20150608-大和证券-Initiation__monetising_through_margin_finance_31页_919kb

Huatai Securities (6886 HK) - Initiation Report

Core Content

Huatai Securities is a leading Chinese brokerage firm that has been expanding its market share in the brokerage business through a low-cost online model. This growth is expected to translate into increased market share in the margin finance sector, which is a more profitable segment. The report initiates coverage with a Buy (1) rating and a target price of HKD32.0, implying a 27.0% upside from the 8 June 2015 closing price of HKD25.20.

Main Points

Investment Case

• Customer Acquisition Strategy: Huatai's low commission rates have driven significant growth in its brokerage business, increasing its market share from 5.4% in 2012 to 8.0% in 4M15.
• Profit Drivers: The firm is shifting its focus from traditional brokerage to margin finance, which is expected to be a more profitable business. It is anticipated that the margin finance segment will contribute 37% of total revenue in 2015, up from 22% in 2014.
• Market Sensitivity: Huatai's revenue is highly sensitive to market turnover, especially in the A-share market, which reached CNY1.1tn YTD. This sensitivity is expected to continue, given the firm's strong position in the brokerage market.

Valuation

• Current Valuation: Huatai is trading at a 1.8x 2015E PBR, which is below the sector average of 2.0x.
• Target Price: The target price of HKD32.0 implies a 2.3x 2015E PBR, suggesting the stock is undervalued.
• Discount to A Shares: The current valuation is a 36% discount to its A shares, indicating potential for value appreciation.

Risks

• Market Volatility: The firm's earnings are highly sensitive to market turnover, which could affect profitability.
• Regulatory and Operational Risks: Regulatory tightening or operational issues in the margin finance business could pose challenges.

Key Information

Financial Highlights (2015E)

Revenue Mix and Growth

• Brokerage Market Share: Increased from 6.1% in 2013 to 8.0% in 4M15.
• Margin Finance Market Share: At 5.8% in end-April 2015, lagging behind its brokerage share.
• Segmental Revenue Growth:
  • Brokerage: Expected to grow by 71% YoY in 2015.
  • Margin Finance: Expected to grow by 264% YoY in 2015, becoming the largest revenue contributor.

Valuation Comparison

Market Conditions

• Margin Loan Balance: Grew from CNY1.03tn in end-2014 to CNY2.17tn as of 5 June 2015.
• Interest Rates: Despite benchmark rate cuts, margin lending interest rates have not dropped significantly, indicating strong pricing power among brokers.
• Funding Costs: Moderating due to improved market liquidity, with the 3-month collateralised bond repurchase rate falling below 3% from previous 3-6% range.

Capital Constraints

• Net Capital (End-2014): CNY19.7bn, lower than peers like CITICS (CNY44.3bn) and HTS (CNY37.1bn).
• Net Capital Ratio: 53.2%, below the sector average and near the CSRC warning level of 48%.

Summary

Huatai Securities is expected to leverage its growing brokerage market share and low-cost online model to increase its presence in the margin finance sector. While its traditional brokerage business has thinner profit margins, the margin finance segment is projected to become a significant revenue driver. The firm is currently undervalued, trading at a 1.8x 2015E PBR and a 36% discount to its A shares. The report initiates with a Buy (1) rating and a target price of HKD32.0, which represents a 27.0% upside. Key risks include market volatility and regulatory challenges in the margin finance segment. The firm's ability to convert its brokerage clients into margin finance users will be critical to achieving its growth objectives.