Coverage
BUY
Close price: HK$16.90
Target Price: HK$20.60 (+22%)
Key Data
HKEx code 1776
12 Months High (HK$) 19.80
12 Month Low (HK$) 14.92
3M AvgDail Vol. (mn) 3.14
Issue Share (mn) 1,701.80
Market Cap (HK$mn) 143,511.46
Fiscal Year 12/2016
Major shareholder (s) Jilin Aodong Pharm. (16.43%)
Source: Company data, Bloomberg, OP Research
Closing price are as of 10/03/2017
Price Chart
1mth 3mth 6mth
Absolute % -0.1 -5.1 -5.3
Rel. MSCI CHINA % -1.3 -11.2 -5.5
Forward PB Band
Company Profi le GF Securities Company Limited is a
securities firm. The Company offers
investment banking services including equity
and bond underwriting, mergers and
acquisitions consulting, financial consulting,
brokerage services, and asset management
services.
Exhibit 56: Forecast and Valuation Year to Dec (RMBmn) FY14A FY15A FY16E FY17E FY18E
Revenue 16,146.9 42,778.9 31,537.4 34,412.7 36,773.2
Growth (%) 74.1 164.9 (26.3) 9.1 6.9
Net Profit 5,022.6 13,201.0 9,315.8 11,073.1 12,265.8
Growth (%) 78.6 162.8 (29.4) 18.9 10.8
Diluted EPS (HK$) 1.061 2.113 1.345 1.598 1.770
EPS growth (%) 78.6 99.2 (36.4) 18.9 10.8
Change to previous EPS (%)
0.0 0.0 0.0
Consensus EPS (HK$)
1.144 1.363 1.673
ROE (%) 13.2 21.8 11.4 12.6 12.7
P/E (x) 15.9 8.0 12.6 10.6 9.5
P/B (x) 2.0 1.4 1.5 1.3 1.2
Yield (%) 1.5 5.8 2.4 2.8 3.1
DPS (HK$) 0.250 0.976 0.403 0.479 0.531
Source: Bloomberg, OP Research
12.0
13.0
14.0
15.0
16.0
17.0
18.0
19.0
Mar/16 Jun/16 Sep/16 Dec/16 Mar/17
HK$1776 HK MSCI CHINA
0.5
1.0
1.5
2.0
2.5
Jun/15 Dec/15 Jun/16 Dec/16
Forward P/B Ratio
+1std.
avg.
-1std.
Mon, 13 Mar 2017
GF Securities (1776 HK)
Page 37 of 68
11%5% 8% 8% 8%
54%55%
38% 35% 35%
21%22%
28%28% 27%
12%14%
22% 26% 26%
2% 4% 3% 3% 3%
-50%
0%
50%
100%
150%
200%
0%
20%
40%
60%
80%
100%
FY14 FY15 FY16E FY17E FY18EOthers Investment managementTrading and institutional client services Wealth managementInvestment banking YoY (%)
(RMB mn) (%)
Leading in asset management
Premium is justified
As the market turnover and average commission rate dropped 50% and 21%
respectively in 2016, it is expected GFS would report a decline in total revenue
and net profit due to drop in commission income. As the commission on securities
of GFS is expected to go down by 61% to RMB 5.41bn in FY16E due to keen
market competition, the contribution from wealth management is expected to
drop from 55% in FY15 to 38% in FY16E. However, we believe GFS would
perform better than industry peers due to (1) higher contribution from asset
management segment (2) robust growth in debt issuance underwriting and (3)
solid balance sheet to generate dividend income from financial assets.
Exhibit 57: GF Securities revenue contribution by segment
Source: Company, OP Research
Highest proportion of revenue contributed by asset management
By increasing equity interest and consolidating income of GF Fund since August
2014, revenue contribution from investment management in GFS is relatively
higher than peer average. With robust growth in personal investable assets in
China, we think the total AUM of GF Asset Management and GF Fund will reach
RMB 1.59 tn in FY18E, representing a 3-Year CAGR of 22.5%. Under lower
market turnover, lower commission rate and keen competition, the robust growth
in investment management would favor brokers, like GFS, with higher portion of
revenue coming from asset management business.
With higher total AUM size, we expect asset management fee income of GFS will
increase by 35% growth to RMB 4.84bn in FY16E, we expect the investment
management segment revenue contribution to total revenue ratio will increase
from 14% in FY15 to 22% FY16E, much higher than the sector average and
supporting the overall growth.
Investment management and
investment banking will lead GF
Securities to outperform
GFAM and GF Fund are expected
to have robust CAGR in AUM size
Investment management would
contribute over 20% of total
revenue
Mon, 13 Mar 2017
GF Securities (1776 HK)
Page 38 of 68
197
532
791
1,024
1,147
133
330 380
417 438
1.6%
2.3% 2.3%2.3% 2.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
0
200
400
600
800
1,000
1,200
1,400
FY14 FY15 FY16E FY17E FY18E
GF Asset Management GF Fund Market share (%)
(RMB bn) (%)
1,124
3,597
4,842
6,462
7,108 448%
220%
35% 33%10%
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
500%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
FY14 FY15 FY16E FY17E FY18E
Asset management Fund management YoY (%)
(RMB mn) (%)
We believe larger contribution from investment management would give a
competitive edge to brokers as (1) asset management is a scalable business with
lower staff cost and (2) more investment products, such as money market funds,
funds, would generate better commission income by offering flexible investment
solution. Besides, since investment management fee is largely dependent on the
AUM size, but slightly related to market performance due to high water marks,
investment management fee income generally fluctuates to a much smaller
degree than commission income. Thus, brokers, such as GFS, which have higher
exposure in asset management business would offer better cost to income ratio
and expected growth.
Exhibit 58: GF Securities asset management fee income
Source: Company, OP Research
Exhibit 59: GF Securities AUM size
Source: Company, OP Research
Higher contribution from
investment offers stable growth
Mon, 13 Mar 2017
GF Securities (1776 HK)
Page 39 of 68
1,034 951 952 1,040 1,137
406 344
734 808
888 113
147
187
205
225
1,552 1,442
1,873
2,053
2,251 404%
-7%
30%10% 10%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
0
500
1,000
1,500
2,000
2,500
FY14 FY15 FY16E FY17E FY18E
Equity financing Debt financing Others YoY (%)
(RMB mn) (%)
3.0%
1.8%1.7% 1.7% 1.7%
0.6% 0.7%
0.5% 0.5% 0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
FY14 FY15 FY16E FY17E FY18E
Equity comm rate (%) Debt comm rate (%)
(%)
Debt issuance supports growth in investment banking
Underwriting and sponsor fees from equity financing is expected to have low
growth in 2016E due to suspension of IPO approvals in 1H16 but higher equity
refinancing amount. However, it is expected that the total underwriting fee will
increase by 30% to RMB 1.87 bn in FY16E. Although the average commission
rate of debt underwriting dropped to 0.52% in 1H16, the debt underwriting
amount increased by 3.9x to RMB 75.4 bn. We believe this growth in debt
issuance was driven by (1) reduced restrictions on investments by foreign entities
(2) more corporate bond issuances were approved (3) more restrictions on the
sale of shares. Thus, we think investment banking would partly support the
growth of GFS and increase the contribution from 5% of total revenue to 8% in
FY16E.
Exhibit 60: GF Securities underwriting and sponsor fee
Source: Company, OP Research
Exhibit 61: GF Securities investment banking commission rate
Source: Company, OP Research
Debt issuance will drive growth in
underwriting and sponsor fee in
FY16E
Mon, 13 Mar 2017
GF Securities (1776 HK)
Page 40 of 68
2,286
4,353
5,645 5,544 5,544
35%
90%
30%
-2% 0%
-20%
0%
20%
40%
60%
80%
100%
0
1,000
2,000
3,000
4,000
5,000
6,000
FY14 FY15 FY16E FY17E FY18E
Dividend income YoY (%)
(RMB mn) (%)
61
180 168 168 168
4.3%
3.7%
3.3% 3.3% 3.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
0
20
40
60
80
100
120
140
160
180
200
FY14 FY15 FY16E FY17E FY18E
Financial assets held Yield from financial assets (%)
(RMB bn) (%)
Solid balance sheet to generate dividend income from financial assets
Because of the (1) fund raised through IPO and (2) respectable profitability and
market performance, GFS significantly increased the total amount of financial
assets held in 2H15. Unlike other consensus analyses, we believe dividend
income from financial assets is core income. Since brokers generally hold low risk
securities, such as government bonds, as financial assets, the yield spread is
mainly determined by their borrowing costs and the dividend yield of the assets
held. With IPO in 2015, it enabled GFS to (1) secure a respectable capital and (2)
lower financing costs as a listed company. Since higher dividend income only
factored in half year result in FY15, we believe it would still have 30% growth to
RMB 5.6 bn in FY16E for full year effect. Besides, as the interest rate in China is
expected to be stable, yield from financial assets would provide a stable income
source for the market leaders, like GFS, with a solid balance sheet to invest.
Exhibit 62: GF Securities dividend income from financial assets
Source: Company, OP Research
Exhibit 63: GF Securities amount of financial assets held
Source: Company, OP Research
Solid balance sheet provides
stable dividend income for GFS
Mon, 13 Mar 2017
GF Securities (1776 HK)
Page 41 of 68
Premium is justified
GFS is trading at FY17E 1.32x PB, which is 12% higher than industry average.
Since GFS has (1) higher revenue contribution from robust growing asset
management business (2) respectable development in debt issuance
underwriting and (3) solid balance sheet to generate stable dividend income, we
believe the premium is justified. With FY17E 1.6x PB or 1 standard deviation from
the historical mean, our TP of HK$20.6 implies FY17E 12.9x PE and 22% upside.
With strong competitive edge, our
TP implies 12% premium to
industry average and 22% upside
Mon, 13 Mar 2017
GF Securities (1776 HK)
Page 42 of 68
Management profiles
Exhibit 64: Management profiles
Name Position Role and responsibilities Description
Mr. Sun Shuming Chairman, Executive
Director
Overall business operations
and strategies
Mr. Sunwas appointed as the Chairman and Executive Director of the
group in 2012.
Mr. Sun has over 30 years’ experience in the finance industry. Before
joining the group, Mr. Sun had been working in the government
institutions such as Ministry of Finance of the PRC, CSRC and the
People’s Government of Zhuozhou, Hebei for 25 years and worked as
supervisor of China Galaxy Securities Co. Ltd from 2003 to 2006.
Mr. Sun obtained Bachelor’s degree in Economics from the Hubei
Institute of Finance and Economics (now known as Zhongnan University
of Economics and Law) in 1984, Doctorate degree in Economics from the
Research Institute for Fiscal Science of the Ministry of Finance in 1997.
Mr. Lin Zhihai CEO, Executive Director,
General Manager
Business operation and
management of the group,
strategies planning of GF
Asset Management
Mr. Lin joined the group in 1996.
Mr. Lin has over 20 years’ experience in the finance industry. Mr. Lin is
also the Chairman of GFHK since 2011 and worked as Chairman of GF
Asset Management in 2014.
Mr. Lin obtained Bachelor’s, Master’s and Doctorate degree in Economics
from the Dongbei University of Finance and Economics. Mr. Lin also
obtained the senior management executive MBA degree from the Hong
Kong University of Science and Technology.
Mr. Qin Li Executive Director, Deputy
General Manager
Business operation and
management, mainly
responsible for investment
business
Mr. Qin joined the group in 1997.
Mr. Qin has over 20 years’ experience in the finance industry. Before
appointed as Executive Director in 2011, Mr. Qin had been working as
general manager of investment banking department and fund manager of
E Fund and GF Xinde.
Mr. Qin obtained Bachelor’s degree in Economics from the Shanghai
University of Finance and Economics, Master’s degree in Economics
from the Jinan University and Doctorate in Economics from the Renmin
University of China. Mr. Qin also completed the course of senior
management executive MBA from the Cheung Kong Graduate School of
Business.
Ms. Sun Xiaoyan CFO, Executive Director Supervising the strategic
planning and financial
management
Ms. Sun joined the group in 1993. Ms. Sun was appointed as CFO of the
group since 2011 and also the director of GFHK since 2013
Ms. Sun has over 20 years’ experience in the finance industry. and had
been working in the capital operation, finance department, investment
banking department as deputy general manager.
Ms. Sun obtained Bachelor’s degree in Economics from the Renmin
University of China, MBA from the China Europe International Business
Source: Company, OP Research
Mon, 13 Mar 2017
GF Securities (1776 HK)
Page 43 of 68
10.18%
Public
2.03% 1.35% 53.61%16.40%16.43%
Zhongshan
Public Utilities
- A&H shs
Liaoning Cheng
Da – A shs
Jilin Aodong
Pharmaceutical
Group – A shs
Fubon Life
Insurance
- H shs
L.R. Capital
- H shs
Appendix
Exhibit 65: Shareholding structure
Source: Company, OP Research
Exhibit 66: Core assumptions
FY16E FY17E FY18E
Commission on securities 5,413 5,401 5,628
Avg. comm. Rate (bps) 4.1 3.8 3.6
ADT (RMB bn) 517.2 569.0 625.9
Stock market share (%) 4.6 4.5 4.5
Underwriting and sponsors fees 1,873 2,053 2,251
Equity underwritten amount (RMB bn) 56.0 61.2 66.9
Comm. Rate (%) 1.7 1.7 1.7
Debt underwritten amount (RMB bn) 52.0 57.2 62.9
Comm. Rate (%) 0.5 0.5 0.5
Asset management fee income 4,842 6,462 7,108
Asset mgmt AUM (RMB bn) 790.5 1,023.8 1,147.2
Asset mgmt fee (%) 0.3 0.3 0.3
Fund mgmt AUM (RMB bn) 379.5 417.5 438.4
Fund mgmt fee (%) 0.9 0.9 0.8
Interest from deposits 2,651 2,799 2,866
Deposits (RMB bn) 125.4 129.1 131.5
Interest rate (%) 2.2 2.2 2.2
Interest from advances to clients 3,855 3,878 4,200
Margin financing (RMB bn) 52.6 56.0 61.6
Interest rate (%) 7.0 7.0 7.0
Net gains from financial assets 5,330 6,277 6,947
Stock market T/O (RMB tn) 126.7 139.4 153.3
SHCOMP change (%) (12.3) 5.0 5.0
Bond market T/O (RMB tn) 238.4 262.2 288.5
T-Bond index change (%) 3.4 3.0 3.0
C-Bond index change (%) 6.0 5.0 5.0
Dividend income from financial assets 5,645 5,544 5,544
Financial assets held (RMB bn) 168.0 168.0 168.0
Yield (%) 3.3 3.3 3.3
Source: Company, OP Research
Mon, 13 Mar 2017
GF Securities (1776 HK)
Page 44 of 68
Financial Summary–GF Securities(1776 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E
Year to Dec FY14A FY15A FY16E FY17E FY18E
Income Statement (RMB mn)
Ratios
Commission and fee income 8,217 20,046 13,229 15,102 16,272
Gross margin (%) n.a. n.a. n.a. n.a. n.a.
Interest income 4,325 12,336 7,191 7,377 7,835
Operating margin (%) 56.2 61.9 61.7 62.2 62.4
Net investment gains 3,605 10,396 11,118 11,933 12,666
Net margin (%) 31.1 30.9 29.5 32.2 33.4
Turnover 16,147 42,779 31,537 34,413 36,773
Staff cost/Sales (%) 26.9 25.5 24.3 23.4 23.2
YoY% 74 165 (26) 9 7
Admin exp/Sales (%) n.a. n.a. n.a. n.a. n.a.
Other income 17 (46) (385) (480) (480)
Payout ratio (%) 23.6 46.2 30.0 30.0 30.0
Commission and fee expenses (241) (461) (378) (413) (441)
Effective tax (%) 23.8 23.9 23.9 23.9 23.9
Staff costs (4,346) (10,914) (7,659) (8,050) (8,539)
Total debt/equity (%) 290.1 254.2 214.0 193.7 175.7
Depreciation &Amortisation (257) (279) (282) (280) (286)
Net debt/equity (%) 243.3 228.4 183.1 161.7 144.3
Other opex (2,100) (4,337) (3,262) (3,682) (3,989)
Current ratio (x) 1.4 1.5 1.4 1.4 1.5
Total opex (6,944) (15,992) (11,582) (12,425) (13,255)
Quick ratio (x) 1.4 1.5 1.4 1.4 1.5
Impairment loss (150) (282) (100) (100) (100)
Inventory T/O (days) 0 0 0 0 0
Operating profit (EBIT) 9,069 26,459 19,470 21,407 22,938
AR T/O (days) 29 21 21 21 21
Operating margin 56.2% 61.9% 61.7% 62.2% 62.4%
AP T/O (days) 0 0 0 0 0
Finance costs (2,758) (8,943) (7,193) (6,726) (6,726)
Cash conversion cycle (days) 29 21 21 21 21
Profit after financing costs 6,311 17,516 12,278 14,681 16,212
Asset turnover (x) 0.1 0.1 0.1 0.1 0.1
Associated companies & JVs 337 290 348 383 421
Financial leverage (x) 4.7 5.4 4.9 4.4 4.1
Pre-tax profit 6,649 17,806 12,625 15,064 16,633
EBIT margin (%) 56.2 61.9 61.7 62.2 62.4
Tax (1,503) (4,193) (2,939) (3,515) (3,881)
Interest burden (x) 0.7 0.7 0.6 0.7 0.7
Minority interests (123) (411) (370) (476) (486)
Tax burden (x) 0.8 0.7 0.7 0.7 0.7
Net profit 5,023 13,201 9,316 11,073 12,266
Return on equity (%) 13.2 21.8 11.4 12.6 12.7
YoY% 79 163 (29) 19 11
ROIC (%) 6.4 10.0 5.9 6.8 7.1
Net margin 31.1% 30.9% 29.5% 32.2% 33.4%
EBITDA 9,326 26,738 19,752 21,687 23,224
Year to Dec FY14A FY15A FY16E FY17E FY18E
EBITDA margin 57.8% 62.5% 62.6% 63.0% 63.2%
Balance Sheet (RMB mn)
EPS (RMB) 0.849 1.732 1.222 1.453 1.609
Fixed assets 1,287 1,580 1,676 1,798 1,933
YoY% 79 99 (36) 19 11
Intangible assets & goodwill 155 216 165 119 77
DPS (HK$) 0.250 0.976 0.403 0.479 0.531
Associated companies & JVs 1,584 3,348 3,695 4,078 4,499
Long-term financial assets 2,110 17,850 17,000 17,000 17,000
Year to Dec FY14A FY15A FY16E FY17E FY18E
Other non-current assets 1,302 3,248 3,601 4,089 4,578
Cash Flow (RMB mn)
Non-current assets 6,439 26,242 26,137 27,084 28,086
EBITDA 9,326 26,738 19,752 21,687 23,224
Chg in working cap (20,163) (20,118) 11,426 (3,670) (5,907)
Margin account 64,696 68,970 53,805 57,312 63,085
Others (2,004) (6,337) 0 0 0
Short-term financial assets 59,237 162,645 151,000 151,000 151,000
Operating cash (12,841) 283 31,178 18,017 17,317
Repurchase agreements 11,801 11,911 11,171 11,171 11,171
Tax (1,019) (4,314) (983) (2,939) (3,515)
Cash held for customers 70,851 117,090 100,000 100,000 100,000
Interests paid (1,181) (3,660) (7,193) (6,726) (6,726) Other current assets 8,104 11,858 10,390 12,164 13,299
Net cash from operations (15,040) (7,691) 23,003 8,352 7,076
Cash 18,974 20,382 25,385 29,098 31,484
Current assets 233,661 392,855 351,750 360,744 370,039
Capex (235) (390) (315) (344) (368)
Investments (9,307) (59,439) 8,583 0 0
Payable to brokerage client 71,466 118,137 100,000 100,000 100,000
Dividends received 0 0 0 0 0
Repurchase agreements 50,718 85,396 84,000 84,000 84,000
Sales of assets 2 20 0 0 0
Tax 1,081 983 2,939 3,515 3,881
Interests received 0 0 0 0 0
Accruals & other payables 2,801 9,087 6,699 7,310 7,812
Others 817 2,189 (1,900) (1,500) (1,000)
Bank loans & leases 1,286 896 3,000 3,000 3,000
Investing cash (8,723) (57,620) 6,367 (1,844) (1,368)
Bonds, CBs& other debts 30,660 30,370 36,000 36,000 36,000
FCF (23,764) (65,311) 29,370 6,507 5,708
Other current liabilities 7,519 18,389 19,061 19,061 19,061
Issue of shares 0 25,396 0 0 0
Current liabilities 165,530 263,258 251,699 252,886 253,753
Buy-back 0 0 0 0 0
Minority interests 49 159 0 0 0
Bank loans & leases 3,000 3,469 2,500 2,500 2,500
Dividends paid (1,226) (1,293) (6,097) (2,795) (3,322)
Bonds, CBs& other debts 26,031 72,270 40,000 40,000 40,000
Net change in bank loans 37,171 42,077 (18,112) 0 0
Deferred tax & others 4,162 278 278 278 278
Others 113 339 (158) 0 0
Non-current liabilities 33,192 76,018 42,778 42,778 42,778
Financing cash 36,107 66,680 (24,367) (2,795) (3,322)
Total net assets 41,377 79,821 83,410 92,164 101,594
Net change in cash 12,343 1,368 5,003 3,713 2,386
Exchange rate or other Adj 2 40 0 0 0
Shareholder's equity 41,377 79,821 83,410 92,164 101,594
Opening cash 6,629 18,974 20,382 25,385 29,098
Share capital 5,919 7,621 7,621 7,621 7,621
Closing cash 18,974 20,382 25,385 29,098 31,484
Reserves 33,692 69,898 73,117 81,396 90,339
MI 1,767 2,302 2,672 3,148 3,633
CFPS (HK$) (3.176) (1.231) 3.320 1.205 1.021
BVPS (HK$) 8.36 12.41 11.65 12.85 14.14
Segment Revenue (RMB mn)
Investment banking 1,784 2,094 2,418 2,662 2,908
Total debts 120,027 202,918 178,500 178,500 178,500
Wealth management 8,672 23,529 11,977 12,211 12,871
Net cash/(debts) (100,653) (182,293) (152,715) (149,002) (146,616)
Trading and institutional client
services
3,415 9,506 8,966 9,492 10,107
Investment management 1,890 6,128 7,078 8,856 9,634
Adj. leverage ratio (ex-client
money)
4.09 3.78 3.33 3.12 2.93
Others 387 1,523 1,098 1,191 1,254
Source: Company, OP Research
Mon, 13 Mar 2017
GF Securities (1776 HK)
Page 45 of 68
Exhibit 67: Peer Group Comparison
Company Ticker Price
Mkt cap
(US$m)
3-mth
avg t/o
(US$m)
PER Hist
(x)
PER FY1
(x)
PER
FY2
(x)
EPS
FY1
YoY%
EPS
FY2
YoY%
3-Yr EPS
Cagr (%) PEG (x)
DivyldHist
(%)
Divyld
FY1
(%)
P/B
Hist
(x)
P/B
FY1
(x)
EV/
EbitdaHist
EV/
Ebitda
Cur Yr
Net
gearing
Hist
(%)
Gross
margin
Hist
(%)
Net
margin
Hist
(%)
ROE
Hist
(%)
ROE
FY1
(%)
Shpx
1-mth
%
Shpx
3-mth
%
