China Galaxy Securities [6881.HK]

Transcription

1 China Galaxy Securities [6881.HK] China Galaxy Securities (CGS) announced its proposal to seek an A-share listing yesterday, pending shareholders approval in an EGM. It should be a big positive for H-share investors if A-shares are issued successfully: (i) the A-share offer price is likely to be priced above the current H-share price due to the higher valuation of the sector in the mainland; (ii) it will strengthen CGS capital base to develop more balance sheet-driven business and reduce its reliance on brokerage commission; and (iii) it will be much easier to acquire competitors by issuing RMB-dominated A- shares to the target. We reiterate our BUY call with a price target of HK$6.70 (1.4x 2014E PBR). Our earnings forecasts remain unchanged at the moment. Investment Highlights Kick-off of A-share Listing Plan To issue 1.69bn A-shares at maximum. The scale of the proposed A-share IPO is equivalent to 18.35% of the enlarged share capital. The A-share listing plan will be effective for 12 months once the shareholders approval is obtained. Maximum gross proceeds would be HK$8.3bn based on the latest H-share price. Positive #1: Higher valuation in the A-share market. In Figure 1, we can see that the major A-share securities companies are trading between 1.1x and 4.59x 2014E PBR. Excluding outliers, the simple average is 1.5x. As CGS H-share is trading at merely 1.05x 2014E PBR, we believe it is very likely for the company to achieve a higher valuation in the A-share market, based on market position. Positive #2: Enable further diversification of income stream. As CGS still has >50% net revenue from brokerage commission, further strengthening of its capital base will allow it to expand margin financing business and potentially market-making business. In addition, as we demonstrated in our initiation report dated June 25, 2013, margin financing business is able to generate a return on capital of 12.9% (trading commission included), even without leverage. Positive #3: Easier for M&A execution. Industry consolidation is a clear trend in the securities sector. Issuing RMB-dominated A-shares to the acquisition target is an effective way to facilitate the deal, as shown by the acquisition of Minzhu Securities by Founder Securities ( CH). Y/E Dec E 2014E 2015E Turnover (RMB m) 6,431 5,962 8,226 10,129 11,847 Recurring net profit (RMB m) 1,578 1,420 2,264 2,750 3,048 Adjusted net margin (%) Recurring EPS (RMB) % Change (43) (10) PER (x) PBR (x) ROAA (%) ROAE (%) Sources: Company, CGIHK Research BUY Close: HK$4.91 (February 28, 2013) Target Price: HK$6.70 (+36%) Price Performance (HK$) Market Cap Shares Outstanding Auditor China Securities Sector US$4,769m 7,537.3m Deloitte Free Float 21.3% 52W range 3M average daily T/O Major Shareholding Sources: Company, Bloomberg HK$ US$13.8m China Galaxy Financial Holdings (69.2%) Wong Chi Man Senior Analyst (852) cmwong@chinastock.com.hk John Mulcahy Head of Research (852) johnmul@chinastock.com.hk March 3, May13 Jul13 Sep13 Nov13 Jan14 Turnover (RHS) Price (LHS) (HK$ million)

2 Figure 1: Valuation of Major A-share Listed Securities Companies Company Ticker Rating Price (Local Market cap currency) (US$m) E 2014E E 2014E E 2014E E 2014E E 2014E CITIC-A CH Equity NR , Haitong-A CH Equity NR , Guangfa CH Equity NR , China Merchants CH Equity NR , Huatai CH Equity NR , Founder CH Equity NR , Everbright CH Equity NR , Sinolink CH Equity NR , Southw est CH Equity NR , Industrial CH Equity NR , Changjiang CH Equity NR , Guoyuan CH Equity NR , n.a. n.a n.a. n.a. Northeast CH Equity NR , Pacific CH Equity NR , Simple average Sources: Bloomberg, CGIHK Research PER (x) PBR (x) Dividend yield (%) ROE (%) ROA (%) 2

3 Key financials China Galaxy Securities (06881.HK) Income Statement (RMB'000, except for per share amount) Year ended 31 Dec E 2014E 2015E Equities 5,813,563 3,672,683 2,732,345 4,105,403 4,102,377 4,160,440 Investment banking 715, , , , , ,419 Futures and options 253, , , , , ,773 Asset management 31,269 27,169 41, , , ,380 Others 55,824 62,709 44,372 78,326 99, ,091 Commission and fee income 6,869,190 4,664,192 3,830,546 4,926,280 5,232,546 5,544,103 Interest income 1,243,137 1,629,268 1,698,648 2,522,871 3,824,153 4,958,672 Net investment gains 313, , , ,594 1,030,080 1,299,749 Total revenue 8,425,953 6,397,870 5,924,007 8,185,744 10,086,778 11,802,524 Other income and gains 34,229 33,169 37,553 40,000 42,000 44,000 Total revenue and other income 8,460,182 6,431,039 5,961,560 8,225,744 10,128,778 11,846,524 Staff costs (2,173,259) (1,812,397) (1,870,806) (2,296,140) (2,618,000) (2,756,500) Commission and fee expenses (209,006) (168,973) (107,650) (137,936) (146,511) (155,235) Interest expenses (328,949) (309,322) (279,105) (821,002) (1,513,599) (2,424,984) Others (1,858,341) (1,879,369) (1,817,686) (1,942,257) (2,171,417) (2,431,379) Operating expenses (4,569,555) (4,170,061) (4,075,247) (5,197,335) (6,449,528) (7,768,097) Operating profit 3,890,627 2,260,978 1,886,313 3,028,409 3,679,251 4,078,427 Non-recurrent items Income before tax 3,890,627 2,260,978 1,886,313 3,028,409 3,679,251 4,078,427 Income tax expense (1,100,157) (676,138) (453,775) (741,960) (901,416) (999,215) Minority interests (13,454) (6,710) (12,759) (22,864) (27,778) (30,792) Net income 2,777,016 1,578,130 1,419,779 2,263,585 2,750,056 3,048,420 Recurring net income 2,777,016 1,578,130 1,419,779 2,263,585 2,750,056 3,048,420 EPS (RMB) Recurring EPS (RMB) DPS (RMB) A-share average daily turnover 225,468, ,807, ,492, ,668, ,000, ,000,000 Brokerage market share of Galaxy (%) Net commission rate of Galaxy (%) Margin financing balance 533,000 2,558,000 5,377,000 17,781,382 28,979,582 40,270,125 Staff cost-to-income (%) Cost-to-income (%) Cost-to-income (ex-impairment) Grow th Rates: Commission and fee income n.a. -32% -18% 29% 6% 6% Interest income n.a. 31% 4% 49% 52% 30% Net investment gains n.a. -67% 278% 87% 40% 26% Total revenue and other income n.a. -24% -7% 38% 23% 17% Operating profit n.a. -42% -17% 61% 21% 11% Recurring net income n.a. -43% -10% 59% 21% 11% Recurring EPS n.a. -43% -10% 27% 21% 11% Margins and Ratios: Adjusted operating margin 48.9% 37.6% 33.4% 41.4% 43.2% 43.7% Adjusted net margin 35.4% 26.8% 25.9% 31.6% 33.0% 33.4% Effective tax rate 28% 30% 24% 25% 25% 25% Sources: Company data, CGIHK Research estimates 3

4 Key financials China Galaxy Securities (06881.HK) Balance Sheet (RMB'000, except for per share amount) Finance Ratios As at 31 Dec E 2014E 2015E E 2014E 2015E Financial assets 8,589,654 6,244,417 12,170,581 17,201,943 22,015,000 25,892,675 PER(x) Advances to customers 532,829 2,548,727 5,438,668 17,781,382 28,979,582 40,270,125 EPS grow th (%) n.a Others 27,617,186 6,300,646 8,060,280 8,708,739 10,949,397 12,345,859 Yield (%) n.a. n.a. n.a Cash held on behalf of customers 50,758,909 36,183,766 33,151,989 39,075,526 38,775,889 39,157,085 Payout ratio (%) n.a. n.a. n.a Bank balances and cash 4,825,999 6,080,641 3,455,016 5,498,341 6,341,358 7,115,527 PBR(x) Total current assets 92,324,577 57,358,197 62,276,534 88,265, ,061, ,781,271 Total asset/equity (x) Non-client asset/net asset (x) PPE, net 608, , , , , ,889 ROAA (%) n.a Financial assets 324, , , , , ,860 ROAE (%) n.a Others 1,006, , , , , ,089 Total non-current assets 1,939,952 1,856,538 2,019,050 1,782,837 1,701,600 1,628,838 Revenue breakdown (%) Equities Total assets 94,264,529 59,214,735 64,295,584 90,048, ,762, ,410,109 Investment banking Futures and options Accounts payable to brokerage clinets 76,794,509 41,231,089 39,745,629 45,527,168 45,833,614 46,663,550 Asset management Financial assets sold under repo - 2,602 5,183,436 9,159,436 12,684,436 15,409,436 Others Due to banks and other financial institutions ,858 3,694,382 12,892,582 22,183,125 Commission and fee income Others 2,925,342 1,854,249 1,488,813 5,802,684 9,048,800 11,183,900 Interest income Total current liabilities 79,719,851 43,087,940 46,736,736 64,183,670 80,459,432 95,440,011 Net investment gains Bank and other borrow ings Others Total non-current liabilities Total liabilities 79,719,851 43,087,940 46,736,736 64,183,670 80,459,432 95,440,011 Shareholders' equity 14,460,235 16,004,139 17,429,859 25,613,153 28,023,671 30,659,582 Minority interests 84, , , , , ,516 Book value per share (HK$) Dupont analysis (as % of average total assets) Equities 4.8% 4.4% 5.3% 4.1% 3.5% Investment banking 0.8% 1.1% 0.4% 0.4% 0.4% Futures and options 0.3% 0.5% 0.4% 0.3% 0.3% Asset management 0.0% 0.1% 0.2% 0.3% 0.4% Others 0.1% 0.1% 0.1% 0.1% 0.1% Commission and fee income 6.1% 6.2% 6.4% 5.3% 4.7% Interest income 2.1% 2.8% 3.3% 3.8% 4.2% Net investment gains 0.1% 0.6% 1.0% 1.0% 1.1% Other income and gains 0.0% 0.1% 0.1% 0.0% 0.0% Total revenue and other income 8.4% 9.7% 10.7% 10.2% 10.1% Operating expenses -5.4% -6.6% -6.7% -6.5% -6.6% Operating profit 2.9% 3.1% 3.9% 3.7% 3.5% Income tax expense -0.9% -0.7% -1.0% -0.9% -0.8% Recurring net income (ROAA) 2.1% 2.3% 2.9% 2.8% 2.6% Leverage (x) Non-client asset/net asset (x) ROAE 10.4% 8.5% 10.5% 10.3% 10.4% Sources: Company data, CGIHK Research estimates 4

5 Analyst Certification The research analyst who is primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong -listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. Explanation on Equity Ratings BUY share price will increase by >20% within 12 months in absolute terms SELL share price will decrease by >20% within 12 months in absolute terms HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL DISCLAIMER For private perusal only. This report (including any information attached) is issued by China Galaxy International Securities (Hong Kong) Co., Limited, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to individual addressees whether they are professional, institutional clients or otherwise, in good faith from sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published view of China Galaxy International Financial Holdings Limited and any of its subsidiaries. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company or companies referred to herein. All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy International Financial Holdings and its group companies may have business relationships with companies covered in research reports, including investment banking and related services, e.g. placing agent, lead manager, sponsor, underwriter or proprietary investor. Please take note that member companies of China Galaxy International Financial Holdings Limited (including but not limited to China Galaxy International Securities (Hong Kong) Co., Ltd) and/or their directors, officers, agents and employees ( the Relevant Parties ) may have an interest in securities of the company or companies referred to in this report. The Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. The disclosures below refer to the relationships between China Galaxy International Securities (Hong Kong) Co. Ltd. (CGI) and companies covered by CGI Research and referred to in this research. CGI has received compensation for investment banking services in the past 12 months: China Galaxy Securities (HK$4.91) CGI expects to receive or intends to seek compensation for investment banking services in the next three months: China Galaxy Securities (HK$4.91) CGI had an investment banking services client relationship during the past 12 months with China Galaxy Securities (HK$4.91) CGI has managed or co-managed a public offering in the past 12 months: China Galaxy Securities (HK$4.91) COPYRIGHT RESERVED China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459, Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: