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Yum Cha 飲 茶 July 27, 2017

INDICES Closing DoD%

Hang Seng Index 26941.0 0.3

HSCEI 10831.5 0.5

Shanghai COMP 3247.7 0.1

Shenzhen COMP 1843.1 (0.3)

Gold 1260.2 0.8

BDIY 980.0 0.3

Crude Oil, WTI(US$/BBL) 48.7 (0.2)

Crude Oil, BRENT(US$/BBL) 51.0 1.5

HIBOR, 3-M 0.8 (0.0)

SHIBOR, 3-M 4.3 (0.1)

RMB/USD 6.8 0.0

DATA RELEASES DUE THIS WEEK

July 27 Industrial Profits YoY

July 31 Manufacturing PMI

July 31 Non-manufacturing PMI

Source: Bloomberg

RESEARCH NOTES

GUOTAI JUNAN INTERNATIONAL [1788.HK; HK$2.43; DOWNGRADE TO HOLD]

- After the lesson learned in 2016, with HK$106m (>10% of net profit) impairment in

its margin financing business, GTJAI spared itself from the small-cap crash in 1H17,

thanks to more stringent risk control in margin lending and a shift in its loan mix focus

to large caps. However, this also sacrificed its previous high interest rate, as well as

its rapid growth in margin balance and revenue in the near term. After raising its cor-

porate finance revenue by 9% because of its impressive debt and equity underwriting

performance this year, we still cut our 2017E/2018E EPS by 7%/14% and trim down

our Gordon Growth Model-based target price from HK$3.20 to HK$2.65 (2.05x 12-

month forward PBR) after revising our estimated mid-term ROE from 16% to 14%.

Downgrade from BUY to HOLD.

HAITONG INTERNATIONAL [0665.HK; HK$4.46; BUY] - We reviewed our financial

model for Haitong International (HTI) recently and adjusted some of its major busi-

ness projections, based on the latest market performance: 1) impressive YoY growth

in debt underwriting, but lackluster performance in equity underwriting; 2) a more con-

servative risk appetite and slower revenue growth in its margin financing business; 3)

equity investment return recovery, since the HSI is up 22% YTD. We still maintain our

market ADT assumption of HK$78bn (HK$75bn YTD) and expect to see decent YoY

growth in revenue and net profit for the Company, given a low base in 2016. Overall,

we cut our 2017E/2018E EPS by 14%/8% and trim our target price from HK$5.56 to

HK$5.41, based on 1.15x 12-month forward PBR (adjusting the mid-term ROE from

11.5% to 11%, moving the base year to mid-2018, leaving other assumptions of the

Gordon Growth Model unchanged). Trading at 1.0x 2017E PBR, the valuation still

looks undemanding. Maintain BUY. For 1H17 results, we expect net profit of

~HK$1bn, representing 23% YoY growth, thanks to a higher ADT for the Hong Kong

market and recovery in trading income from a low base in 1H16.

SNIPPETS

COSCO SHIPPING INTERNATIONAL [0517.HK; HK$3.27; NOT RATED] - COSCO

Shipping Int’l just issued a positive profit alert after market close yesterday, saying

that 1H2017 net profit will increase over 40% YoY. According to the announcement,

such expected increase was mainly due to the increases in net exchange gains and

net finance income. We share the view that COSCO Shipping Int’l’s YoY increase in

net profit is not related to core operation but at least we see the Company reports

YoY growth in net profit for the first time since 2H2015 and the Company is still trad-

ing at 0.65x 2016 PBR and also below cash level. Given the improvement in operat-

ing performance of the shipping lines, COSCO Shipping Int’l will also see pick up in

operating performance going forward. We also re-iterated the view that the shipping

related sector will see earnings recovery.

