GF Securities [1776.HK]

Transcription

1 GF Securities [1776.HK] We initiate coverage on GF Securities (GFS) with a BUY rating and a Gordon Growth Model-based target price of HK$37.00 (2.98x 2015E PBR and 19.1x 2015E PER; beta at 1.41, cost of equity at 10.19%, medium-term ROE at 16.5%). As the first Hong Kong-listed Chinese broker that completed equity fund raising this year, GFS will enjoy the first mover advantage to expand its capital-based intermediary business. The company s relatively balanced business portfolio with meaningful market share in brokerage, IPO and asset management businesses is also a plus. We expect GFS to post a EPS growth of 83% in 2015E, mainly driven by: (i) a market share gain of the brokerage business from 4.3% in 2014 to 4.8% in 2015E; (ii) an 118% growth in net interest income driven by rapid growth in capital-based intermediary business and (iii) an average daily turnover (ADT) of the market to surge from RMB303bn in 2014 to RMB880bn in 2015E. Investment Highlights Initiate with BUY: Balanced Business Portfolio with Rapid Growth A balanced business portfolio. GFS commanded high rankings in its major business lines: (i) the sixth largest broker in China with a market share of 4.4% last year in terms of trading volume; (ii) the largest margin financing and securities lending (MFSL) balance at end-april 2015 with a market share of 7.1%; (iii) the market leader of IPO in 2014 based on total amount of IPO underwritten; and (iv) GFS owns a 51.13% stake in GF Fund and a 25% stake in E Fund. In early June, E Fund and GF Fund were the third largest and the eighth largest fund houses in China in terms of total assets managed, respectively. To enjoy first mover advantage in MFSL business. As the first Hong Konglisted Chinese broker that completed its equity fund raising (> RMB25bn) this year, GFS will enjoy the first mover advantage to further expand its MFSL and other capital-based intermediary business. At end-april 2015, it had the largest MFSL balance of RMB130.6bn with a market share of 7.1%. Rapidly growing market share in brokerage business. Leveraging on policy relaxation in 2013 which allows remote account opening and easier opening of low-cost branches, GFS boosted its market share in brokerage trading volume quickly from 4.02% in 2013 to 4.7% year-to-date (YTD). It is just a matter of time for the company for have >5% market share, in our view. A potential beneficiary of registration system. It is expected that the authorities will gradually shift the IPO regime from an approval-based system to a registration-based system in 2H2015 or 1H2016. As a market leader of A-share IPO in 2014 with the second largest IPO pipeline (37 deals pending approval by China Securities Regulatory Commission (CSRC)), GFS is likely to enjoy the benefit of faster IPO approvals after migration. Y/E Dec E 2016E Turnover (RMB m) 7,280 9,332 16,163 33,967 41,968 Recurring net profit (RMB m) 2,191 2,813 5,023 11,808 13,652 Adjusted net margin (%) Recurring EPS (RMB) % Change n.a PER (x) PBR (x) ROAA (%) n.a ROAE (%) n.a Sources: Company, CGIHK Research BUY Close: HK$24.65 (June 8, 2015) Target Price: HK$37.00 (+50%) Price Performance (HK$) Market Cap Shares Outstanding Auditor China Securities Sector US$33,792m 7,621.0m Deloitte Free Float 58.2% 52W range 3M average daily T/O Major Shareholding Sources: Company, Bloomberg HK$ US$113.9m Liaoning Cheng Da (16.4%) Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk June 9, 2015 (HK$ million) 0 0 Apr15 May15 Jun15 Turnover (RHS) Price (LHS)

2 Key financials GF Securities (01776.HK) Income Statement (RMB'000, except for per share amount) Year ended 31 Dec E 2016E Equities 2,396,000 3,439,400 4,949,900 12,364,971 12,799,822 Investment banking 1,027, ,100 1,552,300 1,923,954 2,619,601 Futures and options 297, , , , ,362 Asset management 112, ,100 1,124,500 2,648,058 3,563,938 Others 169, , , , ,163 Commission and fee income 4,001,500 4,399,400 8,217,300 17,613,150 19,792,886 Interest income 1,541,235 2,349,217 4,324,638 10,598,956 15,313,142 Net investment gains 1,688,087 2,525,131 3,604,956 5,695,188 6,781,956 Total revenue 7,230,822 9,273,748 16,146,894 33,907,293 41,887,984 Other income and gains 49,651 58,114 16,581 60,000 80,000 Total revenue and other income 7,280,473 9,331,862 16,163,475 33,967,293 41,967,984 Staff costs (2,435,257) (2,947,619) (4,345,926) (6,171,398) (7,847,365) Commission and fee expenses (150,259) (105,542) (240,813) (510,781) (573,994) Interest expenses (500,383) (1,378,567) (2,757,676) (7,176,535) (10,081,846) Others (1,883,882) (1,815,828) (2,507,650) (4,489,592) (5,289,718) Operating expenses (4,969,781) (6,247,556) (9,852,065) (18,348,306) (23,792,922) Operating profit 2,310,739 3,084,291 6,311,430 15,618,987 18,175,062 Non-recurrent items Income before tax 2,685,219 3,477,313 6,648,595 15,831,182 18,423,656 Income tax expense (494,880) (664,747) (1,503,082) (3,720,328) (4,421,677) Minority interests 1,118 (65) (122,945) (302,771) (350,049) Net income 2,191,457 2,812,501 5,022,568 11,808,083 13,651,929 Recurring net income 2,191,457 2,812,501 5,022,568 11,808,083 13,651,929 EPS (RMB) Recurring EPS (RMB) DPS (RMB) A-share average daily turnover 129,492, ,668, ,014, ,000,000 1,000,000,000 Brokerage market share of GFS (%) Net commission rate of GFS (%) Margin financing balance 5,183,000 19,945,100 64,356, ,944, ,138,954 Staff cost-to-income (%) Cost-to-income (%) Cost-to-income (ex-impairment) Grow th Rates: Commission and fee income n.a. 10% 87% 114% 12% Interest income n.a. 52% 84% 145% 44% Net investment gains n.a. 50% 43% 58% 19% Total revenue and other income n.a. 28% 73% 110% 24% Operating profit n.a. 33% 105% 147% 16% Recurring net income n.a. 28% 79% 135% 16% Recurring EPS n.a. 28% 79% 83% 16% Margins and Ratios: Adjusted operating margin 34.4% 38.8% 47.9% 59.3% 57.9% Adjusted net margin 33.3% 36.1% 39.1% 46.2% 44.8% Effective tax rate 18% 19% 23% 24% 24% Sources: Company data, CGIHK Research estimates 2

3 Key financials GF Securities (01776.HK) Balance Sheet (RMB'000, except for per share amount) Finance Ratios As at 31 Dec E 2016E E 2016E Financial assets 33,642,898 46,783,207 71,531,551 90,269, ,778,957 PER(x) Advances to customers 5,246,504 20,490,654 64,695, ,944, ,138,954 EPS grow th (%) n.a Others 9,394,574 10,652,117 30,234,496 54,267,885 63,429,196 Yield (%) Cash held on behalf of customers 27,345,508 25,227,415 48,995, ,449, ,784,772 Payout ratio (%) Bank balances and cash 9,033,278 6,146,696 18,203,433 30,762,583 31,029,313 PBR(x) Total current assets 84,662, ,300, ,661, ,693, ,161,192 Total asset/equity (x) Non-client asset/net asset (x) PPE, net 991,741 1,043,274 1,287,461 1,358,944 1,432,513 ROAA (%) n.a Financial assets 1,508,728 3,634,831 2,747,766 3,445,323 3,890,190 ROAE (%) n.a Others 2,692,575 3,313,977 2,403,306 2,800,316 3,113,910 Total non-current assets 5,193,044 7,992,082 6,438,533 7,604,583 8,436,612 Revenue breakdown (%) Equities Total assets 89,855, ,292, ,099, ,298, ,597,804 Investment banking Futures and options Accounts payable to brokerage clinets 34,287,577 31,609,231 71,465, ,897, ,717,332 Asset management Financial assets sold under repo 8,850,471 19,399,797 50,717,726 70,000,000 85,000,000 Others Due to banks and other financial institutions 3,340,000 5,300,000 1,123,000 68,265,618 90,459,754 Commission and fee income Others 10,333,437 14,202,625 42,223,828 56,055,699 58,882,089 Interest income Total current liabilities 56,811,485 70,511, ,530, ,218, ,059,176 Net investment gains Bank and other borrowings - 11,979,740 26,030,664 30,000,000 40,000,000 Others 89,543 57,802 7,161,539 10,111,539 12,111,539 Total non-current liabilities 89,543 12,037,542 33,192,203 40,111,539 52,111,539 Total liabilities 56,901,028 82,549, ,722, ,330, ,170,715 Shareholders' equity 32,942,624 34,604,666 39,610,880 75,898,189 86,007,692 Minority interests 12, ,310 1,766,576 2,069,347 2,419,397 Book value per share (HK$) Dupont analysis (as % of average total assets) Equities n.a. 3.3% 2.8% 3.5% 2.5% Investment banking n.a. 0.3% 0.9% 0.5% 0.5% Futures and options n.a. 0.3% 0.1% 0.1% 0.0% Asset management n.a. 0.2% 0.6% 0.8% 0.7% Others n.a. 0.2% 0.2% 0.1% 0.1% Commission and fee income n.a. 4.2% 4.6% 5.0% 3.9% Interest income n.a. 2.3% 2.4% 3.0% 3.0% Net investment gains n.a. 2.4% 2.0% 1.6% 1.3% Other income and gains n.a. 0.1% 0.0% 0.0% 0.0% Total revenue and other income n.a. 9.0% 9.0% 9.7% 8.3% Operating expenses n.a. -6.0% -5.5% -5.2% -4.7% Operating profit n.a. 3.0% 3.5% 4.4% 3.6% Income tax expense n.a. -0.6% -0.8% -1.1% -0.9% Recurring net income (ROAA) n.a. 2.7% 2.9% 3.4% 2.8% Leverage (x) n.a Non-client asset/net asset (x) n.a ROAE n.a. 8.3% 13.5% 20.4% 16.9% Sources: Company data, CGIHK Research estimates 3

4 Valuation and Recommendation Initiating coverage with a BUY rating. We initiate coverage of GF Securities (GFS) (1776.HK) with a BUY rating and a HK$37.00 price target, based on 2.98x 2015E PBR (equivalent to 19.1x 2015E PER). We expect its EPS growth to reach 83% in 2015E, on the back of (i) a market share gain of the brokerage business from 4.3% in 2014 to 4.8% in 2015E; (ii) an 118% growth in net interest income driven by rapid growth in capital-based intermediary business and (iii) an ADT of the market to surge from RMB303bn in 2014 to RMB880bn in 2015E. As one of the Top 10 securities companies in China, GFS has a relatively balanced business portfolio with high rankings in its major business lines: (i) the sixth largest broker in China with a market share of 4.4% last year in terms of trading volume; (ii) the largest MFSL balance at end-april 2015 with a market share of 7.1%; (iii) the market leader of IPO in 2014 based on total amount of IPO underwritten (RMB14.4bn with 14 deals); and (iv) GFS owns a 51.13% stake in GF Fund and a 25% stake in E Fund. In early June, E Fund was the third largest fund house in China in terms of total assets managed (RMB303bn) while GF Fund was the eighth largest player with total assets of RMB190bn under management. Therefore we believe GFS deserves a BUY rating for its attractive valuation with meaningful market share in major business segments. Target price at HK$37.00 based on 2.98x 2015E PBR. We adopt the Gordon Growth Model ((ROE-g)/(COE-g)) as our principal valuation method with a target PBR of 2.98x. Due to the business nature of securities companies, PER may be easily affected by short-term earnings volatility. Our 2.98x PBR is derived by using the following parameters: (a) a risk-free rate of 2.70% (7-year average of US 10-year treasuries); (b) an 8% expected market return; (c) the beta of 1.41; (d) the cost of equity at 10.19% (the end result of the parameters above); (e) a 7% growth rate (in line with the economic growth); and (f) a medium-term ROE of 16.5%. In terms of current valuation, CITIC Securities (CITICS) is trading at 17.6x 2015E PER and 2.12x 2015E PBR while Haitong Securities (HTS) is trading at 16.2x 2015E PER and 2.17x PBR. GFS valuation represents a 6.6% discount to CITICS and 8.8% discount to HTS in terms of PBR. Using PER as the benchmark, GFS is also trading at 28% and 22% discount to CITICS and HTS, respectively. Given that GFS ROAE is higher than CITICS and HTS in 2015E and 2016E, we believe the company s valuation is still very attractive. From an absolute valuation perspective, the current 2015E PBR of 1.96x also looks undemanding against its 2015E ROAE of 20.4%. 4

