Yum Cha 飲茶. May 8, 2018 TALKING POINT - HSI QUARTERLY REVIEW RESEARCH NOTES SNIPPETS. INDICES Closing DoD%

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1 Yum Cha 飲茶 May 8, 28 INDICES Closing DoD% Hang Seng Index HSCEI Shanghai COMP Shenzhen COMP Gold 34. (.) BDIY Crude Oil, WTI(US$/BBL) Crude Oil, BRENT(US$/BBL) HIBOR, 3-M.7.3 SHIBOR, 3-M 4.. RMB/USD 6.4. DATA RELEASES DUE THIS WEEK 7-8 May Foreign Direct Investment YoY 7-8 May Trade Balance 9 May PPI YoY 9 May CPI YoY 9- May Money Supply M2 YoY 9- May New Yuan Loans CNY Source: Bloomberg TALKING POINT - HSI QUARTERLY REVIEW US crude oil price closed above US$7/barrel last night, the first time in over three years because of concerns about supplies from Iran and Venezuela. In particular, the near term focus is on Iran. President Trump will make a decision today about whether to extend waivers on the sanctions against Iran. Any favourable decision against Iran may lead to further rally of oil prices. For the oil majors, CNOOC (883.HK), Sinopec (386.HK) and PetroChina (87.HK) are trading at x,.6x and 4x 28E PER, respectively. Among them, Sinopec offers the highest 28E dividend yield of 6.8%. RESEARCH NOTES Crude Oil (NYMEX:^CL) - Day Close Price (US$/barrel) Source: Capital IQ Analyst: Wong Chi-man, CFA HONG KONG SECURITIES INDDUSTRY - According to press reports, the HKSFC may launch a consultation paper in the next one or two months on tightening the management of the scale of margin financing to control the financial risk of the securities industry. It is still too early to quantify the potential impact accurately with the limited details available. However, we compare the scale of the margin financing balance with the equity base of the brokers and also the size of margin financing interest income relative to the brokers net profit. For the two leading listed players Haitong International (66.HK; HTI) and GTJA International (788.HK; GTJAI) we found that GTJAI International may be relatively more affected by the potential tightening of the scale of the margin financing business based on its revenue mix. For the sector as a whole, HKEx (388.HK) should be a better choice in the near term, as the average daily turnover surged 83% YoY YTD, and the impact of slower growth of the margin financing business is less direct. SNIPPETS STOCK CONNECT Hang Seng Indexes Company Limited announced that based on the consultation result, Hang Seng Composite Index will be expanded to include foreign companies, stapled securities and WVR companies (companies with multiple classes of shares). It paves the way for Xiaomi to be included in the Hang Seng Composite Index. Therefore it is likely to be eligible to be included in the Stock Connect universe. Meanwhile, Hang Seng Indexes Company Limited is still considering whether these companies will be included in the Hang Seng Index and HSCEI.

2 Industry Note Hong Kong Securities Sector Last Price TP Company Ticker Rating Wong Chi Man Head of Research (82) Mark Lau Research Analyst (82) (HK$) (HK$) HKEx 388 HK BUY HTI 66 HK BUY GTJAI 788 HK BUY Company PER PBR ROAA ROAE (x) (x) (%) (%) HKEx HTI GTJAI Sources: Company, CGIS Research Updated as of May 7, 28 FY28E May 8, 28 Potential Tightening of Margin Financing Rules: GTJAI May Face Larger Impact Than HTI According to press reports, the HKSFC may launch a consultation paper in the next one or two months on tightening the management of the scale of margin financing to control the financial risk of the securities industry. It is still too early to quantify the potential impact accurately with the limited details available. However, we compare the scale of the margin financing balance with the equity base of the brokers and also the size of margin financing interest income relative to the brokers net profit. For the two leading listed players Haitong International (66.HK; HTI) and GTJA International (788.HK; GTJAI) we found that GTJAI International may be relatively more affected by the potential tightening of the scale of the margin financing business based on its revenue mix. For the sector as a whole, HKEx (388.HK) should be a better choice in the near term, as the average daily turnover surged 83% YoY YTD, and the impact of slower growth of the margin financing business is less direct. Increasing reliance on margin financing business drew the attention of the regulator. According to HKSFC data, the outstanding margin financing balance of all licensed corporations jumped from HK$.2bn at end-2 to HK$26bn at end-27. One of the major drivers was the increasing market share of brokerages with a mainland Chinese background. They are usually more aggressive in developing the margin financing business, which is a relatively fast way to expand their business footprint in Hong Kong. However, it has led to higher risk for the overall industry. The ratio of outstanding margin financing balance/total equity of all licensed corporations jumped from 22% at end-2 to.3% at end -27. Margin financing balance/total equity: GTJAI has a higher ratio. Although we don t know which financial indicators will be the focus of HKSFC in controlling the scale of the margin financing business, we believe one of the ratios which may be monitored by the regulator is margin financing balance/total equity. The ratio of GTJAI was relatively high at 7.% at end-27. Even if we include the new funds from the share placement completed early this year, the ratio still stood at 99.%. On the other hand, HTI has proactively controlled the scale of the margin financing business, so its ratio was only 64.% at end-27. GTJAI has a higher reliance on margin financing interest income. For our sensitivity analysis, if we assume margin financing interest income would drop % because of controls on the scale of the margin financing business, the tax-adjusted impact on 27 net profit of GTJAI would be about 6.% (the actual impact may be smaller as the scale-down of the margin financing business will also lead to lower finance costs). For HTI, the potential negative impact is only 3.6%. For other players, the potential earnings hit to Kingston Financial (3.HK), SWHY (HK) (28.HK) and Industrial Securities International (847.HK) is estimated in the range of %-6.%. HKEx a better choice in the near term. HKEx, HTI and GTJAI are trading near the low end of the valuation range (based on PER or PBR), reflecting low market expectations. However, given the uncertainty of the consultation on controlling the scale of margin financing business, we prefer HKEx in the near term because of its much better earnings visibility. On a YTD basis, the average daily turnover of the Hong Kong stock market rose 83% YoY to HK$32bn (in line with our full-year projection of HK$3bn), which should bode well for the earnings of HKEx. The stock is trading at 32.x 28E PER and 24.2x 28E EV/ EBITBA. Both indicators are below the 7-year average.

3 Figure : Margin financing balance of all licensed corporations Figure 2: Margin financing balance/total equity of all licensed corporations 2,.% 6.% 4.% 2, 4.%.%, 3.% 3.% 4.%, 2.% 2.% 3.%,.%.% 2.% -.%.% Outstanding margin financing balance (HK$m) YoY change.%.% Sources: HKSFC, CGIS Research Sources: HKSFC, CGIS Research Figure 3: Sensitivity analysis 847 HK 28 HK 428 HK For the year ended Dec HK Equity 788 HK Equity 993 HK Equity 3329 HK Equity HK Equity 82 HK Equity 3 HK Equity Equity Equity Equity Industrial Huarong BOCOM SWHY Cinda HK$' HTI GTJAI Securities International International (HK) International International SWS International Bright Kingston Sm art# Securities# Margin financing balance 6,369,27 2,97,92 4,948,29 6,46,79 4,692,32 2,29, ,7 7,9 9,27,74 2,764,699 Total Equity 2,367,879,99,426 4,62,822 6,36, 4,397,266 2,63,23 834, 248,9 2,333,66 2,,3 Total Asset 3,223,838 73,96,384 46,324,769 7,968,322 7,3,77 7,686,34 2,2,33 2,99,787,369,829 38,38,22 Interest Income from margin financing,33,37 968,66 38, ,76 34,76 23,748 37,797 48,329 4,644,84,977 Total net profit 3,28,688,228,74 964,93 43,97 2,83 4,97 66,36,92 24,4 9,288 Margin financing balance/total equity 64.% 7.%* 2.8%.9% 6.7%.9% 4.9% 28.% 397.% 8.3% Tax-adjusted earnings impact if margin financing interest income drops 3.6% 6.% 3.% 6.9% 6.% 9.9% 4.7% 367.3%.6% 9.9% % #Financial data based on HFY8 (six months ended Sep 27) *99.% if the proceeds from the share placement completed in early 28 are included. Sources: Companies, CGIS Research Figure 4: Daily turnover of the Hong Kong stock market (HK$m) 3, 2, 2,,,, - 2-Jan 2-Feb 2-Mar 2-Apr 2-May 2-Jun 2-Jul 2-Aug 2-Sep 2-Oct 2-Nov 2-Dec Sources: Bloomberg, CGIS Research

4 Figure : PBR range of HTI Jan- Jan-2 Jan-3 Jan-4 Jan- Jan-6 Jan-7 Jan-8 Rolling forward PBR Rolling forward average PBR Average PBR+ standard deviation Average PBR- standard deviation Figure 7: PBR range of GJTAI Jan- Jan-2 Jan-3 Jan-4 Jan- Jan-6 Jan-7 Jan-8 Figure 6: PER range of HTI Rolling forward PER Rolling forward average PER Average PER+ standard deviation Average PER- standard deviation Figure 8: PER range of GJTAI Jan- Jan-2 Jan-3 Jan-4 Jan- Jan-6 Jan-7 Jan-8 Rolling forward PBR Rolling forward average PBR Rolling forward PER Rolling forward average PER Average PBR+ standard deviation Average PBR- standard deviation Average PER+ standard deviation Average PER- standard deviation Figure 9: PER range of HKEx Figure : EV/EBITDA range of HKEx //2 3//22 3//23 3//24 3//2 3//26 3//27 3//28 Rolling forward PER Rolling forward average PER Average PER+ standard deviation Average PER- standard deviation //2 3//22 3//23 3//24 3//2 3//26 3//27 3//28 Rolling forward EV/EBITDA Rolling forward average EV/EBITDA Average EV/EBITDA + standard deviation Average EV/EBITDA - standard deviation 3

5 Figure : Valuation table Ticker Company name Price (HK$) Market cap (HK$m) PER (x) 28E PER (x) 29E PER (x) PBR (x) 28E PBR (x) 66 HK Equity Haitong International Securities Group Ltd , HK Equity Guotai Junan International Holdings Ltd 2.3 7, HK Equity Hong Kong Exchanges & Clearing Ltd 22 32, HK Equity Huarong International Financial Holdings Ltd.8 6,49 6. n.a. n.a n.a HK Equity BOCOM International Holdings Co Ltd 2.4, HK Equity China Industrial Securities International Financial Group Ltd.27,8 3.7 n.a. n.a..6 n.a. 28 HK Equity Shenwan Hongyuan HK Ltd 2.39, n.a. n.a..88 n.a. HK Equity Cinda International Holdings Ltd n.a. n.a..69 n.a. 82 HK Equity Southwest Securities International Securities Ltd n.a. n.a. 2. n.a. 428 HK Equity Bright Smart Securities & Commodities Group Ltd 2. 4,26 2. n.a. n.a..83 n.a. 3 HK Equity Kingston Financial Group Ltd ,64 4. n.a. n.a n.a. Sources: Bloomberg, CGIS Research estimates (HTI, GTJAI and HKEx) 4

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