Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index 3965.7 (1.5) HSCEI 12528.6 (1.2) Shanghai COMP 3268.6 2.2 Shenzhen COMP 1772. 1.9 Gold 1331.3.6 BDIY 1146. 2.6 Crude Oil, WTI(US$/BBL) 62.6 (.2) Crude Oil, BRENT(US$/BBL) 66.4 1.5 HIBOR, 3-M 1.1 (.2) SHIBOR, 3-M 4.7. RMB/USD 6.4.2 DATA RELEASES DUE THIS WEEK 24 th Feb 218 House Price Index YoY JAN Source: Bloomberg RESEARCH NOTES February 23, 218 GUOTAI JUNAN INTERNATIONAL [1788.HK; HK$2.44; BUY] - The share price of Guotai Junan International (GTJAI) dropped nearly 25% within the past month, as the share price weakness post-share placement in late January was exaggerated by the sharp market correction in the past few weeks. The Company is trading at 1.64x 218E PBR, similar to the level in mid- 215 during the A-share market collapse. This is clearly over-bearish, in our view, as the market conditions in Hong Kong and the A-share market are much better now. In addition, average daily turnover of the Hong Kong stock market still stood at HK$149.5bn in February, which is quite impressive after taking the impact of Chinese New Year holidays into account. We believe the downside risk is limited at the current level, and we maintain our Gordon Growth Model-based target price of HK$3.74, implying 218E PBR of 2.51x (cost of equity 9.4%; mid-term ROE at 16%). Maintain BUY. SNIPPETS CHINA INDUSTRIAL According to WIND, Dongyue [189.HK] and Zhejiang Juhua [616.CH] raised the selling prices of methylene chloride (CMS) by 9.1% and 8.8%, respec-tively, after Chinese New Year. CMS prices retreated from the peak in late Dec 217, and then reached a recent low in late Jan 218. We believe the fluorochemical industry names, including both Dongyue and L&M Chemical [746.HK], may attract market attention, given: a) the recovery in selling prices, b) increasing investor relationship activity, and c) Dongyue s potential inclusion in Shenzhen-Hong Kong Stock Connect. CMS and fluorspar (whose price was up 13.2% month on month to RMB3/tonne in mid-feb 218) are in the upstream section of the fluorochemical industry, and their price movement is expected to translate into an increase in the selling prices of downstream products. L&M Chemical will host its results presentation next week for the first time in the past several years. We expect management to talk about the contribution from new products, including chlorinated polyvinyl chloride, thionyl chloride and styrene-acrylic latex sur-face sizing agent, as well as the company s development roadmap. The official changes in the Stock Connect universe will be announced by the Shanghai Stock Exchange and Shenzhen Stock Exchange on 5 Mar 218. Dongyue is one of the 22 candidates which we think will be included in Shenzhen-Hong Kong Stock Connect. Given Dongyue s market position and valua-tion, the Company may attract Mainland investors attention. In the same industry segment, we also expect L&M to benefit from the potential rerating of Dongyue. For details on the fluoro-chemical industry in China, please refer to our industry update released on 3 Aug 217. Figure 1: Peer comparison Ticker Company PE P/B Div yield Share Price Performance Price Market Cap 217F 218F 216 217F 216 217F 1M 3M 6M 12M YTD Lcy US$m x x x x % % % % % % % 189 HK Dongyue Group 7.34 198.9 9.3 1. 