2

Sands China – Losing VIP market share Sands China’s (1928 HK, HK$36.05) parent Las Vegas Sands Corp (LVS US) has released its 2017 Q2 operating num-bers, which show that, while Sand China’s mass-related revenues has been resilient, its VIP business has lost market share recently. According to Macau government’s numbers, VIPGGR grew 1% QoQ while mass market-related GGR revenues slipped 3% in 2017Q2. Figure 1: Average Daily Table Wins at Sands China

Sources: Bloomberg, CGIS,

Average Daily Venetian Cotai Central Four Seasons Sands Macao Parisian3Q Table wins (HKDm) TotalJuly - Sept 2016 July - Sept July - Sept July - Sept Sept 13 - 30VIP 50.2 21.8 9.9 6.2 2.4 9.8 Mass 88.4 29.4 26.3 5.4 11.0 16.4 Slot 14.6 3.8 4.5 0.5 1.9 3.9

Average Daily Venetian Cotai Central Four Seasons Sands Macao Parisian4Q Table wins (HKDm) Total Oct-Dec 2016 Oct-Dec Oct-Dec Oct-Dec Oct-DecVIP 47.8 18.9 7.3 6.8 2.2 12.7 Mass 88.6 36.5 23.0 4.9 10.3 13.9 Slot 11.9 2.9 3.7 0.7 1.7 3.0

Average Daily Venetian Cotai Central Four Seasons Sands Macao Parisian1Q Table wins (HKDm) Total Jan-Mar Jan-Mar Jan-Mar Jan-Mar Jan-MarVIP 47.7 21.2 7.5 5.7 4.3 9.1 Mass 95.5 38.2 25.5 5.7 10.6 15.5 Slot 12.5 3.1 4.1 0.6 1.8 3.0

Average Daily Venetian Cotai Central Four Seasons Sands Macao Parisian2Q Table wins (HKDm) Total Apr-June Apr-June Apr-June Apr-June Apr-JuneVIP 42.6 16.0 6.8 4.1 3.2 12.5 Mass 94.8 37.4 24.7 6.1 10.1 16.4 Slot 12.0 3.1 3.9 0.6 1.7 2.6

1

Guotai Junan International Holdings Ltd [1788.HK]

After the lesson learned in 2016, with HK$106m (>10% of net profit) impairment in its margin

financing business, GTJAI spared itself from the small-cap crash in 1H17, thanks to more

stringent risk control in margin lending and a shift in its loan mix focus to large caps. Howev-

er, this also sacrificed its previous high interest rate, as well as its rapid growth in margin

balance and revenue in the near term. After raising its corporate finance revenue by 9%

because of its impressive debt and equity underwriting performance this year, we still cut our

2017E/2018E EPS by 7%/14% and trim down our Gordon Growth Model-based target price

from HK$3.20 to HK$2.65 (2.05x 12-month forward PBR) after revising our estimated mid-

term ROE from 16% to 14%. Downgrade from BUY to HOLD.

Investment Highlights

Impairment related to margin loans no longer a concern but slower growth mo-

mentum instead. The Company’s loan and financing business saw a 45% and 49%

five-year CAGR in income and financing balance from 2011 to 2016, respectively. Mar-

gin loans and other loans were basically the pillar of its high growth in the past, with

lending interest making up 51% of total revenue in 2016. We believe a longer period is

needed to change its margin financing strategy, focusing more on large caps to better

control the overall risk. We lower our interest rate and margin balance assumptions and

hence reduce our loan and financing income by 3%/16% for 2017E/2018E.

Growth in corporate finance income well-expected. The market should have well-

expected its equity underwriting income growth from its parent company’s IPO in May.

As for debt underwriting, the Company also performed well in 1H17, based on the latest

data. According to Bloomberg, GTJAI’s credited amount of debt underwriting reached

US$8.7bn in 1H17, accounting for >70% of last year’s total amount. We raise our fore-

cast for the investment banking business by 9%/8% in 2017E/2018E, respectively, to

reflect a more optimistic outlook for the Company’s debt capital market business in the

medium term.