Gf Securities-H 1776 HK 16.90 18,485 6.8 8.0 12.6 10.6 (36.4) 18.9 (5.7) (2.19) 5.8 2.4 1.36 1.45 11.6 14.3 228.4 n.a. 30.9 21.8 11.4 (2.0) (4.9)
HSI 23,568.67 13.0 11.8 10.8 10.2 9.4 10.7 1.10 3.5 3.5 1.23 1.16 9.4 9.8 (0.0) 3.5
HSCEI 10,069.10 8.3 8.2 7.5 1.1 9.0 9.9 0.83 3.6 3.6 1.00 0.92 12.0 11.2 (0.6) 2.0
CSI300 3,427.89 15.3 13.0 11.4 17.8 13.8 10.5 1.24 2.0 2.2 1.86 1.59 12.1 12.2 0.4 (1.9)
Adjusted sector avg* 8.3 14.5 12.6 (52.3) 18.5 (10.5) 0.62 3.5 2.4 1.27 1.20 6.7 18.4 49.7 N/A 31.8 10.0 8.7 (1.1) (3.7)
Citic Sec-H 6030 HK 16.50 27,944 21.4 8.6 16.2 12.8 (46.8) 25.9 (7.8) N/A 3.5 1.9 1.28 1.25 5.6 15.2 0.0 N/A 27.8 8.6 7.7 (1.8) (3.7)
HaitongSecuri-H 6837 HK 13.94 24,257 20.0 8.4 16.1 13.0 (48.0) 23.9 (9.5) N/A 3.7 2.0 1.36 1.27 6.3 20.9 50.2 N/A 28.8 9.6 8.1 (2.2) (3.2)
HuataiSecurit-H 6886 HK 15.30 17,382 10.5 8.3 14.9 11.8 (44.5) 26.0 (4.5) N/A 3.8 2.2 1.19 1.17 2.0 5.0 59.4 N/A 27.1 8.6 7.9 (4.7) (8.9)
Cgs-H 6881 HK 7.38 15,915 19.8 5.9 13.2 11.4 (55.2) 16.3 (15.6) N/A 5.3 2.3 1.15 1.06 4.7 16.0 0.0 N/A 29.2 12.0 8.1 (1.5) (3.4)
Gf Securities-H 1776 HK 16.90 18,485 6.8 8.1 14.5 12.1 (43.8) 19.1 (6.3) N/A 5.5 2.4 1.56 1.45 7.8 19.5 90.7 N/A 31.0 12.1 10.1 (2.0) (4.9)
China Merchan-H 6099 HK 11.98 15,264 2.4 5.7 12.4 10.5 (54.1) 17.4 (12.3) N/A N/A 2.4 1.26 1.19 6.3 20.5 75.4 N/A 31.3 12.8 9.6 0.0 (2.6)
Dfzq-H 3958 HK 7.88 12,475 1.7 4.8 16.6 14.5 (71.0) 14.7 (25.7) N/A N/A 1.9 1.06 1.06 9.2 N/A 105.6 N/A 35.8 27.5 6.7 1.8 (3.2)
Everbright Sec-H 6178 HK 12.30 10,029 1.2 5.1 14.2 12.3 (63.9) 15.8 (18.7) N/A N/A 2.0 1.08 1.05 3.6 N/A 112.2 N/A 32.8 9.6 7.3 (2.4) 4.8
Csc Financial-H 6066 HK 6.90 6,439 2.9 4.3 8.4 7.6 (48.1) 9.5 (12.0) N/A N/A 2.1 1.25 1.20 1.3 N/A 0.0 N/A 35.4 36.9 15.6 (0.9) 1.3
China Internat-H 3908 HK 11.14 3,309 3.5 8.9 18.2 14.9 (51.3) 22.4 (9.5) N/A N/A 0.5 1.34 1.33 7.0 N/A 0.0 N/A 20.6 10.2 7.0 0.9 1.3
Cc Securities-H 1375 HK 4.15 4,905 2.8 7.5 14.6 14.2 (48.4) 2.8 (19.6) N/A 8.8 3.4 1.53 1.36 13.6 N/A 27.7 N/A 29.6 9.8 8.3 2.0 (8.4)
Kingston Financi 1031 HK 3.19 5,593 3.8 32.6 N/A N/A N/A N/A N/A N/A 0.6 N/A 2.31 N/A 22.1 N/A 53.5 N/A 54.6 8.2 N/A (7.5) (11.9)
HaitongInt'L 665 HK 4.55 3,127 9.0 14.3 9.6 8.3 49.6 15.8 26.6 0.36 2.5 4.7 1.14 1.00 12.9 14.1 72.1 N/A 43.2 5.6 10.1 (1.9) (6.0)
GuotaiJunan 1788 HK 2.56 2,299 7.5 18.2 13.3 11.5 36.9 15.5 15.1 0.88 2.7 3.8 2.18 1.77 21.6 22.8 130.1 N/A 40.7 13.0 13.1 (8.2) (3.0)
Source: Bloomberg, OP Research
Mon, 13 Mar 2017
CITIC Securities (6030 HK)
Page 46 of 68
CITIC Securities (6030 HK) –Leading in investment banking CITIC has highest total revenue in brokerage sector
CITIC has strong edge in client mix and business coverage
Initiate a BUY with TP of HK$19.4
Industry leader Driven by progressive development, CITIC has taken the
leading position of the industry by offering a wide range of professional
value-added services. With strong edge in investment banking and equity
research, CITIC has a solid mix of institutional clients to generate higher average
commission rate and market share than its peers. CITIC also has strong
exposure in asset management business with a leading size in AUM. With a
well-balanced business portfolio, we believe CITIC would maintain their leading
position in total revenue in near future.
Riding on the growth in investment banking With the reactivation of IPO
market and higher demand in debt issuance and equity financing, CITIC is
capturing the robust growth in investment banking given higher exposure to
institutional clients. We expect CITIC will have 21% increase in investment
banking income to RMB 5.5bn in FY16E, which would contribute around 13% of
total revenue and higher than the peer average.
Strong position in asset management CITIC owns majority stake of China
AMC, which is one of the largest fund management companies in China.
Including the AUM under directly held asset management business, we think
CITIC is the leader in asset management with AUM of RMB 2.9tn or market share
of 5.7%. We expect the revenue from asset management of CITIC will increase
by 12% to RMB 7.2bn in FY16E even if the market turnover declined by a
significant degree.
Initiate a BUY We initiate our coverage on CITIC with a BUY rating and target
price of HK$19.4 based on FY17E 1.4x PB or par to the historical average. We
believe CITIC would maintain the leading position and profitability given the
strong edge in business coverage and client mix and our TP represents 18%
upside.
Initial Coverage
BUY
Close price: HK$16.50
Target Price: HK$19.40 (+18%)
Key Data
HKEx code 6030
12 Months High (HK$) 19.40
12 Month Low (HK$) 15.14
3M AvgDail Vol. (mn) 10.10
Issue Share (mn) 2,278.33
Market Cap (HK$mn) 216,945.16
Fiscal Year 12/2016
Major shareholder (s) CITIC Corp. (16.50%)
Source: Company data, Bloomberg, OP Research
Closing price are as of 10/03/2017
Price Chart
1mth 3mth 6mth
Absolute % 1.5 -3.7 -8.8
Rel. MSCI CHINA % 0.3 -9.8 -9.0
Forward PB Band
Company Profi le CITIC Securities Co., Ltd. provides securities
brokerage, trading, underwriting, investment
banking, asset management, and investment
consulting services.
Exhibit 68: Forecast and Valuation Year to Dec (RMBmn) FY14A FY15A FY16E FY17E FY18E
Revenue 36,970.5 69,384.1 43,824.6 47,910.2 51,280.8
Growth (%) 84.4 87.7 (36.8) 9.3 7.0
Net Profit 11,337.2 19,799.8 9,670.5 12,911.0 14,241.3
Growth (%) 116.2 74.6 (51.2) 33.5 10.3
Diluted EPS (HK$) 1.286 1.994 0.878 1.172 1.293
EPS growth (%) 116.2 55.0 (56.0) 33.5 10.3
Change to previous EPS (%)
0.0 0.0 0.0
Consensus EPS (HK$)
1.000 1.258 1.475
ROE (%) 11.9 16.3 6.7 8.5 8.8
P/E (x) 12.8 8.3 18.8 14.1 12.8
P/B (x) 1.5 1.2 1.3 1.2 1.1
Yield (%) 2.1 3.6 1.6 2.1 2.4
DPS (HK$) 0.350 0.589 0.263 0.352 0.388
Source: Bloomberg, OP Research
12.0
13.0
14.0
15.0
16.0
17.0
18.0
19.0
20.0
Mar/16 Jun/16 Sep/16 Dec/16 Mar/17
HK$6030 HK MSCI CHINA
0.5
1.0
1.5
2.0
2.5
3.0
Dec/14 Jun/15 Dec/15 Jun/16 Dec/16
Forward P/B Ratio
+1std.
avg.
-1std.
Mon, 13 Mar 2017
CITIC Securities (6030 HK)
Page 47 of 68
10% 7%13% 14% 15%
32% 39%35% 33% 32%
35%
42%28% 27% 26%
17%
11%
19% 20% 20%
6% 2% 5% 6% 6%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY14 FY15 FY16E FY17E FY18EInvestment banking Brokerage Trading
Asset management Others YoY (%)
(RMB mn) (%)
10,365
22,714
11,788 12,527 12,795
11,938
26,715
15,298 16,026 16,620
58%
124%
-43%
5% 4%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
0
5,000
10,000
15,000
20,000
25,000
30,000
FY14 FY15 FY16E FY17E FY18E
Brokerage commission income Segment revenue YoY (%)
(RMB mn) (%)
Leading in investment banking
Strong edge in client mix and balanced business portfolio
Although CITIC only ranks second in terms of trading value, CITIC is expected to
have higher total revenue than other peers since CITIC has some strong
competitive edges, especially on (1) a better client mix of institutional clients (2)
higher average commission rate as institutional clients need a wider range of
services (3) greater client loyalty because it provides value-added services, such
as research reports (4) more synergy from different segments, especially in
investment banking and (5) holding majority stake of a leading and well
established asset management company. Despite the challenging year for
brokers in 2016, CITIC is expected to outperform by better investment banking
segment and asset management segment.
Exhibit 69: CITIC Securities revenue contribution by segment
Source: Company, OP Research
Exhibit 70: CITIC Securities brokerage commission income
Source: Company, OP Research
CITIC has strong edge in client
mix and business mix
Mon, 13 Mar 2017
CITIC Securities (6030 HK)
Page 48 of 68
10.58
6.72
7.50 7.00
6.50
6.2%
6.2%
5.7%
5.9% 5.9%
5.4%
5.5%
5.6%
5.7%
5.8%
5.9%
6.0%
6.1%
6.2%
6.3%
-
2.00
4.00
6.00
8.00
10.00
12.00
FY14 FY15 FY16E FY17E FY18E
Commission rate (bps) Market share (%)
(bps) (%)
In line with the drop in market turnover, CITIC is expected to have a 44% drop in
brokerage segment revenue with around 35% contribution in FY16E. Since CITIC
has more institutional clients, average commission rate of CITIC is higher than
industry peers. Although many brokers in the market are competing for new
accounts of retail customers by offering commission rate of as low as 3 bps, it is
expected that CITIC would improve the average commission rate to 7.5 bps in
FY16E due to higher contribution from institutional clients, which may have lower
drop in trading value in 2016. CITIC is also offering industry leading value-added
services, such as equity research reports and investment banking service, which
would enhance the loyalty of intuitional clients. We think CITIC would keep their
market share at 5.7% in FY16E even under keen market competition.
Exhibit 71: CITIC Securities average commission rate and market share
Source: Company, OP Research
Synergy from investment banking
CITIC has a long history of being the first mover in professional financial services
development. By offering innovative and industry-leading corporate financing
solutions, CITIC has a strong edge in investment banking segment. The
investment banking income of CITIC is expected to increase by 21% to RMB
5.5bn in FY16E from a 15% increase in underwriting amount. Given (1)
reactivation of IPO in 2H16E (2) higher debt issuance amount and (3) increase in
equity refinancing, CITIC's total underwriting amount is expected to jump to RMB
648 bn. For debt issuance and equity refinancing, most of the subscribers are
institutional clients due to relatively large investment size. With a better client mix
and management background, CITIC is strongly capable of providing corporate
finance solutions to many corporates by locating suitable clients as well as
providing related supporting services. Thus, among the top industry leaders,
CITIC is expected to have the highest revenue contribution by investment
banking, which would be 13% in FY16E.
CITIC has higher average
commission rate with decent
market share
CITIC has higher revenue
contributions from investment
banking
Mon, 13 Mar 2017
CITIC Securities (6030 HK)
Page 49 of 68
3,516
4,563
5,511
6,793
8,283
59%
30%
21%23% 22%
0%
10%
20%
30%
40%
50%
60%
70%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
FY14 FY15 FY16E FY17E FY18E
Investment banking commission income YoY (%)
(RMB mn) (%)
6.3 12.1 12.1 15.1 18.9 89.7
165.2 231.3 254.5 279.9
334.8
385.7
405.0 445.5
490.0
430.7
563.0
648.4
715.1
788.8 101%
31%
15%
10% 10%
0%
20%
40%
60%
80%
100%
120%
0
100
200
300
400
500
600
700
800
900
FY14 FY15 FY16E FY17E FY18E
IPO Equity refinancing Debt financing YoY (%)
(RMB bn) (%)
Exhibit 72: CITIC Securities investment banking income
Source: Company, OP Research
Exhibit 73: CITIC Securities underwriting amount
Source: Company, OP Research
CITIC has strong asset management exposure
CITIC has both asset management business and fund management. By acquiring
a majority stake in China AMC, CITIC holds 62.2% stake in China AMC, which
has AUM of around RMB 1.2 tn, ranking second in China. By including the RMB
1.7tn AUM directly managed under CITIC’s asset management business, CITIC
is expected to have a leading position in the industry with 5.7% market share. As
asset management is enjoying huge demand and good prospects from
increasingly investable wealth in China, we think CITIC will see a 12% rise in
asset management revenue to RMB 7.2bn in FY16E. Since we expect the total
revenue contribution by asset management to be as high as 19% in FY16E, we
also think CITIC will enjoy a stable and profitable income stream from asset
management in the near future.
CITIC has majority stake of China
AMC
Mon, 13 Mar 2017
CITIC Securities (6030 HK)
Page 50 of 68
4,504
6,449
7,192
8,055
8,787
202%
43% 12% 12% 9%
0%
50%
100%
150%
200%
250%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
FY14 FY15 FY16E FY17E FY18E
Asset management Fund management YoY (%)
(RMB mn) (%)
755
1,071
1,757
2,027
2,230
458
864
1,167 1,284
1,412
5.9%
5.1%
5.7%
5.3% 5.3%
4.6%
4.8%
5.0%
5.2%
5.4%
5.6%
5.8%
6.0%
0
500
1,000
1,500
2,000
2,500
FY14 FY15 FY16E FY17E FY18E
Citic Asset Management China AMC Market share (%)
(RMB bn) (%)
Exhibit 74: CITIC Securities asset management revenue
Source: Company, OP Research
Exhibit 75: CITIC Securities asset management AUM
Source: Company, OP Research
The drop in trading revenue
We expect the segment revenue of trading to decrease by 58% to RMB 12.1bn in
FY16E due to lower market turnover and investment returns. It would be the
major drag on the FY16E revenue, where the total revenue contribution of trading
would decrease to 28%in FY16E from 42%. Although we expect the dividend
income from financial asset would remain stable in FY16E, we expect the net
gains from financial assets to decrease significantly to RMB 2.0bn in FY16E due
to -12% in stock index return. However, we expect the net losses from derivatives
and others to turn around in FY16E since we believe the derivatives were mainly
used in hedging activities. Thus, despite a likely drop in trading revenue, we
believe the revenue will remain stable in the near future given that volatility in the
market has receded.
Trading revenue is a mixed result
from market turnover and
investment return
Mon, 13 Mar 2017
CITIC Securities (6030 HK)
Page 51 of 68
17,428 20,254
2,017
6,559 6,559
506%
16% -90%
225%
0%
-200%
0%
200%
400%
600%
0
5,000
10,000
15,000
20,000
25,000
FY14 FY15 FY16E FY17E FY18E
Net gains from financial assets YoY (%)
(RMB mn) (%)
(9,000)
(2,081)
2,853
(1,159) (1,159)
29% 29%
-12%
5% 5%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
(10,000)
(8,000)
(6,000)
(4,000)
(2,000)
0
2,000
4,000
FY14 FY15 FY16E FY17E FY18E
Net gains from derivatives and others Stock index return (%)
(RMB mn) (%)
Exhibit 76: CITIC Securities net gains from financial assets
Source: Company, OP Research
Exhibit 77: CITIC Securities net gains from derivatives and others
Source: Company, OP Research
Initiate BUY with TP of HK$19.4
We initiate our cover on CITIC Securities with TP of HK$19.4 since CITIC has
strong edge in investment banking and asset management. As CITIC has already
built up a large revenue chest, we believe CITIC will have more stable growth
than its peers. CITIC is trading at FY17E 1.19x PB or 16% lower than the
historical mean. With a more balanced revenue mix and higher average expected
growth, our target price is based on FY17E 1.4x PB, which represents a par to the
mean of the forward PB band, 20% premium to the industry average and 18%
upside.
Mon, 13 Mar 2017
CITIC Securities (6030 HK)
Page 52 of 68
Management profiles
Exhibit 78: Management profiles
Name Age Position Role and responsibilities Description
Mr. Zhang Youjun 51 Chairman, Executive
Director
Overall business operations
and strategies
Mr. Zhang joined at the establishment of the group in 1995.
Mr. Zhang has over 20 years’ experience in the finance industry
with the growth of the group. Mr. Zhang also concurrently serves as
the director of Hunan Valin Iron & Steel Group Co. ltd.
Mr. Zhang obtained Bachelor’s degree in Economics with major in
money and banking from Renmin University of China in 1987. And
Master’s degree in Economics from Central University of Finance
and Economics in 1990.
Mr. Yin Ke 53 Vice President, Executive
Director
Supervising the strategic
planning and management
Mr. Yin joined the group in 2007.
Mr. Yin is also the CEO of CITIC Securities International and
director of CITIC CLSA Limited. Before joining the group, Mr. Yin
worked in the investment banking, brokerage and overseas
business department of Guotai Jun’an Securities Co. Ltd for 10
years and worked as the assistant of the CEO of Shenzhen Stock
Exchange for 2 years.
After that Mr. Yin had been the director of 4 listed companies from
2002 to 2014.
Mr. Yin obtained Bachelor’s degree in Engineering in 1985 and
Master’s degree in Economics in 1991 from Zhejiang University.
Mr. Yang Minghui 55 Executive Director Business operation and
strategies planning in Asset
and Fund Management.
Mr. Yang joined the group in 1995.
Mr. Yang also served as the chairman of China AMC.
Mr. Yang has over 20 years’ experience in asset management with
the growth of the group.
Mr. Yang obtained a Bachelor’s degree and Master’s degree in
Engineering in 1982 and 1985 from the East China Institute of
Textile Science and Technology. Mr. Yang was granted the title of
senior economist by CITIC Group in 1996.
Source: Company, OP Research
Mon, 13 Mar 2017
CITIC Securities (6030 HK)
Page 53 of 68
Appendix
Exhibit 79: Shareholding structure
Source: Company, OP Research
Exhibit 80: Core assumptions
FY16E FY17E FY18E
Brokerage 5,511 6,793 8,283
Avg. comm. Rate (bps) 7.5 7.0 6.5
ADT (RMB bn) 517.2 569.0 625.9
Stock market share (%) 5.7 5.9 5.9
Investment banking 11,788 12,527 12,795
Equity underwritten amount (RMB bn) 243.4 269.6 298.8
Debt underwritten amount (RMB bn) 405.0 254.5 279.9
Avg. comm. Rate (%) 0.85 0.95 1.05
Asset management 7,192 8,055 8,787
Asset mgmt AUM (RMB bn) 1,757.1 2,027.1 2,229.8
Asset mgmt fee (%) 0.16 0.15 0.16
Fund mgmt AUM (RMB bn) 1,166.9 1,283.6 1,412.0
Fund mgmt fee (%) 0.77 0.73 0.70
Interest from deposits 4,063 3,864 3,797
Deposits (RMB bn) 184.7 183.3 178.4
Interest rate (%) 2.1 2.1 2.1
Interest from margin account 7,083 7,594 8,437
Margin financing (RMB bn) 61.1 65.0 71.5
Interest rate (%) 7.0 7.0 7.0
Net gains from financial assets 2,017 6,559 6,559
Stock market T/O (RMB tn) 126.7 139.4 153.3
SHCOMP change (%) (12.3) 5.0 5.0
Bond market T/O (RMB tn) 238.4 262.2 288.5
T-bond change (%) 3.4 3.0 3.0
C-bond change (%) 6.0 5.0 5.0
Dividend income from financial assets 2,524 2,565 2,565
Financial assets held (RMB bn) (AFS only) 95.0 95.0 95.0
Yield (%) 2.7 2.7 2.7
Net gains from derivatives and others 2,853 (1,159) (1,159)
Sensitivity to stock market return (231.8) (231.8) (231.8)
Source: Company, OP Research
2.67%
Public
5.70% 1.12% 71.28%2.73%16.50%
China Securities
Finance Corp.
- A shs
China Life
Insurance – A
shs
CITIC
Corporation – A
shs
National Sociery
Security Fund
- H shs
FIL Limited
- H shs
Mon, 13 Mar 2017
CITIC Securities (6030 HK)
Page 54 of 68
Financial Summary–CITIC Securities(6030 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E
Year to Dec FY14A FY15A FY16E FY17E FY18E
Income Statement (RMB mn)
Ratios
Fee and commission income 18,915 34,253 25,403 28,378 30,970
Gross margin (%) n.a. n.a. n.a. n.a. n.a.
Interest income 7,851 15,622 11,190 11,503 12,282
Operating margin (%) 49.4 58.7 56.9 52.7 54.1
Investment income 10,204 19,510 7,232 8,029 8,029
Net margin (%) 26.2 30.7 28.5 22.1 26.9
Turnover 36,971 69,384 43,825 47,910 51,281
Staff cost/Sales (%) 25.3 25.6 21.3 24.8 25.3
YoY% 84 88 (37) 9 7
Admin exp/Sales (%) n.a. n.a. n.a. n.a. n.a.
Other income and gains 2,555 3,540 3,600 3,600 3,600
Payout ratio (%) 31.8 27.2 29.5 30.0 30.0
Fee and commission expenses (1,799) (4,621) (2,667) (2,980) (3,252)
Effective tax (%) 23.2 24.1 26.0 25.0 25.0
Staff costs (9,463) (14,798) (10,867) (12,107) (13,018)
Total debt/equity (%) 113.7 202.5 164.8 132.1 123.2
Business tax and surcharges (1,257) (2,768) (1,315) (1,198) (1,282)
Net debt/equity (%) 82.8 165.0 116.2 105.8 99.5
Depreciation (377) (285) (393) (409) (430)
Current ratio (x) 1.5 1.4 1.4 1.4 1.5
Other opex (4,336) (8,499) (8,012) (8,317) (8,604)
Quick ratio (x) 1.5 1.4 1.4 1.4 1.5
Total opex (17,232) (30,971) (23,255) (25,010) (26,586)
Inventory T/O (days) 0 0 0 0 0
Impairment loss (600) (2,481) (1,096) (575) (615)
AR T/O (days) 8 7 6 6 6
Operating profit (EBIT) 21,693 39,472 23,074 25,925 27,680
AP T/O (days) 0 0 0 0 0
Operating margin 58.7% 56.9% 52.7% 54.1% 54.0%
Cash conversion cycle (days) 8 7 6 6 6
Finance costs (6,901) (12,831) (9,617) (8,160) (8,160)
Asset turnover (x) 0.1 0.1 0.1 0.1 0.1
Profit after financing costs 14,793 26,642 13,458 17,765 19,520
Financial leverage (x) 3.0 3.9 4.5 4.2 3.9
Associated companies & JVs 629 646 138 164 196
EBIT margin (%) 49.4 58.7 56.9 52.7 54.1
Pre-tax profit 15,422 27,287 13,595 17,930 19,716
Interest burden (x) 0.7 0.7 0.7 0.6 0.7
Tax (3,560) (6,927) (3,364) (4,441) (4,880)
Tax burden (x) 0.8 0.7 0.7 0.7 0.7
Minority interests (524) (561) (561) (577) (595)
Return on equity (%) 5.9 11.9 16.3 6.7 8.5
Net profit 11,337 19,800 9,670 12,911 14,241
ROIC (%) 4.7 7.6 10.2 5.7 6.3
YoY% 116 75 (51) 34 10
Net margin 30.7% 28.5% 22.1% 26.9% 27.8%
Year to Dec FY13A FY14A FY15A FY16E FY17E
EBITDA 22,338 40,070 23,840 26,678 28,431
Balance Sheet (RMB mn)
EBITDA margin 60.4% 57.8% 54.4% 55.7% 55.4%
Fixed assets 4,070 1,296 3,927 4,059 4,226
EPS (RMB) 1.029 1.634 0.798 1.066 1.175
Intangible assets & goodwill 11,963 11,962 14,251 13,879 13,535
YoY% 116 55 (56) 34 10
Associated companies & JVs 4,298 3,962 4,484 4,622 4,786
DPS (HK$) 0.350 0.589 0.263 0.352 0.388
Long-term financial assets 13,009 10,864 12,508 20,000 20,000
Other non-current assets 2,544 6,289 10,239 10,239 10,239
Year to Dec FY14A FY15A FY16E FY17E FY18E
Non-current assets 35,884 34,374 45,409 52,799 52,786
Cash Flow (RMB mn)
EBITDA 22,338 40,070 23,840 26,678 28,431
Margin account 34,302 74,135 75,523 62,297 66,327
Chg in working cap (103,688) 16,458 (26,807) (13,137) (16,208)
Short-term financial assets 92,593 164,158 216,419 207,000 207,000
Others 58,039 (10,597) 0 0 0
Repurchase agreements 22,092 42,863 36,771 42,286 48,629
Operating cash (23,312) 45,931 (2,967) 13,541 12,223
Cash held for customers 40,125 96,841 143,554 150,000 150,000
Tax (2,972) (6,398) (4,619) (3,364) (4,441) Other current assets 20,689 31,688 32,761 35,109 38,037
Net cash from operations (26,283) 39,533 (7,586) 10,176 7,781
Cash 25,669 35,569 65,671 34,722 33,262
Current assets 235,470 445,253 570,699 531,414 543,255
Capex (479) (4,279) (526) (575) (615)
Investments 503 (33,631) (2,865) 0 0
Payable to brokerage client 45,196 101,846 150,457 150,000 150,000
Dividends received 0 0 0 0 0
Repurchase agreements 55,704 124,914 127,789 90,800 90,800
Sales of assets 0 0 0 0 0
Short-term financial liabilities 19,283 28,418 24,799 28,200 28,200
Interests received 0 0 0 0 0
Tax 2,203 3,295 4,619 3,364 4,441
Others 0 0 0 0 0
Accruals & other payables 1,326 5,339 4,765 1,753 1,916
Investing cash 24 (37,910) (3,391) (575) (615)
Bank loans & leases 4,710 11,751 18,033 6,250 6,250
FCF (26,259) 1,623 (10,976) 9,601 7,166
Bonds, CBs& other debts 14,523 22,649 17,570 29,700 29,700
Issue of shares 0 0 0 0 0
Other current liabilities 9,761 29,352 52,182 58,000 58,000
Buy-back 0 0 0 0 0
Current liabilities 152,708 327,565 400,213 368,067 369,308
Minority interests 0 0 0 0 0
Dividends and interest paid (4,185) (7,970) (15,675) (11,061) (12,033)
Bank loans & leases 567 2,314 2,345 1,000 1,000
Net change in bank loans 31,679 19,736 (17,986) 0 0
Bonds, CBs& other debts 26,177 43,167 67,836 65,000 65,000
Others 8,779 15,544 13,688 0 0
Long-term financial liabilities 1,487 2,647 1,141 1,400 1,400
Financing cash 36,273 27,309 (19,973) (11,061) (12,033)
Deferred tax & others 1,013 2,801 2,836 2,836 2,836
Non-current liabilities 29,245 50,930 74,158 70,236 70,236
Net change in cash 10,013 28,932 (30,949) (1,460) (4,867)
Exchange rate or other Adj (114) 1,170 0 0 0
Total net assets 89,402 101,131 141,737 145,910 156,497
Opening cash 25,669 35,569 65,671 34,722 33,262
Closing cash 35,569 65,671 34,722 33,262 28,395
Shareholder's equity 89,402 101,131 141,737 145,910 156,497
Share capital 11,017 11,017 12,117 12,117 12,117
CFPS (HK$) (2.982) 3.980 (0.689) 0.924 0.706
Reserves 76,672 88,082 127,021 130,633 140,643
MI 1,714 2,033 2,599 3,160 3,737
Segment Revenue (RMB mn)
Investment banking 3,617 4,563 5,602 6,611 7,786
BVPS (HK$) 9.95 11.24 14.01 12.96 13.87
Brokerage 11,938 26,715 15,298 16,026 16,620
Trading 12,996 29,039 12,140 12,866 13,282
Total debts 101,682 204,796 233,572 192,750 192,750
Asset management 6,187 7,814 8,422 9,649 10,442
Net cash/(debts) (73,997) (166,829) (164,665) (154,328) (155,788)
Others 2,234 1,252 2,363 2,759 3,152
Adj. leverage ratio (ex-client
money)
2.59 3.79 3.33 2.98 2.85
Source: Company, OP Research
Mon, 13 Mar 2017
CITIC Securities (6030 HK)
Page 55 of 68
Exhibit 81: Peer Group Comparison
Company Ticker Price
Mkt cap
(US$m)
3-mth
avg t/o
(US$m)
PER Hist
(x)
PER FY1
(x)
PER
FY2
(x)
EPS
FY1
YoY%
EPS
FY2
YoY%
3-Yr EPS
Cagr (%) PEG (x)
DivyldHist
(%)
Divyld
FY1
(%)
P/B
Hist
(x)
P/B
FY1
(x)
EV/
EbitdaHist
EV/
Ebitda
Cur Yr
Net
gearing
Hist
(%)
Gross
margin
Hist
(%)
Net
margin
Hist
(%)
ROE
Hist
(%)
ROE
FY1
(%)
Shpx
1-mth
%
Shpx
3-mth
%
Citic Sec-H 6030 HK 16.50 27,944 21.4 8.3 18.8 14.1 (56.0) 33.5 (13.4) (1.40) 3.6 1.6 1.18 1.27 9.1 14.9 116.2 n.a. 28.5 16.3 6.7 (1.8) (3.7)
HSI 23,568.67 13.0 11.8 10.8 10.2 9.4 10.7 1.10 3.5 3.5 1.23 1.16 9.4 9.8 (0.0) 3.5
HSCEI 10,069.10 8.3 8.2 7.5 1.1 9.0 9.9 0.83 3.6 3.6 1.00 0.92 12.0 11.2 (0.6) 2.0
CSI300 3,427.89 15.3 13.0 11.4 17.8 13.8 10.5 1.24 2.0 2.2 1.86 1.59 12.1 12.2 0.4 (1.9)
Adjusted sector avg* 8.3 14.5 12.6 (52.3) 18.5 (10.5) 0.62 3.5 2.4 1.27 1.20 6.7 18.4 49.7 N/A 31.8 10.0 8.7 (1.1) (3.7)
Citic Sec-H 6030 HK 16.50 27,944 21.4 8.6 16.2 12.8 (46.8) 25.9 (7.8) N/A 3.5 1.9 1.28 1.25 5.6 15.2 0.0 N/A 27.8 8.6 7.7 (1.8) (3.7)
HaitongSecuri-H 6837 HK 13.94 24,257 20.0 8.4 16.1 13.0 (48.0) 23.9 (9.5) N/A 3.7 2.0 1.36 1.27 6.3 20.9 50.2 N/A 28.8 9.6 8.1 (2.2) (3.2)
HuataiSecurit-H 6886 HK 15.30 17,382 10.5 8.3 14.9 11.8 (44.5) 26.0 (4.5) N/A 3.8 2.2 1.19 1.17 2.0 5.0 59.4 N/A 27.1 8.6 7.9 (4.7) (8.9)
Cgs-H 6881 HK 7.38 15,915 19.8 5.9 13.2 11.4 (55.2) 16.3 (15.6) N/A 5.3 2.3 1.15 1.06 4.7 16.0 0.0 N/A 29.2 12.0 8.1 (1.5) (3.4)
Gf Securities-H 1776 HK 16.90 18,485 6.8 8.1 14.5 12.1 (43.8) 19.1 (6.3) N/A 5.5 2.4 1.56 1.45 7.8 19.5 90.7 N/A 31.0 12.1 10.1 (2.0) (4.9)
China Merchan-H 6099 HK 11.98 15,264 2.4 5.7 12.4 10.5 (54.1) 17.4 (12.3) N/A N/A 2.4 1.26 1.19 6.3 20.5 75.4 N/A 31.3 12.8 9.6 0.0 (2.6)
Dfzq-H 3958 HK 7.88 12,475 1.7 4.8 16.6 14.5 (71.0) 14.7 (25.7) N/A N/A 1.9 1.06 1.06 9.2 N/A 105.6 N/A 35.8 27.5 6.7 1.8 (3.2)
Everbright Sec-H 6178 HK 12.30 10,029 1.2 5.1 14.2 12.3 (63.9) 15.8 (18.7) N/A N/A 2.0 1.08 1.05 3.6 N/A 112.2 N/A 32.8 9.6 7.3 (2.4) 4.8
Csc Financial-H 6066 HK 6.90 6,439 2.9 4.3 8.4 7.6 (48.1) 9.5 (12.0) N/A N/A 2.1 1.25 1.20 1.3 N/A 0.0 N/A 35.4 36.9 15.6 (0.9) 1.3
China Internat-H 3908 HK 11.14 3,309 3.5 8.9 18.2 14.9 (51.3) 22.4 (9.5) N/A N/A 0.5 1.34 1.33 7.0 N/A 0.0 N/A 20.6 10.2 7.0 0.9 1.3
Cc Securities-H 1375 HK 4.15 4,905 2.8 7.5 14.6 14.2 (48.4) 2.8 (19.6) N/A 8.8 3.4 1.53 1.36 13.6 N/A 27.7 N/A 29.6 9.8 8.3 2.0 (8.4)
Kingston Financi 1031 HK 3.19 5,593 3.8 32.6 N/A N/A N/A N/A N/A N/A 0.6 N/A 2.31 N/A 22.1 N/A 53.5 N/A 54.6 8.2 N/A (7.5) (11.9)
HaitongInt'L 665 HK 4.55 3,127 9.0 14.3 9.6 8.3 49.6 15.8 26.6 0.36 2.5 4.7 1.14 1.00 12.9 14.1 72.1 N/A 43.2 5.6 10.1 (1.9) (6.0)
GuotaiJunan 1788 HK 2.56 2,299 7.5 18.2 13.3 11.5 36.9 15.5 15.1 0.88 2.7 3.8 2.18 1.77 21.6 22.8 130.1 N/A 40.7 13.0 13.1 (8.2) (3.0)
Source: Bloomberg, OP Research
Mon, 13 Mar 2017
Haitong Securities (6837 HK)
Page 56 of 68
Haitong Securities (6837 HK) –Leading in diversification Haitong has the most diversified sources of interest income and
multiple asset classes for investment
Haitong has innovative approaches to capture the robust growth in investment banking
Initiate a HOLD with TP of HK$14.8
More diversified sources of income In addition to margin financing and resale
agreement, Haitong has diversified its capital into multiple asset classes, such as
finance lease and other loans and receivables. It would make the growth of
interest income less dependent on market sentiments and enhance the yield
return. We expect Haitong would only record a 9.9% drop in interest income in
FY16E, where its peers would record 30% - 40% decrease.
Innovation in investment banking Haitong has been developing its pioneer
position in investment banking through innovation, such as issuance of green
bonds and project bonds. Given the reactivation of IPO market in 2H16E, we
believe Haitong would enjoy 26% growth in investment banking income to RMB
2.1 bn in FY16E.
Asset management dragged down by lower market returns Despite total
AUM of HT Asset Management and HFT Fund is expected to jump 79% to RMB
1.06 bn, we expect Haitong would generate 22% less asset management income
of RMB 1.91 bn in FY16E due to (1) absent of performance fee from lower market
returns in 2016 and (2) significant drop in asset management fee rate due to
higher contribution from private placement in total AUM.
Initiate a HOLD with TP of HK$14.8 Despite Haitong having similar ROE and
valuation to other industry peers, the adjusted leverage ratio of Haitong is 10%
higher than the others. Since the competitive edges of Haitong are more
diversified investment and overseas operations, we believe the higher than
average leverage ratio may limit Haitong in improving their ROE. We initiate our
coverage on Haitong with a HOLD and TP of HK$14.8 based on FY17E 1.3x PB,
representing 6% upside.
Initial Coverage
HOLD
Close price: HK$13.94
Target Price: HK$14.80 (+6%)
Key Data
HKEx code 6837
12 Months High (HK$) 15.24
12 Month Low (HK$) 11.60
3M AvgDail Vol. (mn) 11.05
Issue Share (mn) 3,409.57
Market Cap (HK$mn) 188,323.40
Fiscal Year 12/2016
Major shareholder (s) Bright Food (3.50%) Shanghai Haiyan
(3.48%)
Source: Company data, Bloomberg, OP Research Closing price are as of 10/03/2017
Price Chart
1mth 3mth 6mth
Absolute % -1.0 -3.1 -1.0
Rel. MSCI CHINA % -2.2 -9.2 -1.2
Forward PB Band
Company Profi le Haitong Securities Co., Ltd. is a securities
firm which acts as a broker, dealer for
securities. The Company also provides
investment advisory, placing and
underwriting, nominee and custodian
services.
Exhibit 82: Forecast and Valuation Year to Dec (RMBmn) FY14A FY15A FY16E FY17E FY18E
Revenue 22,924.8 51,191.8 35,477.1 37,939.1 41,231.6
Growth (%) 82.3 123.3 (30.7) 6.9 8.7
Net Profit 7,710.6 15,838.9 9,312.5 10,032.3 11,552.2
Growth (%) 91.1 105.4 (41.2) 7.7 15.1
Diluted EPS (HK$) 1.006 1.680 0.891 0.959 1.105
EPS growth (%) 91.1 67.1 (47.0) 7.7 15.1
Change to previous EPS (%)
0.0 0.0 0.0
Consensus EPS (HK$)
0.846 1.048 1.206
ROE (%) 11.3 16.7 7.8 8.0 8.6
P/E (x) 13.9 8.3 15.7 14.5 12.6
P/B (x) 1.6 1.2 1.3 1.2 1.1
Yield (%) 2.3 3.8 1.9 2.1 2.4
DPS (HK$) 0.317 0.533 0.267 0.288 0.331
Source: Bloomberg, OP Research
10.0
11.0
12.0
13.0
14.0
15.0
16.0
Mar/16 Jun/16 Sep/16 Dec/16 Mar/17
HK$6837 HK MSCI CHINA
0.5
1.0
1.5
2.0
2.5
3.0
Dec/14 Jun/15 Dec/15 Jun/16 Dec/16
Forward P/B Ratio
+1std.
avg.
-1std.
Mon, 13 Mar 2017
Haitong Securities (6837 HK)
Page 57 of 68
42%51%
41% 39% 38%
8%
7%
7% 8% 8%
16%13%
11% 12% 12%
6% 4%
5% 6% 6%
1% 2%
2% 2% 2%
9% 8%
11% 10% 10%
6% 4%6% 7% 8%
11% 12% 17% 16% 16%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY14 FY15 FY16E FY17E FY18E
Securities and futures brokerage Asset managementProprietary trading Investment bankingDirect investment Headquarters and othersFinance lease Overseas operationsYoY (%)
(RMB mn) (%)
Leading in diversification
Bridging the domestic and overseas markets
In addition to the traditional businesses of domestic brokers, such as brokerage,
asset management and investment banking, Haitong has been expanding
aggressively in overseas operations and emerging financial services, such as
finance leasing. Haitong has higher overseas business exposure by acquiring
Haitong International (665 HK) in 2009. The revenue contribution from overseas
operations is expected to increase to 17% from 12% of total revenue in FY16E by
leveraging higher interest income and flexibility to structure financing solutions
offshore. Besides, Haitong has also developed finance lease business, which is
expected to have double digit revenue growth in the near future.
Exhibit 83: Haitong Securities segment revenue contribution
Source: Company, OP Research
Most diversified sources of interest income
Haitong has higher diversification in sources of interest income than its peers,
making revenue less dependent on market conditions. Apart from advances to
customers in margin financing, which is highly dependent on market sentiments,
Haitong also receives interest income from finance leases and investment in
other loans and receivables, which cover longer terms and offer better yields.
Besides, with the access of offshore platform, Haitong has aggressively
developed the loans from resale agreements. We think the interest income of
Haitong will enjoy a more stable growth rate than its peers as more sources of
interest income would compensate the drop in margin financing balance since the
massive correction of the market in mid-2015. Thus, we expect the interest
income of Haitong would only drop around 9.9% to RMB 16.5 bn in FY16E, which
would be much lower than 30% - 40% drop for its competitors.
Haitong covers a wide spread of
the business segment
Haitong diversified to invest
multiple asset classes for interest
income
Mon, 13 Mar 2017
Haitong Securities (6837 HK)
Page 58 of 68
1,708 3,596 3,243 2,861 2,870
3,093
7,964
5,505 5,058 5,513 1,458
4,530
4,915 5,369
5,905
1,429
1,987
2,329 2,825
3,236
0
145
438 450
450
7,700
18,322
16,511 16,642
18,054
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
FY14 FY15 FY16E FY17E FY18EDeposits Margin account Resale agreementsFinance lease Loan and advances OthersYoY (%)
(RMB mn) (%)
Exhibit 84: Haitong Securities interest income
Source: Company, OP Research
Exhibit 85: Haitong Securities finance lease
Source: Company, OP Research
Innovating for the growth in investment banking
With the innovation in debt financing business, Haitong gained market shares by
involving in underwriting project yield bonds and asset-backed securitization.
With the rising trend of green bonds and equity refinancing, we expect Haitong to
maintain its leading position in investment banking by increasing the total
underwriting amount by 29% to RMB 258bn in FY16E. As the IPO market is
reactivated in 2H16, we believe the investment banking income of Haitong would
jump 26% to RMB 2.1 bn in FY16E.
20.2
27.4
34.2
41.1 45.2
8.1%
8.4%
7.5% 7.5% 7.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
0
5
10
15
20
25
30
35
40
45
50
FY14 FY15 FY16E FY17E FY18E
Balance of finance leases Interest rate (%)
(RMB bn) (%)
Haitong has strong innovations in
debt financing, such as issuing
green bonds and project bonds
Mon, 13 Mar 2017
Haitong Securities (6837 HK)
Page 59 of 68
1,309 1,645
2,067
2,635
3,349
78%
26% 26%
28% 27%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
FY14 FY15 FY16E FY17E FY18E
Underwriting and sponsors fees YoY (%)
(RMB mn) (%)
37.4 50.8 55.9 67.1 80.5
54.8
150.0
202.5
243.0
291.6
92.2
200.8
258.4
310.1
372.1
33%
118%
29%20% 20%
0%
20%
40%
60%
80%
100%
120%
140%
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
FY14 FY15 FY16E FY17E FY18E
Equity financing Debt financing YoY (%)
(RMB bn) (%)
Exhibit 86: Haitong Securities underwriting and sponsor fee
Source: Company, OP Research
Exhibit 87: Haitong Securities underwriting amount
Source: Company, OP Research
Asset management is riding on market demand
Haitong has developed its asset management business through different vehicles.
HT Asset Management is wholly owned by Haitong and enjoys the robust growth
under strong market demand. The AUM of HT Asset Management is expected to
jump 100% to RMB 876bn in FY16E. Apart from a 27.8% stake in Fullgoal Fund,
Haitong also consolidates the results from HFT Investment Management by
owning 51% stake. Although the total AUM of the asset management would grow
in FY16E, we expect the revenue from asset management would drop 22% to
RMB 1.91bn in FY16E due to lack of performance fee from low market returns in
2016.
Revenue from asset management
would be affected by lower market
returns in FY16E
Mon, 13 Mar 2017
Haitong Securities (6837 HK)
Page 60 of 68
1,202
2,465
1,912
2,650 2,884
64%
105%
-22%
39%
9%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
FY14 FY15 FY16E FY17E FY18E
Asset & fund management YoY (%)
(RMB mn) (%)
294
438
876
1,051
1,156
107 156 187
224 247
2.0%
1.6%
2.1% 2.1% 2.1%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
0
200
400
600
800
1,000
1,200
1,400
FY14 FY15 FY16E FY17E FY18E
Haitong Asset Management HFT Investment Management Market share (%)
(RMB bn) (%)
Exhibit 88: Haitong Securities asset management fee income
Source: Company, OP Research
Exhibit 89: Haitong Securities asset management AUM
Source: Company, OP Research
Investment gains from multiple asset classes
In addition to the traditional equity and debt financial assets, Haitong has been
investing in other loans and receivables for yield enhancement. Since the
dividend income from financial assets would be included in the net gains from
investment in Haitong, we believe the net gains from financial assets in Haitong
would drop 54% to RMB 4.7bn in FY16E due to lower leverage ratio and lower
market returns. However, Haitong is investing into other loans and receivables,
such as structured products, trust products, factoring receivable and entrusted
loan, for yield enhancement. We believe these would compensate for part of the
drop in investment gains and it may help Haitong profitability in the long term
despite bearing higher volatility.
Lower investment gains as lower
leverage ratio
Mon, 13 Mar 2017
Haitong Securities (6837 HK)
Page 61 of 68
7.8
18.2
20.5 20.5 20.5
9.0%
8.5%
7.2% 7.2% 7.2%
3%
4%
5%
6%
7%
8%
9%
10%
0
2
4
6
8
10
12
14
16
18
20
FY14 FY15 FY16E FY17E FY18E
Other loans and receivables Yield (%)
(RMB bn) (%)
5,183
10,134
4,670 5,074 5,313
526
923
1,406 1,476 1,476
5,709
11,057
6,076 6,550 6,789
166%
94%
-45%
8% 4%
-100%
-50%
0%
50%
100%
150%
200%
0
2,000
4,000
6,000
8,000
10,000
12,000
FY14 FY15 FY16E FY17E FY18E
Financial assets Other loans and receivables YoY (%)
(RMB mn) (%)
Exhibit 90: Haitong Securities net investment gains
Source: Company, OP Research
Exhibit 91: Haitong Securities investment in other loans and receivables
Source: Company, OP Research
Initiate HOLD with TP of HK$14.8
Since Haitong has the major competitive edge in the investment diversification
and innovation in investment banking, we believe it would maintain its leading
position in the near future. However, compared to its peers with similar ROE,
such as CITIC, Haitong is trading at higher FY17E PB. We initiate our coverage of
Haitong at HOLD, since our TP of HK$14.8 is based on FY17E 1.3x PB, which
represents par to the historical mean and only 6% upside.
Mon, 13 Mar 2017
Haitong Securities (6837 HK)
Page 62 of 68
Management profiles
Exhibit 92: Management profiles
Name Age Position Role and responsibilities Description
Mr. Zhou Jie 50 Chairman, Executive
Director
Overall business operations
and strategies
Mr. Zhou was appointed as the Chairman of the group in Sep 2016.
Before joining the group, Mr. Zhou served as the vice chairman and
CEO of Shanghai Industrial Holdings LTD (363 HK) from 2004 to
July 2016. Mr. Zhou had served as the director of Shanghai
Pharmaceuticals Holding Co., Ltd. (2607 HK) and Semiconductor
Manufacturing International Corporation (981 HK).
Mr. Zhou obtained Master’s degree of management engineering
from Shanghai Jiao Tong University in 1992.
Mr. Qu Qiuping 56 General Manager,
Executive Director, Deputy
Secretary of CPC Party
Committee
General management of the
group’s business operations
Mr. Qu joined the group in 2014.
Mr. Qu has worked in banking industry for more than 30 years
before he joined the group. Mr. Qu also worked for CSRC from
2010 to 2014.
Mr. Qu holds Master’s degree in Economics.
Ms. QiuXiaping 57 Supervisor Supervising investment
management business of the
group
Ms. Qiu joined the group in 2007.
MsQiu has over 25 years’ experience in banking and finance
industry. Ms. Qiu has been a director of Haitong Futures since
2005, a director of Haitong Capital Investment and a supervisor of
Haitong Jihe Private Equity Investment Fund Management since
2008, and a supervisor of Haitong Creative Capital Fund
Management since 2012.
Ms. Qiu is a holder of an MBA degree and recognized as a senior
accountant.
Ms. Wang Meijuan 53 Supervisor Supervising finance lease
business of the group
Ms. Wang joined the group in 2001.
Ms. Wang now work as supervisor of Haitong UniTrust Finance &
Leasing Corporation (Shanghai) since 2014.
Ms. Wang has over 15 years’ experience in finance industry and
had been working in Haitong Futures, Haitong Innovation Securities
Investment, Haitong International Securities as supervisor from
2005 to 2012.
Ms. Wang holds Master’s degree in Economics and recognized as
a senior accountant.
Source: Company, OP Research
Mon, 13 Mar 2017
Haitong Securities (6837 HK)
Page 63 of 68
3.33%
Public
2.47% 1.94% 77.56%
3.48%
3.50%
Shanghai
Electric – A shs
Shanghai Haiyan
Investment
Management – A
shs
Bright Food – A
shs
Maunakai
Capital Partners
(HK) – H shs
Insight Capital
Management
(HK) – H shs
China Securities
Finance Corp. –
A shs
Shenergy
Group – A shs
2.80%
2.76%
Shi Jing – H shs
2.16%
Appendix
Exhibit 93: Shareholding structure
Source: Company, OP Research
Exhibit 94: Core assumptions
FY16E FY17E FY18E
Commission on securities 6,723 6,976 7,367
Avg. comm. Rate (bps) 5.3 5.0 4.8
ADT (RMB bn) 517.2 569.0 625.9
Stock market share (%) 4.6 4.6 4.6
Underwriting and sponsors fees 2,067 2,635 3,349
Equity underwritten amount (RMB bn) 55.9 67.1 80.5
Debt underwritten amount (RMB bn) 202.5 67.1 80.5
Avg. comm. Rate (%) 0.80 0.85 0.90
Financial advisory and consultancy fee income 1,440 1,665 1,890
No. of deals 160 185 210
Avg. fee per deal (Rmbmn) 9.0 9.0 9.0
Asset management fee income 1,912 2,650 2,884
Asset mgmt AUM (RMB bn) 875.6 1,050.7 1,155.8
Fund mgmt AUM (RMB bn) 187.0 224.4 246.8
Avg. mgmt fee (%) 0.24 0.23 0.22
Bank interest income 3,243 2,861 2,870
Deposits (RMB bn) 135.9 136.5 136.8
Interest rate (%) 2.1 2.1 2.1
Interest from margin account 5,505 5,058 5,513
Margin financing (RMB bn) 69.5 75.0 82.5
Interest rate (%) 8.0 7.0 7.0
Interest from resale agreements 4,915 5,369 5,905
Resale agreements (RMB bn) 85.2 93.7 103.1
Interest rate (%) 6.0 6.0 6.0
Interest from finance leases 2,329 2,825 3,236
Finance leases (RMB bn) 34.2 41.1 45.2
Interest rate (%) 7.5 7.5 7.5
Net gains from financial assets/liabilities 4,670 5,074 5,313
Stock market T/O (RMB tn) 126.7 139.4 153.3
SHCOMP change (%) (12.3) 5.0 5.0
Bond market T/O (RMB tn) 238.4 262.2 288.5
T-bond change (%) 3.4 3.0 3.0
C-bond change (%) 6.0 5.0 5.0
Net gains from other loan and receivables and others 1,406 1,476 1,476
Other loan and receivables (RMB bn) 20.5 20.5 20.5
Yield (%) 7.2 7.2 7.2
Source: Company, OP Research
Mon, 13 Mar 2017
Haitong Securities (6837 HK)
Page 64 of 68
Financial Summary–Haitong Securities(6837 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E
Year to Dec FY14A FY15A FY16E FY17E FY18E
Income Statement (RMB mn)
Ratios
Commission and fee income 6,751 9,516 21,813 12,890 14,747
Gross margin (%) n.a. n.a. n.a. n.a. n.a.
Interest income 3,671 7,700 18,322 16,511 16,642
Operating margin (%) 54.3 63.7 66.8 66.3 63.6
Net investment gains 2,150 5,709 11,057 6,076 6,550
Net margin (%) 32.1 33.6 30.9 26.2 26.4
Turnover 12,572 22,925 51,192 35,477 37,939
Staff cost/Sales (%) 20.9 18.0 15.3 18.3 20.1
YoY% n.a. 82 123 (31) 7
Admin exp/Sales (%) n.a. n.a. n.a. n.a. n.a.
Other income and gains 231 742 4,094 4,921 4,944
Payout ratio (%) 28.7 31.5 31.7 30.0 30.0
Fee and commission expenses (334) (427) (1,192) (773) (885)
Effective tax (%) 22.0 22.4 20.7 16.0 18.0
Staff costs (2,621) (4,131) (7,830) (6,490) (7,636)
Total debt/equity (%) 84.7 238.1 230.8 199.4 189.6
Business tax and surcharges (514) (868) (2,650) (1,370) (1,527)
Net debt/equity (%) 52.9 204.3 185.7 181.8 172.6
Depreciation (307) (284) (300) (295) (286)
Current ratio (x) 1.8 1.4 1.4 1.5 1.5
Other opex (2,203) (3,362) (9,110) (7,950) (8,416)
Quick ratio (x) 1.8 1.4 1.4 1.5 1.5
Total opex (5,981) (9,074) (21,082) (16,879) (18,751)
Inventory T/O (days) 0 0 0 0 0
Impairment loss 0 0 0 0 0
AR T/O (days) 48 70 45 90 90
Operating profit (EBIT) 6,822 14,593 34,204 23,519 24,132
AP T/O (days) 0 0 0 0 0
Operating margin 54.3% 63.7% 66.8% 66.3% 63.6%
Cash conversion cycle (days) 48 70 45 90 90
Finance costs (1,484) (4,340) (13,566) (11,908) (11,355)
Asset turnover (x) 0.1 0.1 0.1 0.1 0.1
Profit after financing costs 5,338 10,253 20,637 11,611 12,777
Financial leverage (x) 2.6 3.8 4.9 4.7 4.3
Associated companies & JVs 117 167 481 361 397
EBIT margin (%) 54.3 63.7 66.8 66.3 63.6
Pre-tax profit 5,455 10,420 21,119 11,972 13,174
Interest burden (x) 0.8 0.7 0.6 0.5 0.5
Tax (1,174) (2,301) (4,278) (1,858) (2,300)
Tax burden (x) 0.7 0.7 0.7 0.8 0.8
Minority interests (246) (408) (1,002) (802) (842)
Return on equity (%) 6.3 11.3 16.7 7.8 8.0
Net profit 4,035 7,711 15,839 9,313 10,032
ROIC (%) 5.4 7.1 9.8 5.8 5.7
YoY% n.a. 91 105 (41) 8
Net margin 32.1% 33.6% 30.9% 26.2% 26.4%
Year to Dec FY13A FY14A FY15A FY16E FY17E
EBITDA 7,129 14,878 34,504 23,814 24,418
Balance Sheet (RMB mn)
EBITDA margin 56.7% 64.9% 67.4% 67.1% 64.4%
Fixed assets 1,258 1,231 1,336 1,470 1,626
EPS (RMB) 0.421 0.804 1.377 0.810 0.872
Intangible assets & goodwill 879 2,855 4,207 4,134 4,071
YoY% n.a. 91 67 (47) 8
Associated companies & JVs 2,231 5,686 5,137 5,296 5,472
DPS (HK$) 0.151 0.317 0.533 0.267 0.288
Long-term financial assets 4,721 10,242 41,220 43,000 43,000
Other non-current assets 3,988 28,982 50,783 60,773 60,773
Year to Dec FY13A FY14A FY15A FY16E FY17E
Non-current assets 13,077 48,996 102,683 114,674 114,942
Cash Flow (RMB mn)
EBITDA 7,129 14,878 34,504 23,814 24,418
Advances to customers 26,531 64,883 76,325 69,504 75,000
Chg in working cap (22,662) (40,185) (57,114) (39,294) (7,622)
Short-term financial assets 52,542 59,621 113,711 105,000 95,000
Others (1,145) (957) (2,825) 0 0
Repurchase agreements 9,037 52,873 60,246 63,216 71,737
Operating cash (16,677) (26,265) (25,435) (15,480) 16,796
Cash held for customers 37,965 76,130 126,279 114,400 114,400
Tax (1,015) (1,353) (2,553) (3,895) (1,858) Other current assets 9,598 25,725 44,546 47,106 55,194
Interests paid (1,150) (1,721) (6,002) (5,954) (5,677)
Cash 20,373 24,392 52,660 21,500 22,132
Net cash from operations (18,842) (29,338) (33,990) (25,330) 9,261
Current assets 156,046 303,626 473,766 420,726 433,464
Capex (328) (248) (339) (355) (379)
Payable to brokerage client 40,430 80,767 129,026 110,000 110,000
Investments 1,461 (8,996) (28,733) (10,510) 0
Repurchase agreements 26,112 59,808 90,952 48,800 52,200
Dividends received 50 53 269 201 222
Short-term financial liabilities 6,507 14,782 24,837 33,000 33,000
Sales of assets 9 5 56 0 0
Tax 395 817 3,895 1,858 2,300
Interests received 0 0 0 0 0
Accruals & other payables 3,298 7,947 19,283 14,191 15,176
Others (632) (3,107) (7,219) (2,305) 0
Bank loans & leases 6,916 34,078 32,800 48,200 48,200
Investing cash 559 (12,294) (35,966) (12,968) (158)
Bonds, CBs& other debts 3,000 22,927 33,131 28,000 28,000
FCF (18,283) (41,633) (69,956) (38,298) 9,103
Other current liabilities 0 0 2,098 3,200 3,200
Issue of shares 0 0 26,045 0 0
Current liabilities 86,658 221,124 336,023 287,249 292,076
Buy-back 0 0 (107) 0 0
Minority interests 574 780 2,737 0 0
Bank loans & leases 0 4,538 15,512 11,000 11,000
Dividends paid (1,258) (1,309) (3,324) (5,176) (2,794)
Bonds, CBs& other debts 17,940 35,776 89,806 104,000 104,000
Net change in bank loans 23,435 48,155 77,211 18,268 0
Repurchase agreements 335 14,910 7,625 3,000 3,000
Others (260) (2,053) (5,483) (5,954) (5,677)
Long-term financial liabilities 0 1,008 6,188 5,000 5,000
Financing cash 22,491 45,573 97,078 7,138 (8,471)
Deferred tax & others 86 3,002 4,368 3,285 3,383
Non-current liabilities 18,361 59,234 123,499 126,285 126,383
Net change in cash 4,208 3,940 27,122 (31,160) 632
Exchange rate or other Adj (198) 79 1,145 0 0
Total net assets 64,105 72,264 116,928 121,866 129,947
Opening cash 16,362 20,373 24,392 52,660 21,500
Closing cash 20,373 24,392 52,660 21,500 22,132
Shareholder's equity 64,105 72,264 116,928 121,866 129,947
Share capital 9,585 9,585 11,502 11,502 11,502
CFPS (HK$) (2.457) (3.826) (3.605) (2.422) 0.886
Reserves 51,922 58,780 96,193 100,330 107,568
MI 2,598 3,900 9,233 10,035 10,877
Segment Revenue (RMB mn)
Securities and futures brokerage 5,693 9,723 26,031 14,384 14,757
BVPS (HK$) 8.02 8.92 11.42 10.70 11.39
Asset management 585 1,878 3,450 2,307 2,900
Proprietary trading 2,278 3,718 6,688 4,056 4,578
Total debts 54,303 172,035 269,824 243,000 246,400
Investment banking 709 1,327 1,851 1,826 2,210 Net cash/(debts) (33,931) (147,643) (217,164) (221,500) (224,268)
Direct investment 275 306 900 808 803
Headquarters and others 1,633 2,048 4,295 3,911 3,895
Adj. leverage ratio (ex-client
money)
2.05 3.83 3.85 3.45 3.34
Finance lease 0 1,447 1,987 2,261 2,721
Overseas operations 1,398 2,477 5,990 5,923 6,075
Source: Company, OP Research
Mon, 13 Mar 2017
Haitong Securities (6837 HK)
Page 65 of 68
Exhibit 95: Peer Group Comparison
Company Ticker Price
Mkt cap
(US$m)
3-mth
avg t/o
(US$m)
PER Hist
(x)
PER FY1
(x)
PER
FY2
(x)
EPS
FY1
YoY%
EPS
FY2
YoY%
3-Yr EPS
Cagr (%) PEG (x)
DivyldHist
(%)
Divyld
FY1
(%)
P/B
Hist
(x)
P/B
FY1
(x)
EV/
EbitdaHist
EV/
Ebitda
Cur Yr
Net
gearing
Hist
(%)
Gross
margin
Hist
(%)
Net
margin
Hist
(%)
ROE
Hist
(%)
ROE
FY1
(%)
Shpx
1-mth
%
Shpx
3-mth
%
HaitongSecuri-H 6837 HK 13.94 24,257 20.0 8.3 15.7 14.5 (47.0) 7.7 (13.0) (1.20) 3.8 1.9 1.22 1.30 10.9 16.0 185.7 n.a. 30.9 16.7 7.8 (2.2) (3.2)
HSI 23,568.67 13.0 11.8 10.8 10.2 9.4 10.7 1.10 3.5 3.5 1.23 1.16 9.4 9.8 (0.0) 3.5
HSCEI 10,069.10 8.3 8.2 7.5 1.1 9.0 9.9 0.83 3.6 3.6 1.00 0.92 12.0 11.2 (0.6) 2.0
CSI300 3,427.89 15.3 13.0 11.4 17.8 13.8 10.5 1.24 2.0 2.2 1.86 1.59 12.1 12.2 0.4 (1.9)
Adjusted sector avg* 8.3 14.5 12.6 (52.3) 18.5 (10.5) 0.62 3.5 2.4 1.27 1.20 6.7 18.4 49.7 N/A 31.8 10.0 8.7 (1.1) (3.7)
Citic Sec-H 6030 HK 16.50 27,944 21.4 8.6 16.2 12.8 (46.8) 25.9 (7.8) N/A 3.5 1.9 1.28 1.25 5.6 15.2 0.0 N/A 27.8 8.6 7.7 (1.8) (3.7)
HaitongSecuri-H 6837 HK 13.94 24,257 20.0 8.4 16.1 13.0 (48.0) 23.9 (9.5) N/A 3.7 2.0 1.36 1.27 6.3 20.9 50.2 N/A 28.8 9.6 8.1 (2.2) (3.2)
HuataiSecurit-H 6886 HK 15.30 17,382 10.5 8.3 14.9 11.8 (44.5) 26.0 (4.5) N/A 3.8 2.2 1.19 1.17 2.0 5.0 59.4 N/A 27.1 8.6 7.9 (4.7) (8.9)
Cgs-H 6881 HK 7.38 15,915 19.8 5.9 13.2 11.4 (55.2) 16.3 (15.6) N/A 5.3 2.3 1.15 1.06 4.7 16.0 0.0 N/A 29.2 12.0 8.1 (1.5) (3.4)
Gf Securities-H 1776 HK 16.90 18,485 6.8 8.1 14.5 12.1 (43.8) 19.1 (6.3) N/A 5.5 2.4 1.56 1.45 7.8 19.5 90.7 N/A 31.0 12.1 10.1 (2.0) (4.9)
China Merchan-H 6099 HK 11.98 15,264 2.4 5.7 12.4 10.5 (54.1) 17.4 (12.3) N/A N/A 2.4 1.26 1.19 6.3 20.5 75.4 N/A 31.3 12.8 9.6 0.0 (2.6)
Dfzq-H 3958 HK 7.88 12,475 1.7 4.8 16.6 14.5 (71.0) 14.7 (25.7) N/A N/A 1.9 1.06 1.06 9.2 N/A 105.6 N/A 35.8 27.5 6.7 1.8 (3.2)
Everbright Sec-H 6178 HK 12.30 10,029 1.2 5.1 14.2 12.3 (63.9) 15.8 (18.7) N/A N/A 2.0 1.08 1.05 3.6 N/A 112.2 N/A 32.8 9.6 7.3 (2.4) 4.8
Csc Financial-H 6066 HK 6.90 6,439 2.9 4.3 8.4 7.6 (48.1) 9.5 (12.0) N/A N/A 2.1 1.25 1.20 1.3 N/A 0.0 N/A 35.4 36.9 15.6 (0.9) 1.3
China Internat-H 3908 HK 11.14 3,309 3.5 8.9 18.2 14.9 (51.3) 22.4 (9.5) N/A N/A 0.5 1.34 1.33 7.0 N/A 0.0 N/A 20.6 10.2 7.0 0.9 1.3
Cc Securities-H 1375 HK 4.15 4,905 2.8 7.5 14.6 14.2 (48.4) 2.8 (19.6) N/A 8.8 3.4 1.53 1.36 13.6 N/A 27.7 N/A 29.6 9.8 8.3 2.0 (8.4)
Kingston Financi 1031 HK 3.19 5,593 3.8 32.6 N/A N/A N/A N/A N/A N/A 0.6 N/A 2.31 N/A 22.1 N/A 53.5 N/A 54.6 8.2 N/A (7.5) (11.9)
HaitongInt'L 665 HK 4.55 3,127 9.0 14.3 9.6 8.3 49.6 15.8 26.6 0.36 2.5 4.7 1.14 1.00 12.9 14.1 72.1 N/A 43.2 5.6 10.1 (1.9) (6.0)
GuotaiJunan 1788 HK 2.56 2,299 7.5 18.2 13.3 11.5 36.9 15.5 15.1 0.88 2.7 3.8 2.18 1.77 21.6 22.8 130.1 N/A 40.7 13.0 13.1 (8.2) (3.0)
Source: Bloomberg, OP Research
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 66 of 68
Investment risks
Drop in stock market turnover Brokerage commission income and interest
income from margin financing is highly dependent on the market turnover and
sentiment. Any drop in market velocity and leverage ratio would have a negative
impact in the profits of the brokers. However, with the aggressive development of
(1) asset management business (2) equity refinancing and debt issuance
business (3) higher market shares in capturing new accounts, we believe the
company in our coverage will have an edge in a competitive market.
Higher volatility in the market As investment gains of brokers are highly
related to the debt and equity market returns, significant increase in the market
volatility may have huge impact on broker earnings. As the brokers mainly invest
in debt financing assets, we believe brokers having less EPS sensitivity to stock
market returns would benefit in a bear market.
Lower commission rate The average commission rate of brokerage sector
has been dropping at a CAGR of double digit rate due to keen market competition.
With aggressive promotion from smaller brokers to capture market shares, some
of the leading brokers have been dropping market share due to higher adoption of
mobile trading. With the intensive investment in technology integration, we
believe the brokers on our coverage list have developed advance trading app to
maintain market share through integrating stock trading with other value-added
services.
Delay in IPO approval process The IPO market has been reactivated since
after the market stablised in 2H16. Any major setback in the stock market may
trigger another suspension of IPO market by the regulatory department, which
would adversely affect brokers' investment banking business. With innovative
development for more products, such as debt issuance and equity refinancing,
we believe the brokers on our coverage list will have better competitive edge in
the market.
More regulations from policy change The regulatory department may change
the limit of margin financing to regulate the trading activities and lower the level of
speculation in the equity and futures markets. However, since the market
correction in mid-2015, we believe there is less chance for more new regulations
in the near future as the market has been stabilised.
Besides, since CSRC has reduced the maximum number of shares that can be
issued in placement and increased the time gap between two consecutive new
share issuances by listed companies, it would lower the future growth of the
equity refinancing in the near future.
Mon, 13 Mar 2017
China Securities Sector - A year for opportunists
Page 67 of 68
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