Industry Note. Appealing Valuation After Correction; Upgrade CITICS/GFS to BUY. January 26, China Securities Sector

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1 Industry Note China Securities Sector Last Price TP Compa ny Tic ke r Ra ting (HK$ ) (HK$ ) CITICS 6030 HK BUY HTS 6837 HK BUY GFS 1776 HK BUY Compa ny P ER P B R ROAA ROAE (x) (x) (x) (%) CITICS HTS GFS Updated as of January 25, 2016 FY E January 26, 2016 Appealing Valuation After Correction; Upgrade CITICS/GFS to BUY Sharp correction of the sector due to low daily turnover and weak market sentiment. Share prices of H-share listed securities companies dropped >20% within a month mainly due to (i) CSI300 Index tumbled 18% in the corresponding period and (ii) average daily turnover (ADT) in January (up till January 25) was merely RMB559bn, down 29% month-on-month (MoM). Low ADT in January is disappointing but too early to write off the full year. Although it is not encouraging to see a low ADT of RMB559bn in January, we cannot ignore the fact that A- share market is a very volatile one. In 2015, the lowest monthly ADT was RMB503bn while the highest monthly ADT was RMB1,740bn (Figure 1), which clearly showed the large ups and downs. Therefore we believe it is too early to project what happens in January for the full year. 2016E PER at reasonable level if we assume full year ADT at RMB700bn. Currently we assume the ADT for full year at RMB950bn. If ADT drops to RMB700bn, 2016E PER for CITIC Securities [6030.HK; CITICS], Haitong Securities [6837.HK; HTS] and GF Securities [1776.HK; GFS] would be 11.1x, 11.1x and 14.3x, respectively (Figure 2). In terms of 2016E PBR based on ADT at RMB700bn, they are trading at 1.05x, 0.97x and 1.32x, respectively. The high valuation of GFS is largely due to its strong share price performance on a 3-month basis (outperformed by about 20ppts) therefore the downside risk of GFS may be higher than the peers if market sentiment weakens again. Mild downside for CITICS and HTS under a bearish scenario. If we assume ADT at RMB700bn in 2016E, ROAE of CITICS, HTS and GFS would be 9.7% (2015E: 16.8%), 9% (2015E: 16%) and 9.4% (2015E: 21.9%), respectively (Figure 3). If we assume this 2016E ROAE to stay forever and set the growth rate at 0%, CITICS and HTS may still have 10.3% and 6.7% downside based on Gordon Growth Model (Figure 4). However, we believe zero growth rate is overly bearish unless we expect the financial reform in China will be a big failure. However, there is a potential downside of 31% for GFS based on the bearish scenario, due to its strong share price performance we mentioned above. Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk Livy Lyu Research Assistant (852) livylyu@chinastock.com.hk Upgrade CITICS and GFS from HOLD to BUY. After the sharp correction in the past few weeks, valuations of securities companies have returned to low-end of the range as we upgrade the ratings of CITICS and GFS from HOLD to BUY. Our order of preference is HTS>CITICS>GFS. GFS may have higher downside risk if market sentiment weakens, based on our analysis above. Meanwhile, our target prices are lowered by 2-3% to reflect the latest trend of RMB depreciation (Figure 5). Valuation Table PER (x) PBR (x) Dividend yield (%) Company Ticker Rating Price (HK$) Market cap (US$m) E 2016E E 2016E E 2016E China Galaxy Securities 6881 HK Equity NR , CITIC Securities 6030 HK Equity BUY , Haitong Securities 6837 HK Equity BUY , GF Securities 1776 HK Equity BUY , Simple average Weighted average EPS Growth (%) E ROAE (%) ROAA (%) Company Ticker 2015E 2016E CAGR (%) E 2016E E 2016E China Galaxy Securities 6881 HK Equity 80.7 (24.4) CITIC Securities 6030 HK Equity 83.2 (19.4) Haitong Securities 6837 HK Equity 51.2 (19.4) GF Securities 1776 HK Equity 97.5 (26.8) Simple average 71.7 (21.1) Weighted average 77.3 (21.7) Source: CGIS Research estimates

2 Figure 1: Average daily turnover of A-share market (RMB bn) 2,000 1,800 1,600 1,400 1,200 1, ,552 1,427 1,740 1, , Sources: Bloomberg, CGIS Research Figure 2: 2016E earnings sensitivity based on various ADT scenarios 2016E net profit (RMB m) 2016E ADT (RMB bn) CITICS (6030.HK) HTS (6837.HK) GFS (1776.HK) ,756 11,276 9, ,333 10,401 8, ,385 9,818 7, ,437 9,235 6, ,488 8,652 5, E ADT (RMB bn) CITICS (6030.HK) HTS (6837.HK) GFS (1776.HK) Base case: RMB950bn; conservative case: RMB700m Source: CGIS Research 2016E PER (based on closing price on Jan 25) Figure 3: 2016E ROAE sensitivity based on various ADT scenarios 2016E ROAE (%) 2016E ADT (RMB bn) CITICS (6030.HK) HTS (6837.HK) GFS (1776.HK) Base case: RMB950bn; conservative case: RMB700m Source: CGIS Research 2

3 Figure 4: Fair value assumes no growth and ROE stays at our bearish scenario Company HTS CITICS GFS Ticker 6837.HK 6030.HK 1776.HK Beta Cost of equity 9.9% 10.3% 10.4% Medium-term ROE 9.0% 9.7% 9.4% Growth rate 0% 0% 0% PBR = (ROE-g)/(COE-g) Fair value (HK$) Upside -6.7% -10.3% -31.3% Source: CGIS Research Figure 5: Target prices based on Gordon Growth Model Company HTS CITICS GFS Ticker 6837.HK 6030.HK 1776.HK Rating BUY BUY BUY Beta Cost of equity 9.9% 10.3% 10.4% Medium-term ROE 11.0% 11.7% 12.5% Growth rate 7% 7% 7% PBR = (ROE-g)/(COE-g) Target price (HK$) Upside 39.5% 34.9% 23.0% Source: CGIS Research Figure 6: Peer valuations Company Ticker Rating Price (Local currency) Market cap (US$m) PER (x) PBR (x) ROE (%) ROA (%) E 2016E E 2016E E 2016E E 2016E CITIC 6030 HK Equity BUY , Haitong 6837 HK Equity BUY , China Galaxy 6881 HK Equity NR , Guangfa 1776 HK Equity BUY , HTSC 6886 HK Equity NR , CICC 3908 HK Equity NR , 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 , Guotai Junan 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, CGIS Research 3

4 May-13 Sep-13 Nov-13 Mar-14 May-14 Sep-14 Nov-14 Mar-15 May-15 Sep-15 Nov-15 Jan-16 May-13 Sep-13 Nov-13 Mar-14 May-14 Sep-14 Nov-14 Mar-15 May-15 Sep-15 Nov-15 Jan-16 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Jan-16 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Jan-16 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Figure 7: PBR range of HTS Figure 8: PER range of HTS Rolling forward PBR (x) Average Rolling forward PER (x) Average Figure 9: PBR range of CITICS Figure 10: PER range of CITICS Rolling forward PBR (x) Average Rolling forward PER (x) Average Figure 11: PBR range of CGS Figure 12: PER range of CGS Rolling forward PBR (x) Average Rolling forward PER (x) Average 4

5 Haitong Securities (6837.HK) Income Statement (RMB'000, except for per share amount) Year ended 31 Dec E 2016E 2017E Equities 3,933,956 2,894,924 4,228,623 5,939,819 15,448,468 12,035,039 11,976,794 Investment banking 960, , ,777 1,309,095 1,607,425 1,972,302 2,352,441 Asset management 985, , ,324 1,202,203 2,465,567 2,928,000 3,522,000 Futures/derivatives 393, , , , , , ,368 Others 293, , , ,866 1,061,045 1,325,756 1,655,345 Commission and fee income 6,566,781 5,213,180 6,751,188 9,516,170 21,006,005 18,580,522 19,848,947 Interest income 2,553,171 2,878,805 3,670,965 7,699,971 16,436,964 17,552,007 20,055,513 Net investment gains 1,506,926 2,404,312 2,150,038 5,708,662 8,094,371 7,289,500 8,851,400 Total revenue 10,626,878 10,492,789 12,572,191 22,924,803 45,537,341 43,422,030 48,755,859 Other income and gains 233, , , ,063 3,000,000 2,000,000 2,500,000 Total revenue and other income 10,860,374 10,743,347 12,802,734 23,666,866 48,537,341 45,422,030 51,255,859 Staff costs (2,319,953) (2,142,298) (2,621,465) (4,131,308) (7,141,709) (6,852,648) (7,763,599) Commission and fee expenses (1,044,243) (828,334) (848,704) (1,295,519) (3,960,632) (3,155,277) (3,212,430) Interest expenses (459,796) (704,404) (1,484,370) (4,340,189) (10,722,892) (12,978,024) (14,357,206) Others (2,809,130) (3,006,939) (2,510,387) (3,646,790) (7,698,831) (7,204,692) (8,040,936) Operating expenses (6,633,122) (6,681,975) (7,464,926) (13,413,806) (29,524,065) (30,190,641) (33,374,171) Operating profit 4,227,252 4,061,372 5,337,808 10,253,060 19,013,276 15,231,389 17,881,688 Share of profits of associates 72,912 65, , , , , ,540 Non-recurrent items Income before tax 4,300,164 4,127,238 5,454,748 10,420,394 19,179,710 15,461,423 18,146,228 Income tax expense (1,018,167) (874,980) (1,173,754) (2,301,371) (4,219,536) (3,401,513) (3,992,170) Minority interests (178,963) (214,716) (245,970) (408,400) (972,411) (783,894) (920,014) Net income 3,103,034 3,037,542 4,035,024 7,710,623 13,987,762 11,276,016 13,234,044 Recurring net income 3,103,034 3,037,542 4,035,024 7,710,623 13,987,762 11,276,016 13,234,044 EPS (RMB) Recurring EPS (RMB) DPS (RMB) A-share average daily turnover 172,807, ,492, ,668, ,014,286 1,050,000, ,000,000 1,050,000,000 Brokerage market share of Haitong (%) Net commission rate of Haitong (%) Margin financing balance 3,916,142 7,049,196 19,848,211 57,169,592 72,174,904 88,176, ,857,085 Staff cost-to-income (%) Cost-to-income (%) Cost-to-income (ex-impairment) Growth Rates: Commission and fee income -22% -21% 30% 41% 121% -12% 7% Interest income 55% 13% 28% 110% 113% 7% 14% Net investment gains 40% 60% -11% 166% 42% -10% 21% Total revenue and other income -4% -1% 19% 85% 105% -6% 13% Operating profit -14% -4% 31% 92% 85% -20% 17% Recurring net income -16% -2% 33% 91% 81% -19% 17% Recurring EPS -16% -16% 33% 91% 51% -19% 17% Margins and Ratios: Adjusted operating margin 43.8% 42.5% 49.9% 55.0% 51.9% 48.5% 49.3% Adjusted net margin 36.0% 36.3% 41.8% 47.0% 48.5% 44.2% 45.4% Effective tax rate 24% 21% 22% 22% 22% 22% 22% 5

6 Haitong Securities (6837.HK) Balance Sheet (RMB'000, except for per share amount) Finance Ratios As at 31 Dec E 2016E 2017E E 2016E 2017E Financial assets 34,657,677 56,908, ,149, ,394, ,394, ,394,111 PER(x) Advances to customers 11,338,687 26,531,096 64,883,359 91,174, ,076, ,847,085 EPS grow th (%) Others 18,685,132 20,019,422 41,889,579 70,318,822 70,693,567 79,569,398 Yield (%) Cash held on behalf of customers 31,460,515 33,777,588 62,592, ,030, ,628, ,852,000 Payout ratio (%) Bank balances and cash 20,539,726 18,809,405 23,111,153 56,781,170 45,156,071 41,685,509 PBR(x) Total current assets 116,681, ,046, ,626, ,699, ,948, ,348,104 Total asset/equity (x) Non-client asset/net asset (x) PPE, net 1,134,459 1,171,604 1,210,145 1,177,492 1,206,180 1,252,038 ROAA (%) Financial assets 3,854,089 5,074,255 9,024,602 10,773,837 11,613,837 12,813,837 ROAE (%) Others 4,811,819 6,831,580 38,761,337 65,898,067 75,916,388 86,946,705 Total non-current assets 9,800,367 13,077,439 48,996,084 77,849,396 88,736, ,012,580 Revenue breakdown (%) Equities Total assets 126,482, ,123, ,622, ,548, ,684, ,360,684 Investment banking Asset management Accounts payable to brokerage clients 36,956,823 40,429,567 80,766, ,494, ,126, ,034,000 Futures/derivatives Financial assets sold under repo 16,040,561 26,111,914 59,807, ,172, ,572, ,972,219 Others Due to banks and other financial institutions 10,776,314 6,916,395 34,077,574 33,000,000 43,000,000 48,000,000 Commission and fee income Others 2,127,847 13,200,026 46,471,975 70,356,518 70,869,578 81,993,284 Interest income Total current liabilities 65,901,545 86,657, ,124, ,023, ,567, ,999,503 Net investment gains Bank and other borrowings - - 4,537,684 11,000,000 15,000,000 18,000,000 Others 149,963 18,360,543 54,696,006 64,363,167 74,090,667 84,563,667 Total non-current liabilities 149,963 18,360,543 59,233,690 75,363,167 89,090, ,563,667 Total liabilities 66,051, ,018, ,357, ,386, ,658, ,563,170 Shareholders' equity 58,679,683 61,506,991 68,364, ,290, ,370, ,221,423 Minority interests 1,750,913 2,598,167 3,899,772 4,872,183 5,656,077 6,576,091 Book value per share (HK$) Dupont analysis (as % of average total assets) Equities 2.6% 2.9% 2.3% 3.4% 2.1% 1.9% Investment banking 0.7% 0.5% 0.5% 0.4% 0.3% 0.4% Asset management 0.8% 0.5% 0.5% 0.5% 0.5% 0.6% Futures/derivatives 0.4% 0.3% 0.2% 0.1% 0.1% 0.1% Others 0.2% 0.4% 0.3% 0.2% 0.2% 0.3% Commission and fee income 4.6% 4.6% 3.6% 4.6% 3.3% 3.2% Interest income 2.6% 2.5% 3.0% 3.6% 3.1% 3.2% Net investment gains 2.1% 1.5% 2.2% 1.8% 1.3% 1.4% Other income and gains 0.2% 0.2% 0.3% 0.7% 0.4% 0.4% Total revenue and other income 9.5% 8.7% 9.1% 10.7% 8.0% 8.3% Operating expenses -5.9% -5.1% -5.1% -6.5% -5.3% -5.4% Operating profit 3.6% 3.6% 3.9% 4.2% 2.7% 2.9% Income tax expense -0.8% -0.8% -0.9% -0.9% -0.6% -0.6% Recurring net income (ROAA) 2.9% 2.9% 3.1% 3.3% 2.1% 2.3% Leverage (x) Non-client asset/net asset (x) ROAE 5.9% 6.7% 11.9% 16.0% 10.3% 11.2% 6

7 CITIC Securities (6030.HK) Income Statement (RMB'000, except for per share amount) Year ended 31 Dec E 2016E 2017E Investment banking 3,286,597 1,982,638 2,754,315 2,217,436 3,516,440 3,047,743 3,871,168 4,638,723 Brokerage 9,447,023 4,517,536 3,602,717 6,493,275 10,365,206 22,669,940 19,804,220 20,879,337 Trading , , , , , ,555 Asset management 3,740,934 3,097, ,542 1,489,344 4,503,850 6,943,499 9,769,000 12,107,750 Others 123, , , , , , , ,000 Commission and fee income 16,598,338 9,713,232 7,089,695 10,698,835 18,915,358 33,299,762 34,190,684 38,491,365 Interest income 1,988,081 2,056,433 2,172,183 4,089,746 7,850,808 14,906,452 14,429,983 16,064,943 Net investment gains 5,735,603 1,311,290 3,648,018 5,259,499 10,204,336 17,975,920 13,175,011 15,389,365 Total revenue 24,322,022 13,080,955 12,909,896 20,048,080 36,970,502 66,182,133 61,795,679 69,945,673 Other income and gains 193, , , , ,356 2,500,000 2,000,000 2,500,000 Total revenue and other income 24,515,871 13,289,567 13,071,241 20,278,737 37,345,858 68,682,133 63,795,679 72,445,673 Staff cost (6,980,960) (4,996,961) (3,785,608) (5,076,588) (9,463,242) (15,752,277) (15,579,728) (17,690,529) Commission and fee expenses (1,739,911) (1,067,483) (800,805) (1,060,676) (1,798,997) (4,046,515) (3,275,660) (3,290,269) Interest expenses (684,840) (654,986) (947,693) (3,260,336) (6,900,792) (11,811,945) (14,048,055) (15,850,158) Others (4,579,507) (5,036,203) (2,482,034) (4,246,060) (6,569,743) (11,411,730) (10,423,649) (11,792,998) Operating expenses (13,985,218) (11,755,633) (8,016,140) (13,643,660) (24,732,774) (43,022,467) (43,327,091) (48,623,954) Operating profit 10,530,653 1,533,934 5,055,101 6,635,077 12,613,084 25,659,666 20,468,587 23,821,718 Share of profits of associates 36, , , , , ,000 1,000,000 1,100,000 Share of profits of JCEs (12,601) 39,636 (7,176) 44,654 (8,616) 10,000 15,000 15,000 Exceptional items 5,765,000 13,081, ,179, Income before tax 16,319,941 15,031,003 5,487,269 6,846,091 15,421,947 26,520,146 21,483,587 24,936,718 Income tax expense (4,183,890) (2,426,514) (1,180,466) (1,538,044) (3,560,448) (6,364,835) (5,156,061) (5,984,812) Minority interests (824,708) (28,006) (69,385) (64,130) (524,305) (604,659) (571,463) (663,317) Net income 11,311,343 12,576,483 4,237,418 5,243,917 11,337,194 19,550,652 15,756,063 18,288,589 Recurring net income 6,987,593 2,765,504 4,237,418 5,243,917 9,702,601 19,550,172 15,756,063 18,288,589 EPS (RMB) Recurring EPS (RMB) DPS (RMB) A-share average daily turnover 225,468, ,807, ,492, ,668, ,014,286 1,050,000, ,000,000 1,050,000,000 Brokerage market share CITICS 8.8% 5.5% 5.7% 6.2% 6.5% 6.4% 6.3% 6.3% Margin financing balance 1,975,414 2,603,885 8,837,561 33,420,286 72,101,290 81,196,767 97,458, ,473,621 Staff cost-to-income 31.6% 43.2% 33.4% 31.8% 33.0% 29.8% 33.5% 33.2% Cost-to-income 52.3% 86.7% 55.4% 58.4% 56.0% 51.4% 56.0% 55.3% Cost-to-income (ex-impairment) 52.3% 73.7% 55.1% 56.2% 53.9% 50.5% 54.7% 54.0% Growth Rates: Commission and fee income -8.6% -41.5% -27.0% 50.9% 76.8% 76.0% 2.7% 12.6% Interest income -1.6% 3.4% 5.6% 88.3% 92.0% 89.9% -3.2% 11.3% Net investment gains 67.3% -77.1% 178.2% 44.2% 94.0% 76.2% -26.7% 16.8% Total revenue and other income 2.7% -45.8% -1.6% 55.1% 84.2% 83.9% -7.1% 13.6% Recurring EPS -22.2% -64.3% 53.2% 23.8% 85.0% 83.2% -19.4% 16.1% Margins and Ratios: Adjusted operating margin 47.2% 11.7% 43.8% 40.7% 43.3% 46.0% 41.5% 42.0% Adjusted net margin 35.7% 24.6% 38.6% 33.8% 36.2% 40.1% 36.7% 37.3% Effective tax rate 26% 16% 22% 22% 23% 24% 24% 24% 7

8 CITIC Securities (6030.HK) Balance Sheet (RMB'000, except for per share amount) Finance Ratios As at 31 Dec E 2016E 2017E E 2016E 2017E Financial assets 65,644, ,176, ,302, ,427, ,058, ,490,196 PER(x) Advances to customers 9,423,188 34,301,932 74,135,256 82,396,767 98,658, ,673,621 EPS grow th (%) Others 5,415,155 12,181,898 22,007,589 40,787,270 48,236,690 53,628,251 Yield (%) Cash held on behalf of customers 33,851,517 40,125,321 96,840, ,448, ,796, ,090,360 Payout ratio (%) Bank balances and cash 25,835,767 27,684,624 37,967,189 20,000,000 20,000,000 20,000,000 PBR(x) Total current assets 140,169, ,470, ,252, ,059, ,749, ,882,428 Total asset/equity (x) Non-client asset/net asset (x) PPE, net 3,319,826 3,637,404 1,222,324 1,088, , ,640 ROAA (%) Financial assets 12,258,464 13,009,348 10,863,766 12,578,641 14,696,019 16,823,398 ROAE (%) Others 12,759,568 19,237,208 22,287,586 49,872,989 46,799,236 47,914,236 Total non-current assets 28,337,858 35,883,960 34,373,676 63,540,454 62,432,987 65,524,274 Revenue breakdown (%) Investment banking Total assets 168,507, ,354, ,626, ,600, ,182, ,406,701 Brokerage Trading Accounts payable 34,807,288 45,196, ,845, ,448, ,796, ,090,360 Asset management Financial assets sold under repo 22,043,614 55,704, ,914, ,000, ,000, ,000,000 Others Due to banks and other financial institutions 2,900,000 4,710,000 11,751, Commission and fee income Others 19,983,948 47,097,184 89,053,707 98,219, ,691, ,896,372 Interest income Total current liabilities 79,734, ,707, ,564, ,667, ,487, ,986,732 Net investment gains Bonds payable 1,500,000 26,177,108 43,167,363 80,000, ,000, ,000,000 Others 588,408 3,067,448 7,762,611 7,337,764 7,637,764 8,137,764 Total non-current liabilities 2,088,408 29,244,556 50,929,974 87,337, ,637, ,137,764 Total liabilities 81,823, ,952, ,494, ,005, ,125, ,124,496 Shareholders' equity 86,465,004 87,688,485 99,098, ,957, ,848, ,409,951 Minority interests 219,293 1,713,610 2,032,815 2,637,474 3,208,938 3,872,254 Book value per share (HK$) Dupont analysis (as % of average total assets) Investment banking 1.7% 1.0% 0.9% 0.5% 0.6% 0.6% Brokerage 2.3% 3.0% 2.8% 4.0% 2.9% 2.8% Trading 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% Asset management 0.2% 0.7% 1.2% 1.2% 1.4% 1.6% Others 0.1% 0.0% 0.1% 0.1% 0.1% 0.1% Commission and fee income 4.5% 3.0% 5.0% 5.9% 5.1% 5.2% Interest income 1.4% 1.1% 2.1% 2.6% 2.1% 2.2% Net investment gains 2.3% 1.5% 2.7% 3.2% 1.9% 2.1% Other income and gains 0.1% 0.1% 0.1% 0.4% 0.3% 0.3% Total revenue and other income 8.3% 5.6% 9.9% 12.1% 9.4% 9.8% Operating expenses -5.1% -3.8% -6.6% -7.6% -6.4% -6.6% Operating profit 3.2% 1.8% 3.4% 4.5% 3.0% 3.2% Income tax expense -0.7% -0.4% -0.9% -1.1% -0.8% -0.8% Recurring net profit (ROAA) 2.7% 2.4% 2.7% 3.6% 2.4% 2.6% Leverage (x) Non-client asset/net asset (x) ROAE 4.9% 6.0% 10.4% 16.8% 11.3% 12.1% 8

9 GF Securities (01776.HK) Income Statement (RMB'000, except for per share amount) Year ended 31 Dec E 2016E 2017E Equities 2,396,000 3,439,400 4,949,900 13,803,080 11,060,942 11,269,378 Investment banking 1,027, ,100 1,552,300 1,147,477 1,349,910 1,602,842 Futures and options 297, , , ,923 62,819 66,317 Asset management 112, ,100 1,124,500 3,291,460 4,242,066 5,120,115 Others 169, , , , , ,558 Commission and fee income 4,001,500 4,399,400 8,217,300 19,006,360 17,375,383 18,883,209 Interest income 1,541,235 2,349,217 4,324,638 11,133,986 10,844,991 12,242,307 Net investment gains 1,688,087 2,525,131 3,604,956 10,004,533 8,869,582 11,199,915 Total revenue 7,230,822 9,273,748 16,146,894 40,144,878 37,089,957 42,325,431 Other income and gains 49,651 58,114 16, , , ,000 Total revenue and other income 7,280,473 9,331,862 16,163,475 40,344,878 37,239,957 42,525,431 Staff costs (2,435,257) (2,947,619) (4,345,926) (10,300,720) (9,719,698) (10,905,502) Commission and fee expenses (150,259) (105,542) (240,813) (456,153) (434,385) (472,080) Interest expenses (500,383) (1,378,567) (2,757,676) (7,387,166) (9,831,309) (11,139,711) Others (1,883,882) (1,815,828) (2,507,650) (5,254,902) (4,890,226) (5,522,419) Operating expenses (4,969,781) (6,247,556) (9,852,065) (23,398,941) (24,875,619) (28,039,711) Operating profit 2,310,739 3,084,291 6,311,430 16,945,937 12,364,338 14,485,719 Non-recurrent items Income before tax 2,685,219 3,477,313 6,648,595 17,296,882 12,807,775 15,007,532 Income tax expense (494,880) (664,747) (1,503,082) (4,064,767) (3,073,866) (3,601,808) Minority interests 1,118 (65) (122,945) (463,124) (389,356) (456,229) Net income 2,191,457 2,812,501 5,022,568 12,768,991 9,344,553 10,949,495 Recurring net income 2,191,457 2,812,501 5,022,568 12,768,991 9,344,553 10,949,495 EPS (RMB) Recurring EPS (RMB) DPS (RMB) A-share average daily turnover 129,492, ,668, ,014,286 1,050,000, ,000,000 1,050,000,000 Brokerage market share of GFS (%) Net commission rate of GFS (%) Margin financing balance 5,183,000 19,945,100 64,356,200 74,752,579 91,270, ,395,931 Staff cost-to-income (%) Cost-to-income (%) Cost-to-income (ex-impairment) Grow th Rates: Commission and fee income n.a. 10% 87% 131% -9% 9% Interest income n.a. 52% 84% 157% -3% 13% Net investment gains n.a. 50% 43% 178% -11% 26% Total revenue and other income n.a. 28% 73% 150% -8% 14% Operating profit n.a. 33% 105% 168% -27% 17% Recurring net income n.a. 28% 79% 154% -27% 17% Recurring EPS n.a. 28% 79% 97% -27% 17% Margins and Ratios: Adjusted operating margin 34.4% 38.8% 47.9% 51.8% 45.5% 46.5% Adjusted net margin 33.3% 36.1% 39.1% 41.0% 36.3% 37.1% Effective tax rate 18% 19% 23% 24% 24% 24% 9

10 GF Securities (01776.HK) Balance Sheet (RMB'000, except for per share amount) Finance Ratios As at 31 Dec E 2016E 2017E E 2016E 2017E Financial assets 33,642,898 46,783,207 71,531, ,049, ,813, ,400,974 PER(x) Advances to customers 5,246,504 20,490,654 64,695,844 75,752,579 92,270, ,395,931 EPS grow th (%) n.a Others 9,394,574 10,652,117 30,234,496 44,405,108 43,264,591 49,092,745 Yield (%) Cash held on behalf of customers 27,345,508 25,227,415 48,995, ,279, ,396, ,731,686 Payout ratio (%) Bank balances and cash 9,033,278 6,146,696 18,203,433 21,477,724 20,734,510 17,950,409 PBR(x) Total current assets 84,662, ,300, ,661, ,964, ,479, ,571,744 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 1,508,145 ROAA (%) Financial assets 1,508,728 3,634,831 2,747,766 4,753,849 5,503,849 6,453,849 ROAE (%) Others 2,692,575 3,313,977 2,403,306 18,955,315 19,343,753 19,990,565 Total non-current assets 5,193,044 7,992,082 6,438,533 25,068,108 26,280,114 27,952,559 Revenue breakdown (%) Equities Total assets 89,855, ,292, ,099, ,032, ,759, ,524,303 Investment banking Futures and options Accounts payable to brokerage clinets 34,287,577 31,609,231 71,465, ,386, ,653, ,587,081 Asset management Financial assets sold under repo 8,850,471 19,399,797 50,717,726 55,000,000 65,000,000 90,000,000 Others Due to banks and other financial institutions 3,340,000 5,300,000 1,123, Commission and fee income Others 10,333,437 14,202,625 42,223,828 54,446,224 86,003,070 87,231,317 Interest income Total current liabilities 56,811,485 70,511, ,530, ,832, ,656, ,818,398 Net investment gains Bank and other borrowings - 11,979,740 26,030,664 73,000,000 73,000,000 85,000,000 Others 89,543 57,802 7,161,539 14,111,539 15,111,539 17,111,539 Total non-current liabilities 89,543 12,037,542 33,192,203 87,111,539 88,111, ,111,539 Total liabilities 56,901,028 82,549, ,722, ,943, ,767, ,929,937 Shareholders' equity 32,942,624 34,604,666 39,610,880 76,859,096 82,372,952 90,519,081 Minority interests 12, ,310 1,766,576 2,229,700 2,619,056 3,075,285 Book value per share (HK$) Dupont analysis (as % of average total assets) Equities n.a. 3.3% 2.8% 4.1% 2.4% 2.2% Investment banking n.a. 0.3% 0.9% 0.3% 0.3% 0.3% Futures and options n.a. 0.3% 0.1% 0.1% 0.0% 0.0% Asset management n.a. 0.2% 0.6% 1.0% 0.9% 1.0% Others n.a. 0.2% 0.2% 0.2% 0.1% 0.2% Commission and fee income n.a. 4.2% 4.6% 5.6% 3.8% 3.7% Interest income n.a. 2.3% 2.4% 3.3% 2.4% 2.4% Net investment gains n.a. 2.4% 2.0% 3.0% 2.0% 2.2% Other income and gains n.a. 0.1% 0.0% 0.1% 0.0% 0.0% Total revenue and other income n.a. 9.0% 9.0% 12.0% 8.2% 8.4% Operating expenses n.a. -6.0% -5.5% -6.9% -5.5% -5.5% Operating profit n.a. 3.0% 3.5% 5.0% 2.7% 2.9% Income tax expense n.a. -0.6% -0.8% -1.2% -0.7% -0.7% Recurring net income (ROAA) n.a. 2.7% 2.9% 3.9% 2.1% 2.2% Leverage (x) n.a Non-client asset/net asset (x) n.a ROAE n.a. 8.3% 13.5% 21.9% 11.7% 12.7% 10

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. 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: