INSTITUTIONAL EQUITY RESEARCH Haitong Securities (6837 HK) Margin trading business will be affected in the short run CHINA FINANCIAL COMPANY REPORT 20 January 2015 Summary Yesterday (19 Jan),Chinese A Shares recorded the largest fall in the last six years, the Shanghai Composite Index declined 260.14 points or 7.7%, with turnover of 409.9 billion. All listed securities companies dropped by 10% approximately, and main sectors such as the banking and insurance faced the large capital outflow; The main reason is because of the investigation of the China Securities Regulatory Commission (CSRC), it said on last Friday night that it had suspended three largest brokerages from opening new margin trading accounts for three months, and stated that the firms could not open the margin account for customers with the securities assets of less than RMB0.5 million; Haitong Securities (HTS) hold the investor meeting and explained the impact of the CSRC s announcement. In general, HTS s business developed stably, and the risks were still under control. It has no significant impact for the Company s whole business, which may be around RMB90.6 million (commission fee 70 million + interest income20 million). Meanwhile, the leverage ratio of HTS margin trading is less than 1.5x currently, lower than other brokerages; In our view, the market was in a panic about the CSRC s punishment of those brokerages, and holds the negative expectation for blue chips such as the brokerages. However, the current adjustment actually is helpful for the long-term stable development of the market. In 2014, the brokerage s margin trading business expanded rapidly with the increase of the risks, and the adjustment will reduce the firms risks under the unchanged expectation of the upward trend of the market, which should have the positive impact in the middle and long term. Therefore, we still have the confidence in HTS s performance in future, and maintain its target price at HK$23.90, recommend Buy rating. Margin trading business will be affected in the short run Haitong Securities (HTS) hold the investor meeting and explained the impact of the CSRC s announcement. In general, HTS s business developed stably, and the risks were still under control. It has no significant impact for the Company s whole business, which may be around RMB90.6 million (commission fee 70 million + interest income20 million). Meanwhile, the leverage ratio of HTS margin trading is less than 1.5x currently, lower than other brokerages. In future, the management will hold the positive view on the development of margin trading business, and the Company s innovative businesses such as margin trading, increased by 240% y-y in total. HTS will also issue the new capital to support such businesses in 2015, therefore we believe the innovative business will continue to increase rapidly. We still have the confidence in HTS s performance in future, and maintain the target value of HTS at HK$23.90 based on 3-stage DDM, 10% discount of the intrinsic value to reflect risks of the market volatility in future, and around 56% higher than the latest closing price, equivalent to 21.9xP/E and 1.6xP/B in 2015 respectively, the valuation is still quite reasonable, and maintain Buy rating. Buy (Maintain) CMP HK$15.36 TARGET HK$23.90 (+56%) COMPANY DATA O/S SHARES (MN) : 9,585 MARKET CAP (HK$ MN) : 179,623 52 - WK HI/LO (HK$) : 23.20/ 9.35 SHARE HOLDING PATTERN, % HKSCC Nominees : 15.57 Bright Food (Group) 4.40 Shanghai Haiyan Investment Management 4.18 Company PRICE PERFORMANCE, % 1MTH 3MTH 1YR HTS -15.79 22.29 32.07 HSI 1.41 2.90 3.53 PRICE & HSI 20.00 15.00 10.00 5.00 0.00 20-Jan-14 20-Feb-14 20-Mar-14 20-Apr-14 20-May-14 20-Jun-14 20-Jul-14 20-Aug-14 20-Sep-14 20-Oct-14 20-Nov-14 Volume, mn 6837 hk equity HSI Source: Phillip Securities (HK) Research KEY FINANCIALS Key Financial Summary FYE 12/13 12/14F 12/15F 12/16F Total income (RMB mn) 5,338 8,634 10,784 13,492 Net Profit, adj. (RMB mn) 4,035 6,726 8,406 10,533 EPS, adj. (RMB) 0.42 0.70 0.88 1.10 P/E (X) 29.3 17.6 14.0 11.2 BVPS (RMB) 6.42 7.17 7.81 8.55 P/B (X) 1.9 1.7 1.6 1.4 DPS (RMB) 0.12 0.21 0.26 0.33 Div. Yield 1.0% 1.7% 2.1% 2.7% Source: Bloomberg, PSR est. *All multiples & yields based on current market price Source: Company reports, Phillip Securities Est. 20-Dec-14 20-Jan-15 250 200 150 100 50 0 Xingyu CHEN (+ 86 21 51699400-105) chenxingyu@phillip.com.cn Page 1 PHILLISECURITIES (HK) RESEARCH
Risk The stronger competition causes the market share to decline; Profits drop obviously due to the decrease of investment gains; Share price decrease sharply because of the deterioration of the market environment. Page 2 PHILLISECURITIES (HK) RESEARCH
FINANCIALS FYE FY12 FY13 FY14F FY15F FY16F Valuation Ratios P/E (X) 37.0 29.3 17.6 14.1 11.2 P/B (X) 2.0 1.9 1.7 1.6 1.4 Dividend Payout ratio 45.04% 28.51% 30.00% 30.00% 30.00% Dividend Yield 1.2% 1.0% 1.7% 2.1% 2.7% Per share data (RMB) EPS, reported 0.33 0.42 0.70 0.88 1.10 EPS, adj. 0.33 0.42 0.70 0.88 1.10 DPS 0.15 0.12 0.21 0.26 0.33 BVPS 6.12 6.42 7.17 7.81 8.55 Grow th Commission and fee income -20.7% 29.6% 12.0% 9.0% 7.0% Total revenue -1.3% 19.8% 20.9% 22.3% 23.5% Total income -3.9% 31.4% 61.8% 24.9% 25.1% Net Income, adj. -2.1% 32.8% 66.7% 25.0% 25.3% Key Ratios Operating margin 36.32% 40.62% 46.92% 47.24% 48.72% Adjusted operating margin 42.53% 49.88% 56.97% 59.65% 63.33% Net margin 28.95% 32.10% 44.24% 45.21% 45.86% Adjusted net margin 33.91% 39.41% 53.71% 57.09% 59.60% ROE 5.44% 6.56% 9.79% 11.23% 12.86% Leverage ratio 215.55% 274.97% 392.74% 460.98% 532.60% Income Statement (RMB mn) FY12 FY13 FY14F FY15F FY16F Commission and fee income 5,210 6,751 7,561 8,242 8,819 Interest income 2,879 3,671 4,956 6,938 9,713 Net investment gains 2,404 2,150 2,688 3,413 4,437 Total revenue 10,493 12,572 15,204 18,593 22,969 Other income and gains 251 231 1,500 2,000 2,300 Total revenue and other income 10,744 12,803 16,704 20,593 25,269 Total expenses (6,682) (7,465) (8,070) (9,809) (11,777) Total income 4,062 5,338 8,634 10,784 13,492 Share of results of associates 66 117 220 250 300 Profit before income tax 4,128 5,455 8,854 11,034 13,792 Income tax (875) (1,174) (1,878) (2,348) (2,958) Income tax rate 21.20% 21.52% 21.21% 21.28% 21.45% Profit for the period 3,253 4,281 6,976 8,686 10,833 Minority interest 215 246 250 280 300 Net profit 3,038 4,035 6,726 8,406 10,533 Dividend 1,234 1,150 2,018 2,522 3,160 Balance Sheet (RMB mn) FY12 FY13 FY14F FY15F FY16F Advances to customers 11,339 26,531 58,368 99,226 148,839 Available-for-sale investments 7,427 4,952 5,942 7,428 9,656 Financial assets at fair value through profits or loss 32,418 47,590 64,247 77,096 88,660 Clearing settlement funds 3,050 5,751 9,489 12,810 15,372 Bank balances and cash 52,000 52,587 70,992 74,542 81,996 Total current assets 116,682 156,046 239,622 309,265 393,694 Total non-current assets 9,800 13,078 30,262 35,845 42,613 Total assets 126,482 169,124 269,884 345,110 436,307 Borrow ings 8,626 5,796 17,098 31,632 52,192 Deposits taken from other financial institution 2,150 1,120 8,000 9,500 10,500 Accounts payable to brokerage clients 36,957 40,430 66,710 80,051 96,062 Other payables and accruals 1,904 3,295 8,567 14,992 23,238 Financial liabilities at fair value through profits or loss 135 6,507 12,038 18,659 26,122 Financial assets sold under repurchase agreements 16,041 26,112 41,779 54,313 67,891 Total current liabilities 65,902 86,658 164,349 219,740 286,939 Net current assets 50,780 69,388 75,273 89,525 106,755 Total non-current liabilities 150 18,361 33,050 45,609 61,572 Total liabilities 66,052 105,019 197,399 265,349 348,510 Equity attributable to ow ners of the company 58,680 61,507 68,718 74,864 81,920 Minority interest 1,751 2,598 3,767 4,897 5,877 Total equity 60,430 64,105 72,485 79,762 87,796 Total equity and non-current liabilities 126,482 169,124 269,884 345,110 436,307 Source: Company, Phillip Securities (HK) Research Estimates Page 3 PHILLISECURITIES (HK) RESEARCH
Ratings History 30 25 20 15 10 5 Market Price Target Price Source: Bloomberg, PSR 0 Oct-15 Jul-15 Apr-15 Jan-15 Oct-14 Jul-14 Apr-14 Jan-14 Oct-13 Jul-13 Apr-13 Jan-13 Oct-12 Jul-12 Apr-12 1 2 3 4 5 PSR Rating System Total Returns Recommendation Rating > +20% Buy 1 +5% to +20% Accumulate 2-5% to +5% Neutral 3-5% to -20% Reduce 4 <-20% Sell 5 Remarks We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk rew ard profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation Page 4 PHILLISECURITIES (HK) RESEARCH
PHILLIP RESEARCH STOCK SELECTION SYSTEMS Total Return Recommendation Rating Remarks >+20% Buy 1 >20% upside from the current price +5% to +20% Accumulate 2 +5% to +20%upside from the current price -5% to +5% Neutral 3 Trade within ± 5% from the current price -5% to -20% Reduce 4-5% to -20% downside from the current price <-20% Sell 5 >20%downside from the current price We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation GENERAL DISCLAIMER This publication is prepared by Phillip Securities (Hong Kong) Ltd ( Phillip Securities ). By receiving or reading this publication, you agree to be bound by the terms and limitations set out below. 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SINGAPORE Phillip Securities Pte Ltd Raffles City Tower 250, North Bridge Road #06-00 Singapore 179101 Tel : (65) 6533 6001 Fax : (65) 6535 6631 Website: www.poems.com.sg HONG KONG Phillip Securities (HK) Ltd Exchange Participant of the Stock Exchange of Hong Kong 11/F United Centre 95 Queensway Hong Kong Tel (852) 22776600 Fax (852) 28685307 Websites: www.phillip.com.hk INDONESIA PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A Jakarta 10220 Indonesia Tel (62-21) 57900800 Fax (62-21) 57900809 Website:www.phillip.co.id THAILAND Phillip Securities (Thailand) Public Co. Ltd 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand Tel (66-2) 6351700 / 22680999 Fax (66-2) 22680921 Websitewww.phillip.co.th UNITED KINGDOM King & Shaxson Capital Limited 6th Floor, Candlewick House, 120 Cannon Street, London, EC4N 6AS Tel (44-20) 7426 5950 Fax (44-20) 7626 1757 Website: www.kingandshaxson.com MALAYSIA Phillip Capital Management Sdn Bhd B-3-6 Block B Level 3 Megan Avenue II, No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (603) 21628841 Fax (603) 21665099 Website: www.poems.com.my JAPAN PhillipCapital Japan K.K. Nagata-cho Bldg., 8F, 2-4-3 Nagata-cho, Chiyoda-ku, Tokyo 100-0014 Tel (81-3) 35953631 Fax (81-3) 35953630 Website:www.phillip.co.jp CHINA Phillip Financial Advisory (Shanghai) Co. Ltd No 436 Hengfeng Road, Greentech Unit 604, Postal code 200070 Tel (86-21) 51699400 Fax (86-21) 63532643 Website: www.phillip.com.cn FRANCE King & Shaxson Capital Limited 3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France Tel (33-1) 45633100 Fax (33-1) 45636017 Website: www.kingandshaxson.com UNITED STATES Phillip Futures Inc 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL 60604 USA Tel +1.312.356.9000 Fax +1.312.356.9005 AUSTRALIA PhillipCapital Australia Level 12, 15 William Street, Melbourne, Victoria 3000, Australia Tel (613) 96188238 Fax (613) 92002272 Website: www.phillipcapital.com.au PHILLIP SECURITIES (HK) RESEARCH 6 P a g e