20170109-中国银河国际证券-Industry_Note_2017_Outlook_Limited_Catalysts_from_Policy_and_Liquidity_Focus_on_Revenue_Mix_16页_1mb

Industry Note Summary - China Securities Sector (January 9, 2017)

Core Content

This document provides an analysis of the Chinese securities sector as of January 9, 2017, with a focus on the outlook for 2017, financial performance in 2016, and valuation metrics for major securities companies. The analysis suggests limited growth opportunities due to stringent policies and tighter market liquidity, with a recommendation to focus on companies with a diversified revenue mix and strong ROE.

Main Points

• Policy Outlook: The regulatory environment has become stricter since Liu Shiyu became chairman of the CSRC in February 2016. The focus is on the long-term healthy development of capital markets, limiting room for financial innovation.

• Market Liquidity: Tightened liquidity is expected in 2017 due to inflation risks and the US interest rate upcycle, which may restrict monetary easing.

• Brokerage Business: The brokerage and margin financing businesses are unlikely to see strong recovery in 2017. ADT is projected to increase only moderately from RMB519bn in 2016 to RMB560bn in 2017E, and the average brokerage commission rate is expected to remain low.

• Investment Banking and Asset Management: These segments showed less volatility and decent growth in 2016, with investment banking revenue increasing by 52.5% and asset management by 12.3% YoY.

• Valuation and Recommendations:

  • CITICS (6030 HK): Maintains a HOLD rating with a target price of HK$17.0, based on 1.23x 2017E PBR.
  • HTS (6837 HK): Also maintains a HOLD rating with a target price of HK$14.90, based on 1.32x 2017E PBR.
  • GFS (1776 HK): Maintains a BUY rating with a target price of HK$20.7, based on 1.71x 2017E PBR. It has a diversified revenue mix and higher ROE compared to its peers.

• Performance in 2016: All major securities companies saw negative returns, with HTS being the best performer. GFS had the highest PBR but one of the highest ROEs. CITICS was negatively impacted by the loss of valuation premium and increased competition.

• Financial Metrics:

  • Growth Rates: Most companies saw declines in revenue and net income in 2016. GFS had a more stable performance with a 21.0% EPS growth in 2016E and 13.4% in 2017E.
  • ROE and ROAA: GFS had the highest ROE at 12.3%, while CITICS and HTS had lower ROE and ROAA.
  • Margin Financing Balance: Expected to increase to RMB1.12trn by end-2017, equivalent to 2% of the A-share market cap.

Key Financials

• CITIC Securities (6030 HK):

  • Income Statement: Revenue from investment banking and brokerage decreased in 2016, with significant declines in other income and gains.
  • Operating Profit: Declined in 2016E and 2017E, with a recurring net income of RMB5,243,917,000 in 2016E and 2017E.
  • ROE: Expected to be around 10.8% in 2017E.
  • PBR: 1.17x in 2016E and 1.23x in 2017E.

• Haitong Securities (6837 HK):

  • Income Statement: Similar trends to CITICS, with declining revenue and net income.
  • ROE: Expected to be around 10.6% in 2017E.
  • PBR: 1.23x in 2016E and 1.32x in 2017E.

• GF Securities (1776 HK):

  • Income Statement: Stronger performance in 2016E and 2017E, with higher ROE and diversified revenue sources.
  • ROE: Expected to be around 12.3% in 2017E.
  • PBR: 1.37x in 2017E.

Summary Table

Conclusion

The securities sector in China is expected to face limited growth in 2017 due to stringent policies and tighter liquidity. Investors are advised to focus on companies with diversified revenue streams and strong ROE, such as GF Securities. The sector's valuations are not particularly attractive, and a wait-and-see approach is recommended until better opportunities arise.