5 Figure 1: Peer valuation Company Ticker Rating Price (HK$) Market cap (US$m) E 2016E E 2016E E 2016E China Galaxy Securities 6881 HK Equity BUY , CITIC Securities 6030 HK Equity BUY , Haitong Securities 6837 HK Equity BUY , GF Securities 1776 HK Equity BUY , Simple average Weighted average Source: CGIHK Research estimates Figure 2: Peer comparison Source: CGIHK Research estimates Figure 3: Sector valuation PER (x) PBR (x) Dividend yield (%) EPS Growth (%) E ROAE (%) ROAA (%) Company Ticker 2015E 2016E CAGR (%) E 2016E E 2016E China Galaxy Securities 6881 HK Equity CITIC Securities 6030 HK Equity Haitong Securities 6837 HK Equity GF Securities 1776 HK Equity Simple average Weighted average PER (x) PBR (x) ROE (%) ROA (%) Company Ticker Rating Price (Local currency) Market cap (US$m) E 2016E E 2016E E 2016E E 2016E CITIC 6030 HK Equity BUY , Haitong 6837 HK Equity BUY , China Galaxy 6881 HK Equity BUY , Guangfa 1776 HK Equity BUY , Central China 1375 HK Equity NR , Simple average Weighted average A-share listed securities companies CITIC-A CH Equity NR , Haitong-A CH Equity NR , Guangfa CH Equity NR , China Merchants CH Equity NR , Huatai CH Equity NR , Shenw an Hongyuan CH Equity NR , Founder CH Equity NR , Everbright CH Equity NR , Industrial CH Equity NR , Changjiang CH Equity NR , Southw est CH Equity NR , Guoyuan CH Equity NR , Northeast CH Equity NR , Sinolink CH Equity NR , Pacific CH Equity NR , Simple average Weighted average International investment banks Goldman Sachs GS US Equity NR , Morgan Stanley MS US Equity NR , Sources: Bloomberg, CGIHK Research estimates Figure 4: Target prices Company CGS HTS CITICS GFS Ticker 6881.HK 6837.HK 6030.HK 1776.HK Rating BUY BUY BUY BUY Beta Cost of equity 10.86% 9.96% 9.75% 10.19% Medium-term ROE 18.0% 15.80% 13.5% 16.5% Growth rate 7% 7% 7% 7% PBR = (ROE-g)/(COE-g) (15% valuation premium included) 2.98 Target price (HK$) Upside 70% 37% 28.2% 50.1% Source: CGIHK Research estimates 5

6 Figure 5: Comparison with major securities companies (I) Sources: Company, CGIHK Research estimates Figure 6: Comparison with major securities companies Sources: Company, CGIHK Research CITIC Securities Haitong Securities Guangfa Securities China Galaxy Securities CH/6030.HK CH/6837.HK CH/1776.HK 6881.HK Total assets (RMB bn) (2014) Net assets (RMB bn) (2014) Net assets (RMB bn) (2015E) Leverage (x) (2014) Adjusted leverage (x) (2014) Net capital/net asset (parent company level) (%) (2014) Cost-to-income ratio (%) Staff cost-to-income ratio (%) ROA (2014) (%) ROE (2014) (%) ROE (2015E) (%) Stock brokerage market share (equity & funds) 2014 (%) Ranking MFSL balance End-2014 balance (RMB bn) market share (%) Ranking Investment banking Total equity underwriting (RMB bn) (2014) No of deals Average deal size (RMB bn) Total bond underwriting (RMB bn) (2014) No of deals Average deal size (RMB bn) Asset management Total AUM (RMB bn) 1, Collective asset management (RMB bn) Targeted asset management (RMB bn) Others (RMB bn) CITIC Securities Haitong Securities Guangfa Securities China Galaxy Securities RMB m (2014) CH/6030.HK CH/6837.HK CH/1776.HK 6881.HK Net fee and commission income 17,116 8,221 7,977 6,934 Brokerage 8,834 5,147 5,053 5,357 Investment banking 3,472 1,617 1, Asset management 4, , Net interest income 950 3,360 1,499 2,805 Net investment gains 10,535 8,793 3,899 1,653 Others Total revenue 28,568 17,811 13,058 9,786 Net fee and commission income 59.9% 46.2% 61.1% 70.9% Brokerage 30.9% 28.9% 38.7% 54.7% Investment banking 12.2% 9.1% 13.3% 9.8% Asset management 15.0% 2.5% 8.6% 1.9% Net interest income 3.3% 18.9% 11.5% 28.7% Net investment gains 36.9% 49.4% 29.9% 16.9% Others 1.4% 3.1% 0.2% 0.5% Total revenue 100.0% 100.0% 100.0% 100.0% 6

7 Company Analysis Brokerage Gaining Market Share Rapidly Added 45 new branches in 2013 and 2014; 4th largest branch network Market share rose from 4.02% in 2013 to 4.7% in 2015 YTD Market share to exceed 5% soon Thanks to new policies launched in March 2013 that allowed remote account opening through relaxing new branch restriction on securities companies, GFS grabbed this golden opportunity to expand its regional coverage. The company added 34 and 11 new branches in 2013 and 2014, respectively. Most of these new addition were C-type branches with lower operation expenses and no on-site trading service. As of end- 2014, the company had a client base of 4.18m. According to Securities Association of China (SAC), its latest total number of branches reached 252, the fourth largest branch network in China. Regional expansion in the past two years has been a key reason of the company s market share gain, in our view. In terms trading volume (equities and funds), GFS market share rose from 4.02% in 2013 to 4.31% in Its year-to-date (YTD) market share in 2015 increased further to about 4.7%. Following the H-share IPO which raised >RMB25bn, we believe it is just a matter of time for GFS to boost its market share to >5% as a stronger balance sheet will allow the company to provide better services, particularly margin financing. Figure 7: Market share of GFS in trading turnover (equities and funds) Figure 8: GFS branch network coverage (end-2014) 8,000 7, % 4.80% 4.60% 6,000 5, % 4.40% 4,000 3, % 4.02% 4.16% 4.11% 4.04% 4.02% 4.20% 4.00% 2,000 1, % YTD 3.60% Trading turnover (equities and funds) : GF Securities (RMB bn) Market share Sources: Wind Info, CGIHK Research Sources: Company, CGIHK Research 7

8 Figure 9: Number of branches of leading listed brokers (early June 2015) Everbright Securities China Merchants Securities Guosen Securities Essence Securities CITIC Securities 216 Huatai Securities GF Securities Haitong Securities Shenwan Hongyuan Securities China Galaxy Securities 330 Sources: SAC, CGIHK Research Brokerage Margin Financing to Enjoy First Mover Advantage Market leader of MFSL balance at end-april 2015 First mover to strengthen equity base to maintain market leadership As the bull market in China attracted more and more investors, MFSL balance in the A- share market surged from RMB347bn at end-2013 to >RMB2trn in late May, up more than 4.7x. GFS MFSL balance also jumped from RMB20bn at end-2013 to RMB130.6bn at end-april 2015, propelling its market leader status with a market share of 7.1%. At end-2014, GFS adjusted leverage (excluding client assets) increased to 4.1x. Among major A-share brokers listed in Hong Kong, GFS was the fastest player to complete equity fund raising this year. After raising more than RMB25bn in Hong Kong, its equity was expanded by 65%. As the first mover to strengthen its equity base this year, GFS should be able to maintain its leadership in MFSL business. GFS had about 64,000 MFSL clients with asset value of over RMB500,000 at end-2014, representing 35.5% of the total number of qualified brokerage clients. There is, we believe, still a huge room to increase its penetration rate. Figure 10: Market share of GFS MFSL balance Figure 11: MFSL market share of major securities companies Q Q Q Q Q Q Q Q Apr-15 End of period MFSL balance (RMB bn) (LHS) End of period MFSL balance market share (%) Sources: Wind Info, CGIHK Research Securities company Sources: Wind Info, CGIHK Research MFSL balance end-apr 2015 (RMB bn) MFSL balance market share end-apr 2015 (%) GF Securities China Galaxy Securities China Merchants Securities Shenwan Hongyuan Securities Huatai Securities Haitong Securities Guotai Junan Securities CITIC Securities Guosen Securities Everbright Securities

9 Investment Banking Market Leader in IPO Market Migration to registration-based system will benefit GFS 5.8% market share in equity offerings underwritten Strong IPO pipeline As many large state-owned enterprises (SOEs) have already completed their IPOs, more and more companies in the A-share IPO market are SMEs. GFS benefitted from this trend, thanks to its SME-focused strategy and became the market leader of IPO in Its total amount of IPO underwritten last year was RMB14.4bn with 14 deals. In particular, the company was the market leader of ChiNext IPOs in 2014, contributing to a market share of 10.9% in terms of aggregate mount underwritten (RMB2.4bn). It also ranked first in IPO underwritten last year in the TMT sector with a total amount of RMB3.1bn (16.9% market share). As the authorities are planning to migrate from approval-based system to registration-based system, which will allow more companies to be listed in the A-share market, GFS will be one of the major beneficiaries as an IPO expert. Including share placements and rights issues, GFS also ranked fourth last year in terms of total amount of equity offerings underwritten with an amount of RMB30bn (5.8% market share). As of end-may 2015, the company had 37 A-share IPO projects pending approval by CSRC, the second highest in the market. Meanwhile, GFS is also an active player of the NEEQ (New Third Board) as it recommended the quotation of 55 companies in Figure 12: Top 10 players in A-share IPO (2014) Figure 13: Top 10 players in equity issuance underwritten (2014) Haitong Securities 1,866 China Merchants Securities 15,664 China Galaxy Securities 2,165 China Galaxy Securities 17,477 CICC 2,433 Huatai United Securities 22,332 Huatai Securities 3,146 Guosen Securities 25,307 Guotai Junan Securities 3,529 Guotai Junan Securities 25,553 China Securities 4,232 Southwest Securities 25,583 Guosen Securities 6,044 GF securities 30,080 CITIC Securities 6,252 Haitong Securities 34,735 China Merchants Securities 8,247 CITIC Securities 38,658 GF securities 14,571 China Securities 42,548 Sources: Company, CGIHK Research - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16, Capital raised from IPOs (RMBm) Sources: Company, CGIHK Research - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45, Capital raised from equity offerings (RMBm) 9

10 Figure 14: Major equity offerings underwritten by GFS Amount Issuers Offering Type Underwritten Year (RMB m) Wuhan Iron and Steel Company Limited Rights issue 8, Convertible bonds 7, with detachable warrants Guosen Securities Co. Ltd. IPO 6, China Yangtze Power Co., Ltd. Warrants 6, Yunnan Copper Co., Ltd. Private placement 4, Tebian Electric Apparatus Stock Co., Ltd Rights issue 3, Hubei Energy Group Co., Ltd. Private placement 3, Goertek Inc. Private placement 2, Fujian Expressway Development Company Limited Follow-on offerings 2, Sources: Company, CGIHK Research Asset Management A Major Player in Mutual Fund Market A key investor in E Fund and GF Fund AUM of GF Asset Management grew 45% in 2014 GFS owns a 51.13% stake in GF Fund and a 25% stake in E Fund. In early June, E Fund was the third largest fund house in China in terms of total assets managed (RMB303bn) while GF Fund was the eighth largest player with total assets of RMB190bn under management. On the back of investments in these two major fund houses, GFS is likely to be one of the major beneficiaries of mutual recognition of funds between Hong Kong and the mainland. GFS itself also provides asset management services through GF Asset Management. As of end-2014, assets under management including collective asset management, targeted asset management and specified asset management reached RMB197bn, up 45% YoY. Figure 15: Top 10 fund houses in China based on assets under management (RMB bn, early June) Fullgoal Fund China Merchants Fund Management GF Fund Management China Universal Asset Management China Southern Fund Management Harvest Fund ICBC Credit Suisse Asset Management E Fund Management China Asset Management 344 Tianhong Asset Management Sources: Wind Info, CGIHK Research 10

11 Figure 16: Assets managed by GF Asset Management (RMB m) 160, , , ,000 80,000 60,000 40,000 20, , ,224 48,083 15,560 9,508 12,171 3, Collective asset management Specified asset management Targeted asset management Sources: Company, CGIHK Research 11

12 Financial Analysis Recurring EPS to grow at 45.3% between 2014 and 2016E We project GFS recurring EPS to grow at a 45.3% CAGR between 2014 and 2016E, driven mainly by (i) a strong growth of ADT from RMB303bn in 2014 to RMB1trn in 2016E; (ii) a 145% growth of interest income in 2015E thanks to 168% increase in margin financing balance and (iii) a 58% growth of net investment gains in 2015E thanks to an impressive rally of capital markets, especially equities. Figure 17: Key assumptions and projections Y/E Dec E 2016E RMB'000 Equities 2,396,000 3,439,400 4,949,900 12,364,971 12,799,822 Investment banking 1,027, ,100 1,552,300 1,923,954 2,619,601 Futures and options 297, , , , ,362 Asset management 112, ,100 1,124,500 2,648,058 3,563,938 Others 169, , , , ,163 Commission and fee income 4,001,500 4,399,400 8,217,300 17,613,150 19,792,886 Interest income 1,541,235 2,349,217 4,324,638 10,598,956 15,313,142 Net investment gains 1,688,087 2,525,131 3,604,956 5,695,188 6,781,956 Total revenue 7,230,822 9,273,748 16,146,894 33,907,293 41,887,984 YoY change n.a. 28% 74% 110% 24% Staff costs (2,435,257) (2,947,619) (4,345,926) (6,171,398) (7,847,365) Other operating expenses (2,534,524) (3,299,937) (5,506,139) (12,176,908) (15,945,557) Total operating expenses (4,969,781) (6,247,556) (9,852,065) (18,348,306) (23,792,922) Operating profit 2,310,739 3,084,291 6,311,430 15,618,987 18,175,062 Adjusted operating margin* 34.4% 38.8% 47.9% 59.3% 57.9% Recurring net profit 2,191,457 2,812,501 5,022,568 11,808,083 13,651,929 Adjusted net margin* 33.3% 36.1% 39.1% 46.2% 44.8% Recurring EPS (RMB) YoY change n.a. 28% 79% 83% 16% A-share average daily turnover 129,492, ,668, ,014, ,000,000 1,000,000,000 Brokerage market share of GFS (%) Net commission rate of GFS (%) Margin financing balance 5,183,000 19,945,100 64,356, ,944, ,138,954 Equities underwritten 17,669,500 3,167,800 34,023,900 50,299,490 74,896,649 Bonds underwritten 26,000,000 30,969,100 63,065,000 84,866, ,014,810 Staff cost-to-income (%) Cost-to-income (%) *Adjusted operating margin = (Total revenue operating expenses)/(total revenue commission and fee expenses interest expenses) **Adjusted net margin = Net profit including minority interests/(total revenue commission and fee expenses interest expenses) Sources: Company, CGIHK Research estimates 12

13 H-share IPO strengthened capital base for future expansion As a result of the rapid growth of capital-based intermediary business, especially MFSL, GFS adjusted leverage rose from 2.5x at end-2013 to 4.1x at end However, it raised more than RMB25bn in April though H-share IPO and we expect its equity base to grow from RMB39.6bn at end-2014 to RMB76bn at end-2015e. Therefore the company should have more rooms to expand its capital-based intermediary business and we expect GFS adjusted leverage to stay at 4x at end Figure 18: Adjusted leverage and equity base of GFS E 2016E Equity (RMB bn) (LHS) Adjusted leverage (x) Sources: Company, CGIHK Research estimates Substantial increase in ROE thanks to strong capital markets We forecast GFS ROE to increase significantly from 13.5% in 2014 to 20.4% in 2015E. The impressive improvement is driven by: (i) average daily turnover to surge 190% YoY in 2015E to RMB880bn; (ii) interest income to jump 145% in 2015E thanks to 168% increase in margin financing balance; (iii) cost-to-income ratio to drop from 52.1% in 2014 to 40.6% in 2015E as revenue growth will be much faster than cost hike in a bull market with maximised operating leverage. (Note: We project ROE to drop to 16.9% in 2016E, which is largely a technical issue. The calculation of 2015E ROE is based on average equity between 2014 (before H-share IPO) and 2015, which led to a lower base.) Figure 19: ROAA and ROAE of GFS E 2016E ROAA (%) (LHS) ROAE (%) Sources: Company, CGIHK Research estimates 13

14 Improvement in revenue mix We forecast revenue from brokerage commission to represent 36.5% of total revenue in 2015E, up from 30.7% in It is only a temporary issue, in our view, due to exceptionally rapid jump in ADT this year. We expect the trend of reducing reliance on brokerage commission to be back on track in 2016E, with brokerage commission to account for 30.6% of total revenue. Revenue contribution from interest income is expect to increase from 31.3% this year to 36.6% next year. Figure 20: Revenue mix of GFS % E 2016E Equities Investment banking Futures and options Asset management Others Commission and fee income Interest income Net investment gains Sources: Company, CGIHK Research estimates Sources: Company, CGIHK Research estimates 14

15 Company Background Established on May , GF Securities (GFS) is one of the first full service investment banks and integrated securities brokerage in China. According to Securities Association of China (SAC), the company ranked No.3 by net assets at end In terms of equity trading value, GFS was the sixth largest broker in China with a market share of 4.4% last year. According to WIND Info, the company ranked No.6 and No.1 among mainland peers in terms of total equity underwriting value (5.8% market share) and A-share IPO underwriting value (18.5% market share) respectively in GFS ranked seventh among securities brokers in bond underwriting market (corporate bond and enterprise bond) last year with a market share of around 4.24%. The company also ranked No.1 in terms of number of OTC market products at end GFS was listed on the Shenzhen Stock Exchange and the Hong Kong Stock Exchange on February 12, 2010 and April 10, 2015, respectively. Liaoning Cheng Da Co, Ltd, a Dalian-based company engaged in international trade, biological drugs manufacturing, pharmacy retail chain, and energy development businesses, is the largest shareholder of the company with a 16.4% stake. Figure 21: Shareholding Structure H Shareholders 22.3% Liaoning Cheng Da Co., Ltd 16.4% Jilin Aodong Pharmaceutical Group Co., Ltd 16.3% Other A Shareholders 35.9% Zhongshan Public Utilities Group Co., Ltd 9.0% Source: Company data 15

16 GF Securities Management Profiles Directors Mr Sun Shuming ( 孙树明 ), 52, chairman and executive director of GF Securities since May His primary working experience includes: serving as clerk, deputy chief officer and chief officer of the Department of Treaty and Law of the Ministry of Finance from August 1984 to August 1990, deputy head of the Department of Treaty and Law of the Ministry of Finance from August 1990 to September 1994, the head of the Department of Treaty and Law of the Ministry of Finance from September 1994 to March 1996, deputy mayor (a temporary post) of the People s Government of Zhuozhou, Hebei from July 1994 to July 1995, director of the general manager s office and assistant to the general manager of China Economic Development Trust & Investment Corporation from March 1996 to June 2000, deputy director of the Central Financial Work Commission Supervisors Work Department from June 2000 to March 2003, supervisor of China Galaxy Securities from September 2003 to January 2006, deputy chief officer of the Accounting Department of the CSRC from January 2006 to April 2007, chief officer of the Accounting Department of the CSRC from April 2007 to March He has a bachelor of economics from Zhongnan University of Economics and Law(1984) and a doctorate in Economics from the Research Institute for Fiscal Science of the Ministry of Finance (1997). Mr. Lin Zhihai ( 林治海 ), 51, executive director and general manager of GF Securities since March 2008 and April 2011, respectively. His primary working experience includes: assistant economist of the People s Bank of China (Dalian Branch) from January 1992 to May 1993, economist and deputy general manager at the investment banking department of Liaoning Trust & Investment Company from May 1993 to January 1995 and January 1995 to August 1996, respectively. He joined GF Securites in September 1996, and became a general manager at the Dalian branch from February 1997 to October 2001, chairman and general manager of Guangfa Northern Securities Company Limited from October 2001 to March 2006, deputy general manager and standing deputy general manager of GF Securities from March 2006 to April 2011, director of GFHK since July 2011, and chairman of GF Asset Management from January 2014 to August Mr. Lin obtained a bachelor s degree in economics (1986), and a master s degree in economics, a doctorate in economics (1991) and a doctorate in economics (2005) from the Dongbei University of Finance and Economics, Dalian. Mr. Qin Li ( 秦力 ), 46, executive director and standing deputy general manager of GF Securities since April His primary working experience includes: standing deputy general manager at the department of investment banking administration, general manager of the investment management department, general manager of capital operation department, general manager of planning and management department, general manager of investment department, assistant to the general manager, deputy general manager of GF Securities since March 1997, director of GFHK since September 2006 and chairman of GF Xinde from May 2010 to August 2013, director of E Fund since May 2012 and chairman of the board of Guangdong Equity Exchange Co., Ltd. since September Mr. Qin obtained a bachelor s degree in economics from the Shanghai University of Finance and Economics (1992), a master s degree in commercial economics from the Jinan University, Guangzhou (1995) and a doctorate in economics from the Renmin University of China, Beijing (2003). 16

17 GF Securities Management Profiles Ms. Sun Xiaoyan ( 孙晓燕 ), 42, executive director and chief financial officer of GF Securities. Her primary working experience includes: staff of capital operation department, finance department and investment banking department, respectively, since joining GF Securities in July 1993, deputy general manager of accounting department from September 1998 to January 2000, deputy general manager of investment and proprietary trading department from January 2000 to October 2002, chief financial officer of GF Fund (preparatory) from October 2002 to August 2003, chief financial officer of GF Fund from August 2003 to October 2003, deputy general manager of GF Fund from October 2003 to March 2005, and general manager of finance department of GF Securities from November 2003 to March She has been the chief financial officer of GF Securities from March 2006 to April 2011, a director of GF Fund since June Ms. Sun has been the deputy general manager and chief financial officer of GF Securities since April 2011 while also acting as director of GFHK since August Ms. Sun was appointed as the chairman of the first Session of supervisory committee of Zhengtong Co., Ltd. ( 証通股份有限公司 ) in December 2014 Ms. Sun obtained a bachelor s degree in economics from the Renmin University of China, Beijing (1993) and a master s degree of business administration from the China Europe International Business School, Shanghai (2007). 17

18 Key Investment Risks The overall economy is susceptible to domestic and global risks, resulting in substantial downturns in market turnover. This would undermine GF Securities core brokerage, sales & trading activities. Meanwhile, with more than 70% of its branches along coastal region, the business of GF Securities is likely to be affected by the economic performance of the coastal area. Domestic investor sentiment remains uncertain, and the volatility in China s equity market may continue for a prolonged period, although that is not our base case. Increased online trading activity may erode commissions and attract broking clients away from traditional securities companies. Competition in China s brokerage industry is very intense with more than 110 market players. Commercial banks respond to securities companies incursion into interbank market by offering more proactive wealth management products; by defending their positions in FICC; and possibly by entering the direct market access/flow market with low-margin products. Regulatory changes could affect the business environment for securities companies. Generally increased competition in investment banking and investment management businesses could erode fees in these sectors. 18

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