Guotai Junan International [1788.HK]

Guotai Junan International [788.HK] Adjustment of Margin Financing Business Largely Completed; Reiterate BUY Net profit of Guotai Junan International (GTJAI) was HK$.bn for 7, up 7% YoY. This was lower than market consensus by about %, as the shift of focus of the margin financing business to big caps led to flat interest income. The good news is that the margin financing balance rebounded from HK$.8bn at end-june 7 to HK$.9bn at end-dec 7, which shows that the business strategy adjustment is largely completed. Given that the other business segments generally performed well last year, the positive outlook for the Company remains unchanged, in our view. Maintain BUY. We trim our FY8E EPS by ~6% due to a lower forecast for interest income, and we revise our Gordon Growth Model-based target price from HK$.7 to HK$. accordingly (cost of equity 9.%; mid-term ROE.%). GTJAI is trading at.7x 8E PBR, similar to the level in mid- during the A-share market collapse. We maintain the view that the downside risk is limited at the current level, and we see attractive upside once market sentiment recovers from the large market volatility last month. Investment Highlights Business strategy adjustment of margin financing business affected interest income. Interest income from loans and financing was largely flat in 7 at HK$.9bn (% of total revenue). To control the risk of the loan portfolio, GTJAI shifted the focus of the margin financing business from small caps to large caps, which led to a lower effective interest rate. However, the business strategy adjustment has largely been completed, as the margin financing balance rebounded from HK$.8bn at end-june 7 to HK$.9bn at end-dec 7. We expect the margin financing balance to rebound to HK$7.bn this year and interest income from loans and financing to grow 9% YoY to HK$.bn for 8E. Strong growth of income from investment holding and market making. GTJAI s income from investment holding and market making jumped 78% YoY to HK$6m in 7. Its financial assets at fair value through profit or loss surged 8% YoY to HK$7.bn at end- 7. However, only about HK$8bn-9bn is GTJAI s own investments, such as bonds and IPO investments. The remaining HK$8bn is assets held for clients, for which GTJAI does not bear any risk. Revenue from financial products grew 6% YoY to HK$m in 7. This shows that the earnings growth of this segment was driven more by offering services to clients rather than making money through proprietary investments. GTJAI s leverage is about.6x, but the effective leverage is about.x after deducting the assets held on behalf of clients. Continuing the transformation from traditional brokerage to wealth management. At end-7, GTJAI had,7 active accounts in its brokerage business. There was new account addition of,687 last year, including, professional investors. The average balance of its professional investor clients surged 6% YoY to HK$.m. The Company will continue to focus on these high net worth professional investors to broaden its source of revenue, not just from brokerage commissions, but also from selling insurance and other products and services. BUY Close: HK$. (Mar 6, 8) Target Price: HK$. (+%) Price Performance (HK$) Market Cap Shares Outstanding Auditor Hong Kong Securities Sector US$,7m 7,77.m Ernst & Young Free Float.% W range M average daily T/O Major Shareholding Sources: Company, Bloomberg HK$.6-. US$.m Guotai Junan Holdings (8.7%) Wong Chi Man Head of Research (8) 698 67 cmwong@chinastock.com.hk March 9, 8 (HK$ million) Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 Turnover (RHS) Price (LHS) Source: Bloomberg Year ended December 6 7 8E 9E Revenue(HK$ m),77,9,,9,68 Net income(hk$ m), 969,8,6,9 Adjusted Net Margin % 7% 8% % % Adjusted EPS (HK cents per share):.9. 7.7.9.6 YOY Change 7% -% 6% 8% 8% PER(x) 6.8 7.7.9.9.6 PBR(x)....7.6 ROAE.8%.%.6% 6.% 6.% ROAA.%.%.%.%.% Sources: Company, CGIS Research Mark Lau Research Analyst (8) 698 69 marklau@chinastock.com.hk

Figure : 7 results highlights Year ended December 6 7 YoY Change Brokerage 9, 7,8.6% Loans and Financing,97,78,88,777 -.7% Corporate Finance 6,69 68,6 9.7% Asset Management 8,87 9,79.6% Investment Holding & Market Making,77 6,8 78.% Revenue,9,87,,9.% Other income,68,99-8.% Operating Expenses Staff costs 6,67 676, 8.% Commission to accounts executives,7 6,97.% Depreciation,69 8,76.6% Other operating expenses 79,9,96 6.7% Finance costs 9,6 98,9 6.8% Operating Profit,,867,,9 8.% Income tax expense 6,,7 7.% Non-controlling interests 8,7 99.% Net income 969,9,8,7 6.7% Revenue Breakdown(%) Brokerage 6% 7% Loans and Financing % % Corporate Finance 8% % Asset Management % % Investment Holding & Market Making % % Sources: Company, CGIS Research Figure : PBR range of GTJAI 6 Jan- Jan- Jan- Jan- Jan- Jan-6 Jan-7 Jan-8 Figure : PER range of GTJAI Jan- Jan- Jan- Jan- 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 Sources: Bloomberg, CGIS Research Sources: Bloomberg, CGIS Research

Key financials Income Statement (HKD', except for per share amount) Year ended December 6 7 8E 9E Brokerage 79,9 9, 7,8 667,96 677,9 Loans and Financing,76,8,97,78,88,777,8,6,98,9 Corporate Finance 8,7 6,69 68,6 8,96 96,98 Asset Management,9 8,87 9,79,97 7, Investment Holding & Market Making 6,6,77 6,8 878,7,,6 Revenue,76,68,9,87,,9,9,,68,7 Other income,899,68,99,, Operating Expenses Staff costs,69 6,67 676, 88,,, Commission to accounts executives 8,,7 6,97 8, 8, Depreciation 8,66,69 8,76,, Other operating expenses 7,98 79,9,96 69,8,78 Finance costs 9,6 9,6 98,9 86,7 7, Operating Profit,68,,,867,,9,9,9,7,9 Income tax expense,689 6,,7 99,8,6 Non-controlling interests,89 8,7 8 8 Net income,, 969,9,8,7,6,,99,88 EPS (HK cents): Basic.9. 7.7.9.6 Diluted.6.9 7.6.9.6 DPS (HK cents): 7. 7. 9... Dividend payout ratio % % % % % Dividend Yield.%.%.6%.%.9% Revenue Breakdown(%) Brokerage % 6% 7% 7% % Loans and Financing 7% % % 9% % Corporate Finance % 8% % % % Asset Management % % % % % Investment Holding & Market Making 6% % % % % Growth Ratio YOY: Total Revenue 7% % % 6% 8% Brokerage % -% % 9% % Loans and Financing 9% % -% 9% 7% Corporate Finance -% 6% % 9% 8% Asset Management % -6% % % % Investment Holding & Market Making 9% % 78% % % Operating profit 8% 8% 8% 9% 8% Net profit 7% -% 6% % 8% EPS growth 7% -% 6% 8% 8% Margins and Ratios: Adjusted Operating Margin* 6% % 7% 9% 9% Adjusted Net Margin** % 7% 8% % % Effective tax rate % % % 6% 6% Cost-to-income ratio 7% % 9% 7% 8% Staff cost-to-income ratio % % % % % Average daily turnover of HKEx (HK$ m),6 66,8 88,, 7, Margin financing balance(hk$ m),96,8,98 7,89,67 *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

Key financials Balance Sheet (HKD', except for per share amount) Year ended December 6 7 8E 9E Non-current assets 6,79 8,89 76,666 87,8 69,8 Property, plant and equipment,66 9,9 8,6,, Others 8,8 9, 96,66 87,8 9,8 Current assets 6,688,686,87,8 7,8,78 8,, 96,,9 Loans and advances to customers,7,87,86,666,,6,688,,66, Accounts receivable,9,9,9,9,7,,,6,7, Financial assets at fair value through profit or loss,6,97,6,6 7,7,76,66, 9,6,7 Cash held on behalf of customers,66,99,,97,8,,9,6,,89 Cash and cash equivalents,8,666,96,98,,,8,9,77, Others 8,6 778,,7,8,78,,8, Total assets 7,9,,,7 7,96,8 8,7, 97,, Non-current liabilities,,69,,6,68 9,876 7,6 Bank borrowings,9,,, - - - Others,69,6,68 9,876 7,6 Current liabilities 6,8,99,,69 6,97, 7,86,8 8,8,8 Accounts payable 8,8,,87,8 6,9, 9,7,8 9,9,76 Bank borrowings,76,66 6,8,,78,7,, 8,, Debt securities in issue,,8, 9,8,776,,,, Others,9,9 7,6,68,,6 6,79,8,7,69 Total liabilities 9,69,78,66,9 6,968,98 7,896,79 8,98,99 Capital and reserves Share capital and share premium 6,,6 6,, 6,8,6 8,6,6 8,,6 Retained profits,68,78,7,8,,68,6,9,6,8 Proposed final dividend 7,9,6,7,, Other reserves (,,8) (,6,8) (,,77) (,,6) (,,6) Total equity 7,6,6 8,7,98 8,68,86,88,,98, Perperutal debt -,6,68,6,79,,,, Minority,69,9 6,6,, Finance Ratios: PER(x) 6.8 7.7.9.9.6 PBR(x)....7.6 Book value per share(hkd).....6 ROAE.8%.%.6% 6.% 6.% ROAA.%.%.%.%.% Dupont Analysis: Brokerage.%.%.9%.8%.7% Loans and Financing.6%.%.%.9%.% Corporate Finance.9%.%.%.%.% Asset Management.%.%.%.%.% Investment Holding & Market Making.%.8%.%.%.% Revenue 7.7% 6.%.%.9%.% Operating Expenses.7%.%.8%.%.6% Operating Profit.9%.7%.%.%.% Income tax expense.%.%.%.%.% Net income.%.%.%.%.% Leverage [Total assets/equity].9. 8.9 7.6 7.76 Net leverage [(Total assets-accounts payable to clients)/total equity].9.8..8.8 ROAE.8%.%.6% 6.% 6.% Source: Company Data, CGIS Research estimates

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >% within months in absolute terms share price will decrease by >% within 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.AXM9 /F, Wing On Centre, Connaught Road Central, Sheung Wan, Hong Kong. General line: 698-6888.