Market trading volume recovering from a low base. The average daily turnover

(ADT) of Hong Kong market recovered from HK$67bn in 1H16 to HK$75bn in 1H17,

gradually rising to YTD ADT of HK$76bn. We believe the overall market momentum will

continue in the second half thanks to: 1) the stabilizing USD appreciation process; 2) a

continually narrowing valuation gap between listed companies in the Mainland and

Hong Kong; and 3) further growth potential from southbound flows. We keep our full

year ADT assumptions of HK$78bn in 2017 and HK$83bn in 2018, and expect broker-

age income to increase correspondingly 12%/7% in 2017E/2018E, respectively, on a

year-on-year basis.

Earnings Adjustment Based on More Conservative Margin Financing Expecta-

tions; Downgrade to HOLD

July 27, 2017

HOLD (Downgrade from BUY)

Close: HK$2.43 (July 26, 2017)

Target Price: HK$2.66 (+9%)

Price Performance

Market Cap US$2,176m

Shares Outstanding 6,968m

Auditor Ernst& Young

Free Float 33.88%

52W range HK$2.28-3.31

3M average daily T/O US$18.414m

Major Shareholder Guotai Junan Holdings

(65.1%)

Sources: Company, Bloomberg

Livy Lyu—Research Analyst

(852) 3698 6393

livylyu@chinastock.com.hk

Wong Chi-man—Head of Research

(852) 3698 6317

cmwong@chinastock.com.hk

China Securities Sector

Source: Bloomberg

Year ended 31 December 2014 2015 2016 2017E 2018E

Revenue(HK$ m) 1,657 2,277 2,519 2,913 3,150

Net income(HK$ m) 800 1,014 969 1,229 1,283

Adjusted Net Margin 54% 53% 47% 53% 52%

Adjusted EPS (HK cents per share): 13.9 14.9 14.1 17.6 18.2

YOY Change 33% 7% -5% 25% 3%

PER(x) 17.53 16.41 17.32 13.84 13.38

PBR(x) 2.33 2.19 2.08 1.95 1.83

ROAE 14.5% 13.8% 12.3% 14.5% 14.0%

ROAA 4.1% 3.4% 2.4% 2.5% 2.3%

Source: Company Data, CGIS Research estimates

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2.5

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3.5

(HK$ million)(HK$)

Turnover (RHS) Price (LHS)

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Key financials Income Statement

(HKD'000, except for per share amount)

Year ended 31 December 2014 2015 2016 2017E 2018E

Brokerage 501,646 719,945 393,000 439,585 471,143

Loans and Financing 722,470 1,076,018 1,297,278 1,339,843 1,383,810

Corporate Finance 287,825 281,447 456,649 604,203 645,283

Asset Management 46,387 53,092 28,487 45,000 54,000

Investment Holding & Market Making 98,254 146,106 343,773 484,203 596,050

Revenue 1,656,582 2,276,608 2,519,187 2,912,833 3,150,287

Other income 4,459 1,899 2,608 2,500 2,500

Operating Expenses

Staff costs 368,622 505,649 526,657 592,000 663,000

Commission to accounts executives 68,477 118,530 55,117 65,938 70,672

Depreciation 23,643 28,664 34,695 35,000 35,000

Other operating expenses 170,421 207,980 379,923 273,462 296,772

Finance costs 95,162 249,562 393,536 518,849 595,113

Operating Profit 929,216 1,168,122 1,131,867 1,430,084 1,492,231

Income tax expense 127,301 152,689 162,520 200,212 208,912

Non-controlling interests 2,124 1,892 208 800 800

Net income 799,791 1,013,541 969,139 1,229,072 1,282,519

EPS (HK cents):

Basic 13.9 14.9 14.1 17.6 18.2

Diluted 13.7 14.6 13.9 17.4 18.0

DPS (HK cents): 7.0 7.5 7.5 9.2 9.5

Dividend payout ratio 50% 50% 53% 52% 52%

Dividend Yield 2.7% 3.1% 3.1% 3.8% 3.9%

Revenue Breakdown(%)

Brokerage 30% 32% 16% 15% 15%

Loans and Financing 44% 47% 51% 46% 44%

Corporate Finance 17% 12% 18% 21% 20%

Asset Management 3% 2% 1% 2% 2%

Investment Holding & Market Making 6% 6% 14% 17% 19%

Growth Ratio YOY:

Total Revenue 46% 37% 11% 16% 8%

Brokerage 33% 44% -45% 12% 7%

Loans and Financing 82% 49% 21% 3% 3%

Corporate Finance 92% -2% 62% 32% 7%

Asset Management 47% 14% -46% 58% 20%

Investment Holding & Market Making -45% 49% 135% 41% 23%

Operating profit 59% 38% 8% 28% 7%

Net profit 49% 27% -4% 27% 4%

EPS growth 33% 7% -5% 25% 3%

Margins and Ratios:

Adjusted Operating Margin* 62% 61% 55% 61% 60%

Adjusted Net Margin** 54% 53% 47% 53% 52%

Effective tax rate 14% 13% 14% 14% 14%

Cost-to-income ratio 43% 47% 50% 50% 52%

Staff cost-to-income ratio 22% 22% 21% 20% 21%

Average daily turnover of HKEx (HK$ m) 69,456 105,630 66,280 78,000 83,000

Margin financing balance(HK$ m) 8,407 11,963 13,385 13,970 14,406

*Adjusted Operating Margin=Operating profit/(Revenue-commission and interest expenses)

**Adjusted Net Margin=Net profit/(Revenue-commission and interest expenses)Source: Company Data, CGIS Research estimates

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Key financials Balance Sheet

(HKD'000, except for per share amount)

Year ended 31 December 2014 2015 2016 2017E 2018E

Non-current assets 521,501 640,749 812,891 908,323 1,058,323

Property, plant and equipment 513,503 512,166 493,559 500,000 500,000

Others 7,998 128,583 319,332 408,323 558,323

Current assets 21,483,380 36,688,686 44,187,854 52,013,121 56,255,254

Loans and advances to customers 9,099,164 12,375,857 14,286,666 15,269,432 15,905,464

Accounts receivable 1,001,103 1,932,119 1,495,924 2,038,983 2,205,201

Financial assets at fair value through profit or loss 1,353,089 4,506,947 13,261,624 17,900,000 21,080,000

Cash held on behalf of customers 9,009,909 14,662,991 12,400,917 14,066,706 15,076,589

Cash and cash equivalents 889,286 2,408,666 1,964,398 2,000,000 1,200,000

Others 130,829 802,106 778,325 738,000 788,000

Total assets 22,004,881 37,329,435 45,000,745 52,921,444 57,313,577

Non-current liabilities 1,023,208 3,112,269 2,133,262 2,608,446 2,970,974

Bank borrowings 990,000 3,090,000 2,100,000 2,568,404 2,929,192

Others 33,208 22,269 33,262 40,042 41,782

Current liabilities 13,916,459 26,581,909 32,333,649 39,141,843 42,521,977

Accounts payable 10,004,468 18,218,312 14,871,038 16,401,779 17,579,303

Bank borrowings 3,472,719 4,765,662 6,811,433 9,500,000 10,000,000

Debt securities in issue - 505,340 3,485,520 4,500,000 5,000,000

Others 439,272 3,092,595 7,165,658 8,740,064 9,942,674

Total liabilities 14,939,667 29,694,178 34,466,911 41,750,289 45,492,951

Capital and reserves

Share capital and share premium 5,852,194 6,004,362 6,054,025 6,104,025 6,154,025

Retained profits 2,172,562 2,685,718 3,171,842 3,753,590 4,363,061

Proposed final dividend 292,434 274,295 310,613 320,000 320,000

Other reserves (1,261,777) (1,340,811) (1,361,282) (1,341,460) (1,351,460)

Total equity 7,055,413 7,623,564 8,175,198 8,836,155 9,485,626

Perperutal debt - - 2,346,685 2,325,000 2,325,000

Minority 9,801 11,693 11,951 10,000 10,000

Finance Ratios:

PER(x) 17.53 16.41 17.32 13.84 13.38

PBR(x) 2.33 2.19 2.08 1.95 1.83

Book value per share(HKD) 1.0 1.1 1.2 1.3 1.3

ROAE 14.5% 13.8% 12.3% 14.5% 14.0%

ROAA 4.1% 3.4% 2.4% 2.5% 2.3%

Dupont Analysis:

Brokerage 2.6% 2.4% 1.0% 0.9% 0.9%

Loans and Financing 3.7% 3.6% 3.2% 2.7% 2.5%

Corporate Finance 1.5% 0.9% 1.1% 1.2% 1.2%

Asset Management 0.2% 0.2% 0.1% 0.1% 0.1%

Investment Holding & Market Making 0.5% 0.5% 0.8% 1.0% 1.1%

Revenue 8.5% 7.7% 6.1% 5.9% 5.7%

Operating Expenses 3.7% 3.7% 3.4% 3.0% 3.0%

Operating Profit 4.8% 3.9% 2.7% 2.9% 2.7%

Income tax expense 0.7% 0.5% 0.4% 0.4% 0.4%

Net income 4.1% 3.4% 2.4% 2.5% 2.3%

Leverage [Total assets/equity] 3.12 4.90 5.50 5.99 6.04

Net leverage [(Total assets-Accounts payable to clients)/Total equity] 1.83 2.90 3.96 4.30 4.36

ROAE 14.5% 13.8% 12.3% 14.5% 14.0%

Source: Company Data, CGIS Research estimates

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Figure 3: Six-year PER Band

Figure 4: Six-year PBR Band

Sources: CGIS Research estimates

Sources: CGIS Research estimates

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25

30

35

40

45

3/1/2011 3/1/2012 3/1/2013 3/1/2014 3/1/2015 3/1/2016 3/1/2017

Rolling forward PER Rolling forward average PER

Average PER+1 standard deviation Average PER-1 standard deviation

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3/1/2011 3/1/2012 3/1/2013 3/1/2014 3/1/2015 3/1/2016 3/1/2017

Rolling forward PBR Rolling forward average PBR

Average PBR+1 standard deviation Average PBR-1 standard deviation

1

We reviewed our financial model for Haitong International (HTI) recently and adjusted some

of its major business projections, based on the latest market performance: 1) impressive

YoY growth in debt underwriting, but lackluster performance in equity underwriting; 2) a

more conservative risk appetite and slower revenue growth in its margin financing business;

3) equity investment return recovery, since the HSI is up 22% YTD. We still maintain our

market ADT assumption of HK$78bn (HK$75bn YTD) and expect to see decent YoY growth

in revenue and net profit for the Company, given a low base in 2016. Overall, we cut our

2017E/2018E EPS by 14%/8% and trim our target price from HK$5.56 to HK$5.41, based on

1.15x 12-month forward PBR (adjusting the mid-term ROE from 11.5% to 11%, moving the

base year to mid-2018, leaving other assumptions of the Gordon Growth Model unchanged).

Trading at 1.0x 2017E PBR, the valuation still looks undemanding. Maintain BUY. For 1H17

results, we expect net profit of ~HK$1bn, representing 23% YoY growth, thanks to a higher

ADT for the Hong Kong market and recovery in trading income from a low base in 1H16.

Investment Highlights

More active risk control in its margin financing business after gaining sizable

market share. The Company has achieved a 47% CAGR in its margin financing bal-ance during the past five years, resulting in steady growth momentum in revenue. Ac-cording to the latest market data in the IPO prospectus of BOCOMI, a mid-sized Chi-nese-background investment bank in Hong Kong, total margin financing balance of Hong Kong market was around HK$171bn as of end-2016. This means HTI had ~12% market share of the margin financing business. Its share of the stock trading market was still below 2%, according to our rough estimation. We cut our forecast for margin financing revenue by 7% and 10% in 2017E and 2018E, respectively, based on expec-tations of more stringent risk management in its margin lending business, as well as slower growth in its total margin balance to avoid excessive risk exposure caused by a large market share.