2.1 n.a. 1.5 4.2 17.6 47.1 94.7 435.8 34.4 746 HK Lee & Man Chemical 6.24 657.9 n.a. n.a. 2. n.a. 2.2 n.a. 14.1 41.8 43.1 89.1 11.2 616 Ch Zhejiang Juhua Co-A 1.57 358.4 18.9 15.8 2. 2. n.a. 6.7-4.8 2.8-12.4-1.9 -.6 6636 CH Shanghai 3F New Materials-A 15.11 161.5 n.a. n.a. 2.6 n.a. n.a. n.a. 11.1 17. 4. 9. 1.5 247 CH Do-Fluoride Chemicals Co-A 17.53 1781.2 18.8 16.2 3.9 n.a. n.a. n.a. -12.5-25. -28.4-38.6-14.2 2326 CH Zhejiang Yongtai Tech-A 9.32 124.7 19. 16.6 2.8 3.1 n.a. 1.6-16.8-28.3-34. -4.8-18.4 Average 16.5 14.7 2.6 2.5 1.9 4.2 1.5 9.2 11.2 73.9 2.4 HSI Index -4.4 3.2 13. 27.9 3.5 HSCEI Index -5.1 4.8 14.4 18.9 7. SHCOMP Index -4.2-3.9.5 1.7-1.2 1
Guotai Junan International [1788.HK] Correction Overdone; Valuation Back to Crisis Level; Reiterate BUY The share price of Guotai Junan International (GTJAI) dropped nearly 25% within the past month, as the share price weakness post-share placement in late January was exaggerated by the sharp market correction in the past few weeks. The Company is trading at 1.64x 218E PBR, similar to the level in mid-215 during the A-share market collapse. This is clearly over-bearish, in our view, as the market conditions in Hong Kong and the A-share market are much better now. In addition, average daily turnover of the Hong Kong stock market still stood at HK$149.5bn in February, which is quite impressive after taking the impact of Chinese New Year holidays into account. We believe the downside risk is limited at the current level, and we maintain our Gordon Growth Model-based target price of HK$3.74, implying 218E PBR of 2.51x (cost of equity 9.4%; mid-term ROE at 16%). Maintain BUY. Investment Highlights GTJAI underperformed significantly. GTJAI s share price dropped about 25% within a month, much further than the Hang Seng Index (-4.4%), and shares of HKEx (-7%) and Haitong International (-15.6%) (Figure 1). The combined effect of the share placement in late January and weak market sentiment in the past few weeks led to the poor share price performance, in our view. Overly bearish valuation with limited downside risk. The Company is trading at 1.64x 218E PBR, in line with the level in mid-215 (the collapse of the A-share market) and early 216 (the circuit breaker incident in the A-share market) (Figure 3). We believe the share price correction is clearly overdone, as the current market conditions are significantly stronger than the conditions in mid-215 and early 216. Therefore, we see limited downside risk for GTJAI at the current price level. (Recap: The share placement price in late January is HK$2.85 per share.) Average daily turnover remains encouraging in February. Following strong average daily turnover of HK$16bn in January, the average daily turnover of the Hong Kong stock market in February (up to February 22) dropped moderately to HK$149.5bn. This is still quite impressive, in our view, as market activity was affected by the Chinese New Year holidays. The business outlook for Hong Kong securities companies, including GTJAI, should remain upbeat. The sharp share price correction offers a good buying opportunity, and we maintain our Gordon Growth Model-based target price of HK$3.74, translating into 53% upside. BUY Close: HK$2.44 (Feb 22, 218) Target Price: HK$3.74 (+53%) Price Performance (HK$) 4 3 2 1 Market Cap Shares Outstanding Auditor Hong Kong Securities Sector US$2,43m 7,77.2m Ernst & Young Free Float 39.9% 52W range 3M average daily T/O Major Shareholding February 23, 218 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Turnover (RHS) Price (LHS) Sources: Company, Bloomberg Source: Bloomberg HK$2.26-3.33 US$2.3m Guotai Junan Holdings (58.74%) Wong Chi Man Head of Research (HK$ million) 3 25 2 15 1 5 (852) 3698 6317 Year ended 31 December 214 215 216 217E 218E Revenue(HK$ m) 1,657 2,277 2,519 3,25 3,977 Net income(hk$ m) 8 1,14 969 1,387 1,78 Adjusted Net Margin 54% 53% 47% 52% 54% Adjusted EPS (HK cents per share): 13.9 14.9 14.1 19.9 22.8 YOY Change 33% 7% -5% 41% 15% PER(x) 17.53 16.41 17.32 12.26 1.69 PBR(x) 2.33 2.19 2.8 1.98 1.64 ROAE 14.5% 13.8% 12.3% 16.5% 17.5% ROAA 4.1% 3.4% 2.4% 2.6% 2.5% Sources: Company, CGIS Research cmwong@chinastock.com.hk 2
Figure 1: Relative performance Figure 2: Average daily turnover of the Hong Kong stock market (HK$bn) 18. 16. Hong Kong Stock Exchange Average Daily Turnover in the past 12 months 16.2 149.5 Figure 3: PBR range of GTJAI 6 5 4 14. 12. 1. 8. 81.6 73.5 78.3 78.8 84.7 98.4 94.6 95.2 119.2 14. 3 2 1 6. 4. Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 2. - Mar 217 Apr 217 May 217 June 217 July 217 Aug 217 Sep 217 Oct 217 Nov 217 Dec 217 Jan 218 Feb 218 Rolling forward PBR Average PBR+1 standard deviation Rolling forward average PBR Average PBR-1 standard deviation Figure 4: PER range of GTJAI 45 4 35 3 25 2 15 1 5 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Rolling forward PER Average PER+1 standard deviation Rolling forward average PER Average PER-1 standard deviation 3
Key financials Income Statement (HKD', except for per share amount) Year ended 31 December 214 215 216 217E 218E Brokerage 51,646 719,945 393, 622,165 926,63 Loans and Financing 722,47 1,76,18 1,297,278 1,429,3 1,679,258 Corporate Finance 287,825 281,447 456,649 73,63 554,533 Asset Management 46,387 53,92 28,487 35, 42, Investment Holding & Market Making 98,254 146,16 343,773 46,7 774,925 Revenue 1,656,582 2,276,68 2,519,187 3,25,138 3,977,347 Other income 4,459 1,899 2,68 2,5 2,5 Operating Expenses Staff costs 368,622 55,649 526,657 682,5 779, Commission to accounts executives 68,477 118,53 55,117 8,881 12,462 Depreciation 23,643 28,664 34,695 4, 4, Other operating expenses 17,421 27,98 379,923 298,76 363,81 Finance costs 95,162 249,562 393,536 498,99 569,313 Operating Profit 929,216 1,168,122 1,131,867 1,652,397 2,17,272 Income tax expense 127,31 152,689 162,52 264,383 326,627 Non-controlling interests 2,124 1,892 28 8 8 Net income 799,791 1,13,541 969,139 1,387,213 1,779,845 EPS (HK cents): Basic 13.9 14.9 14.1 19.9 22.8 Diluted 13.7 14.6 13.9 19.6 22.8 DPS (HK cents): 7. 7.5 7.5 1. 11.4 Dividend payout ratio 5% 5% 53% 5% 5% Dividend Yield 2.1% 2.5% 2.4% 3.2% 3.7% Revenue Breakdown(%) Brokerage 3% 32% 16% 19% 23% Loans and Financing 44% 47% 51% 44% 42% Corporate Finance 17% 12% 18% 22% 14% Asset Management 3% 2% 1% 1% 1% Investment Holding & Market Making 6% 6% 14% 14% 19% Growth Ratio YOY: Total Revenue 46% 37% 11% 29% 22% Brokerage 33% 44% -45% 58% 49% Loans and Financing 82% 49% 21% 1% 17% Corporate Finance 92% -2% 62% 54% -21% Asset Management 47% 14% -46% 23% 2% Investment Holding & Market Making -45% 49% 135% 34% 68% Operating profit 59% 38% 8% 41% 24% Net profit 49% 27% -4% 43% 28% EPS growth 33% 7% -5% 41% 15% Margins and Ratios: Adjusted Operating Margin* 62% 61% 55% 62% 64% Adjusted Net Margin** 54% 53% 47% 52% 54% Effective tax rate 14% 13% 14% 16% 16% Cost-to-income ratio 43% 47% 5% 48% 46% Staff cost-to-income ratio 22% 22% 21% 21% 2% Average daily turnover of HKEx (HK$ m) 69,456 15,63 66,28 87,6 135, Margin financing balance(hk$ m) 8,47 11,963 13,385 15,295 18,597 *Adjusted Operating Margin=Operating profit/(revenue-commission and interest expenses) **Adjusted Net Margin=Net profit/(revenue-commission and interest expenses) Source: Company Data, CGIS Research estimates 4
Key financials Balance Sheet (HKD', except for per share amount) Year ended 31 December 214 215 216 217E 218E Non-current assets 521,51 64,749 812,891 98,323 1,58,323 Property, plant and equipment 513,53 512,166 493,559 5, 5, Others 7,998 128,583 319,332 48,323 558,323 Current assets 21,483,38 36,688,686 44,187,854 62,116,432 8,3,722 Loans and advances to customers 9,99,164 12,375,857 14,286,666 16,594,6 2,96,46 Accounts receivable 1,1,13 1,932,119 1,495,924 2,275,97 2,784,143 Financial assets at fair value through profit or loss 1,353,89 4,56,947 13,261,624 2,6, 24,78, Cash held on behalf of customers 9,9,99 14,662,991 12,4,917 19,99,276 29,652,173 Cash and cash equivalents 889,286 2,48,666 1,964,398 2,, 2,2, Others 13,829 82,16 778,325 738, 788, Total assets 22,4,881 37,329,435 45,,745 63,24,755 81,359,45 Non-current liabilities 1,23,28 3,112,269 2,133,262 1,436,341 8,956,818 Bank borrowings 99, 3,9, 2,1, 1,383,464 8,891,492 Others 33,28 22,269 33,262 52,877 65,325 Current liabilities 13,916,459 26,581,99 32,333,649 41,573,53 58,452,422 Accounts payable 1,4,468 18,218,312 14,871,38 23,214,215 34,574,433 Bank borrowings 3,472,719 4,765,662 6,811,433 1,5, 3,5, Debt securities in issue - 55,34 3,485,52 4,5, 5,, Others 439,272 3,92,595 7,165,658 12,359,315 15,377,988 Total liabilities 14,939,667 29,694,178 34,466,911 52,9,871 67,49,239 Capital and reserves Share capital and share premium 5,852,194 6,4,362 6,54,25 6,14,25 8,149,25 Retained profits 2,172,562 2,685,718 3,171,842 3,597,319 4,487,241 Proposed final dividend 292,434 274,295 31,613 32, 33, Other reserves (1,261,777) (1,34,811) (1,361,282) (1,341,46) (1,351,46) Total equity 7,55,413 7,623,564 8,175,198 8,679,884 11,614,86 Perperutal debt - - 2,346,685 2,325, 2,325, Minority 9,81 11,693 11,951 1, 1, Finance Ratios: PER(x) 17.53 16.41 17.32 12.26 1.69 PBR(x) 2.33 2.19 2.8 1.98 1.64 Book value per share(hkd) 1. 1.1 1.2 1.2 1.5 ROAE 14.5% 13.8% 12.3% 16.5% 17.5% ROAA 4.1% 3.4% 2.4% 2.6% 2.5% Dupont Analysis: Brokerage 2.6% 2.4% 1.% 1.2% 1.3% Loans and Financing 3.7% 3.6% 3.2% 2.6% 2.3% Corporate Finance 1.5%.9% 1.1% 1.3%.8% Asset Management.2%.2%.1%.1%.1% Investment Holding & Market Making.5%.5%.8%.9% 1.1% Revenue 8.5% 7.7% 6.1% 6.% 5.5% Operating Expenses 3.7% 3.7% 3.4% 3.% 2.6% Operating Profit 4.8% 3.9% 2.7% 3.1% 2.9% Income tax expense.7%.5%.4%.5%.5% Net income 4.1% 3.4% 2.4% 2.6% 2.5% Leverage [Total assets/equity] 3.12 4.9 5.5 7.26 7. Net leverage [(Total assets-accounts payable to clients)/total equity] 1.83 2.9 3.96 4.83 4.3 ROAE 14.5% 13.8% 12.3% 16.5% 17.5% Source: Company Data, CGIS Research estimates 5
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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >2% within 12 months in absolute terms share price will decrease by >2% 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 2/F, Wing On Centre, 111 Connaught Road Central, Sheung Wan, Hong Kong. General line: 3698-6888. 6