Equity Research Financials 2H17 Securities Sector Outlook Positive outlook for Chinese brokers in Hong Kong Felix Luo SFC CE No. AQF573 felixluo@gfgroup.com.hk +852 3719 1048 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Sector view Positive Mainland brokers 5M17 net profit drop priced in The aggregate net profit of the 25 securities companies tracked came in at Rmb24,159m in 5M17, annualized as Rmb57,982m for 2017, meaning full-year sector profit might drop 21% YoY. However, our A-share research team believes the impact of negative profit growth has been priced in, as A-share securities names (e.g. CITIC [600030 CH]) valuations are close to historically low levels. Chinese securities companies to benefit most from MSCI A shares inclusion Securities is one of the major sectors in the pro-forma MSCI China Index, not to mention that Chinese securities companies benefit from direct exposure to the resulting increased trading volume and related business opportunities in the A-share market. We believe Chinese securities companies will be the major beneficiaries of the inclusion. Chinese brokers growing influence in HK Chinese brokers are expanding their influence in Hong Kong. Haitong Intl (665 HK, Buy), one of the leading Chinese brokers, is now a significant player in corporate finance, asset management, and the equity derivatives business in Hong Kong. Moreover, the market share of its brokerage business in Hong Kong has been increasing. Recently it has been upgraded to a Category-A broker according to management. We expect Chinese brokers influence to grow in 2017. For example, both China Merchants Securities Intl and China Galaxy Intl have capital injection plans in 2017 in order to expand their businesses. HK capital market s great potential Over the long term, Hong Kong is targeted to become a global wealth management center, a leading offshore risk management center, and a pricing center of world-wide assets for mainland investors. As the gateway between mainland and global markets, we see substantial long-term potential for the Hong Kong capital market. Key investment themes Investment value Our A-share research team believes the Chinese securities sector carries lower risk at present as the financial leverage ratios of mainland brokers are at the lowest level in two years. Investment value is emerging in the A-share Chinese securities sector. For example, CITIC s (600030 CH) valuation in the A-share market is close to its historical low and cheap for long-term value investors. Positive outlook for Chinese brokers in HK As discussed above, Chinese brokers in Hong Kong are well positioned to connect mainland investors with global markets, and global investors with the mainland market. Top picks Haitong International (665 HK, Buy) The company takes a significant market share in business areas such as corporate finance, asset management, and equity derivatives in Hong Kong. Its customer base is expanding and it is now qualified as a Category-A broker. The company has the highest capital strength among Chinese brokers operating in Hong Kong, enabling it to grasp future business opportunities. Currently it is undervalued at ~1.0x P/B. We have a Buy rating on the company and a target price of HK$6.40, representing ~1.4x P/B. Risks Upside risk: Stronger-than-expected capital market performance. Downside risks: Poor capital market performance; tightening policies in mainland markets.
Positive outlook for Chinese brokers in Hong Kong 5M17 data indicate potential 20% YoY drop in sector net profit this year Aggregate net profit at the 25 securities companies tracked came in at Rmb24,159m in 5M17, annualized into Rmb57,982m for 2017, implying a potential net profit drop of 21% YoY (see Figure 1). Figure 1: Financial performance of Chinese brokers in 5M17 (Rmb m) Net profit Ticker 5M16 5M17 Annualized 2017 YoY CITIC 600030 CH, 6030 HK 2,557 2,587 8,011 6,208-23% Haitong 600837 CH, 6837 HK 2,315 2,985 6,061 7,163 18% Huatai(HTSC) 601688 CH, 6886 HK 1,850 1,998 5,252 4,795-9% China Merchants 600999 CH, 6099 HK 2,183 1,804 5,274 4,328-18% Everbright 601788 CH, 6178 HK 1,137 765 2,832 1,836-35% Changjiang 000783 CH 815 587 2,208 1,408-36% Guoyuan 000728 CH 306 269 1,260 647-49% Southwest 600369 CH 706 121 1,099 291-74% Shenwan Hongyuan 000166 CH 1,431 1,324 5,672 3,177-44% Pacific 601099 CH 45 (229) 485 (551) n.a. Northeast 000686 CH 380 191 1,040 459-56% Sinolink 600109 CH 576 448 1,318 1,074-19% Industrial 601377 CH 1,103 1,044 1,889 2,505 33% Shanxi 002500 CH 229 282 553 677 22% Founder 601901 CH 1,478 405 2,012 973-52% Sealand 000750 CH 449 269 980 647-34% Soochow 601555 CH 420 381 1,480 915-38% Western 002673 CH 423 295 1,137 708-38% Guosen 002736 CH 2,023 1,517 5,331 3,640-32% Dongxing 601198 CH 555 439 1,387 1,054-24% Essence Not listed 188 840 134 2,015 n.a. Northeast 000686 CH 818 1,009 2,142 2,422 13% Guotai Juan 601211 CH, 2611 HK 4,756 3,376 10,435 8,102-22% Central China 601375 CH, 1375 HK 177 159 656 381-42% China Galaxy 601881 CH, 6881 HK 1,535 1,294 4,709 3,105-34% Total 28,457 24,159 73,359 57,982-21% Sources: Wind, company data, GF Securities (Hong Kong) Investment value emerging in A shares We believe the impact of negative profit growth at securities firms has been priced in in the A-share market, as securities names valuations are close to historically low levels. In addition, the Chinese securities sector currently carries lower risks as the sector s average leverage ratio is decreasing. The Chinese securities sector in the A- share market is offering investment value, with CITIC (600030 CH) in particular trading near its historically low valuation and cheap for long-term value investors. Figure 2: Decreased leverage ratio for Chinese securities sector 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 4.02 4.29 3.87 3.65 3.61 3.45 3.34 3.29 3.31 3.25 2.77 2.51 2.27 2014Q1 2014Q3 2015Q1 2015Q3 Q1 Q3 2017Q1 Average leverage ratio of A-share listed securities companies Sources: Wind, company data, GF Securities (Hong Kong) 2
4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 2017 Sector Outlook Figure 3: P/B valuation range for CITIC (600030 CH) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Sources: Bloomberg, GF Securities (Hong Kong) Chinese securities companies to benefit most from MSCI A shares inclusion According to our A-share research team, securities is one of the major sectors in the pro-forma MSCI China Index. Chinese securities companies benefit from direct exposure to the resulting increased trading volume and related business opportunities in the A-share market, and therefore will be the biggest beneficiaries of the MSCI A shares inclusion. Growing investable assets among Chinese people According to a report by Industrial Bank (601166 CH) and BCG, Chinese residents investable assets will likely grow at a CAGR of 15% in -2021, which will benefit the wealth management sector. In addition, according to another survey conducted by Industrial Bank, more than 50% of individual investors are inclined to consider making cross-border investment. Growing influence of Chinese brokers in HK Haitong Intl (665 HK, Buy) has now been upgraded to a Category-A broker and is a significant player in corporate finance, asset management and the equity derivatives business in Hong Kong. Furthermore, other Chinese brokers in Hong Kong are also striving to expand their businesses in the city. We expect Chinese brokers influence in the Hong Kong capital market to continue to grow in 2017. Figure 4: Some recent developments at Chinese brokers in HK Company Ticker Development BOCOM Intl 3329 HK Listed in HK market in May 2017 Haitong Intl 665 HK Upgraded to Category-A broker in HK in 1H17 Guotai Jun'an Intl 1788 HK Strategic cooporation with SPD Bank China Merchants Securities Intl Not listed Proposed capital injection from parent co. China Galaxy Intl Not listed Sources: Company data, GF Securities (Hong Kong) Proposed capital injection from parent co., planing to acquire 50% stake in CIMB Positive outlook for Chinese brokers in HK Hong Kong is targeted to become a leading wealth management center, risk management center and pricing center of global assets for mainland investors. Meanwhile, Chinese residents investable assets are growing with increasing demand for cross-border investment. Chinese brokers in Hong Kong are well positioned to connect mainland investors with global markets, and global investors with the mainland market. We have a positive outlook on Chinese brokers in Hong Kong. Recommend Haitong International (665 HK, Buy) The company is a significant player in the Hong Kong capital market. In, it ranked No.1 both by the number of IPO deals and IPO underwriting amount in the Hong Kong market; it is one of the largest dealers of Hang Seng Index futures, Hang Seng Index options and stock options in the Hong Kong market; and it is one of the largest ETF market makers in Hong Kong. The company is one of the few Category-A brokers in Hong Kong. It also has the highest capital strength among Chinese brokers operating in Hong Kong and has diversified businesses. We think the company is well positioned and well equipped to grasp long-term development opportunities in the Hong Kong capital market. It is currently 3
undervalued at ~1.0x P/B. We have a Buy rating on the company and a target price of HK$6.40, representing ~1.4x P/B. Figure 5: Haitong Intl s (665 HK) diversified businesses Figure 6: Historical P/B of Haitong Intl (665 HK) Institutional equities 11% FICC 17% Asset management 3% Investment holdings 7% Brokerage 11% Corporate finance 24% Margin financing 27% 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jun- 2012 Jan- 2013 Sep- 2013 Apr- 2014 Nov- 2014 Jul- 2015 Feb- Sep- May- 2017 Sources: Company data, Capital IQ, GF Securities (Hong Kong) Figure 7: Peer valuation comparison Ticker Company Price (HK$) Rating TP (HK$) 2018E ROE (%) P/B 6030 HK CITIC 16.26 Buy 20.4 18.7 13.7 11.9 4.5 1.3 6837 HK Haitong 13 Buy 16.8 22.5 14.1 11.9 6.1 1.2 6886 HK HTSC 15.4 Buy 20.5 20.3 13.1 11.3 5.4 1.1 6881 HK China Galaxy 7.04 Buy 9.1 11.6 10.8 9.5 5.0 1.0 1456 HK Guolian 3.9 Accumulate 4.5 11.6 9.8 8.8 0.5 0.8 1375 HK Central China 3.87 Hold 3.8 16.5 14.9 13.4 3.5 1.3 Weighted average 18.6 13.2 11.4 5.1 1.2 665 HK Haitong Intl 4.62 Buy 6.4 14.0 10.0 8.6 10.2 1.0 1788 HK GTJA Intl 2.51 Buy 3.4 17.0 14.3 12.8 13.4 1.8 Weighted average 15.2 11.7 10.4 11.6 1.3 Sources: Bloomberg, GF Securities (Hong Kong) Note: Calculated based on closing prices on 26 Jun 2017 4
Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong) ) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies have compensation or mandate for investment banking services received within the preceding 12 months from two of the companies, namely China Merchants Securities Co., Ltd. (6099.HK) and BOCOM International Holdings Company Limited (Stock Code: 3329 HK) (collectively referred to as the Companies ) contained in this research report. GF Securities (Hong Kong) and/or its affiliated or associated companies have acted as one of the Joint Lead Managers and one of the Joint Bookrunners of the Companies respectively within the preceding 12 months. GF Securities (Hong Kong) and/or its affiliated or associated companies may receive compensation or mandate for investment banking services from the Companies in the future. In this connection, investors shall aware that conflict of interest may arise as the objectivity of GF Securities (Hong Kong) in this research report may be affected. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report. Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness of the information contained in the research report. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the report. Copyright GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk 5