Growth in debt underwriting should offset the decline in equity underwriting.

Based on Bloomberg League Table statistics, HTI’s credited amount in equity under-writing, placing and sub-underwriting dropped more than 30% YoY in 1H2017, as there were not as many Chinese bank IPOs as last year. However, we believe this could be offset by the substantial growth in debt financing this year, benefiting from more strin-gent financial leverage control in mainland China, as well as the market expectations of RMB depreciation. HTI’s credited debt underwriting amount was five times that of 1H2016, according to the adjusted debt league table, which was even better than our previous forecast. We hence raise HTI’s corporate finance revenue by 6% and 10% in 2017E and 2018E, respectively.

Investment returns may be relatively moderate due to HTI’s business structure.

Although the Hang Seng Index was up 17% in 1H2017, this does not imply that the return rate of its total trading assets was also that high because of the diversified expo-sure of its trading business, constituting back-to-back investment tunnel services, FICC market making, and its investment holdings. We hold a more conservative view of its trading income and lower our forecast by 9% in 2017E.

1H17 Results Preview: Expects to Recover from a Low Base in 1H16

July 27, 2017

BUY

Close: HK$4.46 (July 26, 2017)

Target Price: HK$5.41 (+21%)

Sources: Company, Bloomberg

Livy Lyu—Research Analyst

(852) 3698 6393

livylyu@chinastock.com.hk

Wong Chi-man—Head of Research

(852) 3698 6317

cmwong@chinastock.com.hk

China Securities Sector

Source: Bloomberg

Haitong International [0665.HK]

Share Price Performance

Market Cap US$3,049m

Shares Outstanding 5,336m

Auditor Deloitte

Free Float 38.1%

52W range HK$4.11-5.75

3M average daily T/O US$13.784m

Major Shareholding Haitong Securities

(60.9%)

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(HK$ million)(HK$)

Turnover (RHS) Price (LHS)

Year ended 31 December 2014 2015 2016 2017E 2018E

Revenue(HK$ m) 2,713 5,806 5,351 6,168 6,914

Net income(HK$ m) 1,018 2,510 1,680 2,107 2,615

Adjusted Net Margin 49% 58% 45% 50% 53%

Adjusted EPS (HK cents per share): 32.3 60.7 31.2 38.8 49.0

YOY Change 27% 88% -49% 24% 26%

PER(x) 12.07 7.27 14.23 11.45 9.22

PBR(x) 1.72 1.15 1.07 1.00 0.92

ROAE 15.1% 17.1% 7.8% 9.0% 10.4%

ROAA 2.6% 3.6% 1.5% 1.6% 1.8%

Source: Company Data, CGIS Research estimates

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Key financials Income Statement

(HKD'000, except for per share amount)

Year ended 31 December 2014 2015 2016 2017E 2018E

Brokerage 556,518 1,031,158 644,804 758,247 808,471

Margin financing 624,776 1,272,095 1,567,890 1,582,642 1,618,342

Corporate finance 396,294 841,652 903,409 1,126,309 1,283,287

Asset management 123,457 148,463 175,949 239,814 301,524

Leveraged and acquisition finance 421,206 520,305 450,373 555,103 636,400

FICC, trading and market making 591,040 1,991,841 1,608,392 1,905,470 2,266,200

Revenue 2,713,291 5,805,514 5,350,817 6,167,586 6,914,225

Other income 20,512 9,791 6,899 6,000 6,000

Operating Expenses

Staff costs 545,281 913,361 814,234 976,041 1,075,000

Commission to accounts executives 240,031 408,285 245,564 318,464 339,558

Depreciation 33,494 32,250 39,980 35,786 38,139

Other operating expenses 356,986 384,930 841,991 750,000 750,000

Finance costs 375,475 1,036,569 1,395,816 1,604,818 1,624,050

Investments gains accounted for using the equity method 33,212 (53,522) (27,658) 20,000 20,000

Operating Profit 1,215,748 2,986,388 1,992,473 2,508,478 3,113,479

Income tax expense 197,479 476,336 312,248 401,356 498,157

Non-controlling interests - - - - -

Net income 1,018,269 2,510,052 1,680,225 2,107,121 2,615,322

EPS (HK cents per share):

Basic 37.4 62.2 31.8 39.5 49.0

Diluted 32.3 60.7 31.2 38.8 49.0

DPS (HKD) 0.16 0.23 0.16 0.18 0.21

Dividend payout ratio 42% 37% 49% 45% 42%

Dividend Yield 3.5% 5.1% 3.4% 3.9% 4.6%

Revenue Breakdown(%)

Brokerage 21% 18% 12% 12% 12%

Margin financing 23% 22% 29% 26% 23%

Corporate finance 15% 14% 17% 18% 19%

Asset management 5% 3% 3% 4% 4%

Leveraged and acquisition finance 16% 9% 8% 9% 9%

FICC, Trading and market making 22% 34% 30% 31% 33%

Growth Ratio YOY:

Brokerage 21% 85% -37% 18% 7%

Margin financing 83% 104% 23% 1% 2%

Corporate finance 136% 112% 7% 25% 14%

Asset management 34% 20% 19% 36% 26%

Leveraged and acquisition finance 5% 24% -13% 23% 15%

FICC, Trading and market making 222% 237% -19% 18% 19%

Total Revenue 65% 114% -8% 15% 12%

Operating profit 103% 146% -33% 26% 24%

Net profit 92% 147% -33% 25% 24%

EPS growth 27% 88% -49% 24% 26%

Margins and Ratios:

Adjusted Operating Margin* 58% 68% 54% 59% 63%

Adjusted Net Margin** 49% 58% 45% 50% 53%

Effective tax rate 16% 16% 16% 16% 16%

Cost-to-income ratio 56% 47% 62% 59% 55%

Staff cost-to-income ratio 20% 16% 15% 16% 16%

Average daily turnover of HKEx (HK$ m) 69,456 105,630 66,280 78,000 83,000

Margin financing balance(HK$ m) 9,627 18,886 20,817 19,763 21,733

*Adjusted Operating Margin=Operating profit/(Revenue-commission and interest expenses)

**Adjusted Net Margin=Net profit/(Revenue-commission and interest expenses)Source: Company Data, CGIS Research estimates

3

Key financials

Balance Sheet

(HKD'000, except for per share amount)

Year ended 31 December 2014 2015 2016 2017E 2018E

Non-current assets 4,230,761 14,348,605 22,972,273 25,466,210 27,862,572

Financial assets designated at fair value through profit or loss - 5,705,699 - - -

Available-for-sale investments 471,083 6,253,682 17,846,297 20,000,000 21,700,000

Others 3,759,678 2,389,224 5,125,976 5,466,210 6,162,572

Current assets 43,929,212 77,570,395 108,532,975 114,522,384 124,715,793

Advances to customers in margin financing 9,619,965 18,879,155 20,817,335 19,686,237 21,654,721

Other loans and advances 1,819,200 3,550,880 8,083,096 8,150,000 8,950,000

Accounts receivable 4,495,624 3,820,611 5,113,753 6,784,345 7,605,648

Financial assets at fair value through profit or loss 9,962,803 18,257,597 25,252,697 26,600,000 30,100,000

Financial assets designated at fair value through profit or loss 2,485,154 6,154,656 16,742,585 18,930,000 22,930,000

Cash held on behalf of customers 11,668,936 18,265,360 20,186,813 21,441,420 23,039,555

Cash and cash equivalents 3,236,317 6,405,963 7,171,169 6,108,217 3,000,000

Others 641,213 2,236,173 5,165,527 6,822,166 7,435,869

Total assets 48,159,973 91,919,000 131,505,248 139,988,594 152,578,365

Non-current liabilities 6,994,275 14,939,548 14,790,690 13,774,531 13,804,531

Non-convertible bonds 4,580,804 9,937,201 9,973,074 9,960,000 9,990,000

Financial liabilities designated at fair value through profit or loss 620,000 4,225,698 18,443 - -

Others 1,793,471 776,649 4,799,173 3,814,531 3,814,531

Current liabilities 32,569,196 56,150,666 94,265,534 102,084,841 112,503,392

Accounts payable 15,630,644 20,945,837 28,240,926 30,017,988 29,951,422

Financial liabilities at fair value through profit or loss 326,072 957,979 3,143,726 3,551,841 3,895,591

Financial liabilities designated at fair value through profit or loss 1,645,886 3,263,051 14,216,393 17,000,000 21,000,000

Loans and other borrowings 12,741,730 20,124,598 33,626,574 35,500,000 37,286,167

Repo 1,189,696 7,028,919 9,586,163 9,100,000 9,800,000

Others 1,035,168 3,830,282 5,451,752 6,915,012 10,570,212

Total liabilities 39,563,471 71,090,214 109,056,224 115,859,372 126,307,923

Capital and reserves 8,596,502 20,828,786 22,449,024 24,129,222 26,270,442

Share capital 218,440 528,992 533,653 533,653 533,653

Reserves 8,039,480 20,088,197 21,488,448 23,121,467 25,187,572

Proposed final dividend 338,582 211,597 426,923 474,102 549,218

Total equity 8,596,502 20,828,786 22,449,024 24,129,222 26,270,442

Finance Ratios:

PER(x) 12.07 7.27 14.23 11.45 9.22

PBR(x) 1.72 1.15 1.07 1.00 0.92

Book value per share(HKD) 2.6 3.9 4.2 4.5 4.9

ROAE 15.1% 17.1% 7.8% 9.0% 10.4%

ROAA 2.6% 3.6% 1.5% 1.6% 1.8%

Dupont Analysis:

Brokerage 1.4% 1.5% 0.6% 0.6% 0.6%

Margin financing 1.6% 1.8% 1.4% 1.2% 1.1%

Corporate finance 1.0% 1.2% 0.8% 0.8% 0.9%

Asset management 0.3% 0.2% 0.2% 0.2% 0.2%

Leveraged and acquisition finance 1.1% 0.7% 0.4% 0.4% 0.4%

FICC, trading and market making 1.5% 2.8% 1.4% 1.4% 1.5%

Revenue 7.0% 8.3% 4.8% 4.5% 4.7%

Operating Expenses -4.0% -4.0% -3.0% -2.7% -2.6%

Operating Profit 3.1% 4.3% 1.8% 1.8% 2.1%

Income tax expense -0.5% -0.7% -0.3% -0.3% -0.3%

Net income 2.6% 3.6% 1.5% 1.6% 1.8%

Leverage [Total assets/equity] 5.74 4.76 5.16 5.83 5.80

Net leverage [(Total assets-Accounts payable to clients)/Total equity] 3.96 3.47 4.75 4.74 4.76

ROAE 15.1% 17.1% 7.8% 9.0% 10.4%

Source: Company Data, CGIS Research estimates

4

Figure 1: Six-year PER Band

Figure 2: Six-year PBR Band

Sources: Bloomberg, CGIS Research

Sources: Bloomberg, CGIS Research

Sources: Bloomberg, CGIS Research

Figure 3: Trading velocity of HK equity market

0

5

10

15

20

25

30

3/1/2011 3/1/2012 3/1/2013 3/1/2014 3/1/2015 3/1/2016 3/1/2017

Rolling forward PER Rolling forward average PER

Average PER+1 standard deviation Average PER-1 standard deviation

0

0.5

1

1.5

2

2.5

3/1/2011 3/1/2012 3/1/2013 3/1/2014 3/1/2015 3/1/2016 3/1/2017

Rolling forward PBR Rolling forward average PBRAverage PBR+1 standard deviation Average PBR-1 standard deviation

40%

60%

80%

100%

120%

140%

160%

180%

1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017

Trading velocity of HK market (annualized 20-day moving average traded value/total market cap)(RHS)

5

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Explanation on Equity Ratings

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BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :