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Summary of GFS Performance and Earnings Revisions

Core Content

GF Securities (GFS) is a leading Chinese securities firm with a strong focus on cost efficiency and profitability. The company has consistently maintained the highest Return on Equity (ROE) among H-share peers since 2012, primarily due to its superior profitability and effective cost control. Its Cost-to-Income Ratio (CIR) is among the lowest in the industry, indicating strong cost management capabilities. These factors allow GFS to outperform its peers in terms of profitability, even in a challenging operating environment.

Key Financial Performance

• ROE: GFS reported ROE of 22.5% in FY15, compared to 16.6% for CITICS and 18.0% for HTS. It is expected to maintain a double-digit ROE in FY16-18E.
• CIR: GFS had a CIR of 59.0% in FY15, compared to 63.5% for CITICS and 62.7% for HTS. It is projected to maintain a low CIR in FY16-18E, at 64.2%, 60.9%, and 58.4%, respectively.
• NPAT: Revised down to RMB7.971 bn for FY16E and RMB9.559 bn for FY17E, with an expected increase to RMB11.341 bn in FY18E.
• EPS and DPS: Expected to increase from RMB1.05 and RMB0.32 in FY16E to RMB1.49 and RMB0.45 in FY18E.
• BVPS: Projected to rise from RMB10.65 in FY16E to RMB12.58 in FY18E.
• Payout Ratio: Expected to remain relatively stable, at 30.71% in FY16E and 30.28% in FY18E.
• Gearing Ratio: Expected to increase from 73.5% in FY15 to 76.5% in FY18E.
• Leverage Ratio: Projected to rise from 3.42x in FY16E to 4.38x in FY18E.

Earnings Revisions

• Fee and Commission Income: Expected to grow from RMB11.861 bn in FY15 to RMB15.2 bn in FY16E, RMB17.3 bn in FY17E, and RMB18.5 bn in FY18E. Fee income from investment banking is expected to increase significantly, while the contribution from brokerage is projected to decline.
• Interest Income: Expected to decrease in FY16E due to lower MFSL balances and interest yields, but to recover slightly in FY18E.
• Investment Income: Projected to decline in FY16E due to a high base and weak A-share markets, but to grow in FY17 and FY18E as investment assets increase and yields stabilize.
• Operating Expenses: Expected to decrease by 26.1% in FY16E due to tighter cost control, but to rise in FY17 and FY18E to support business growth.

Valuation

• Target Price (TP): Revised down to HK$20.82 from HK$21.19, based on revised earnings forecasts and updated assumptions for exchange rates.
• P/E Ratio: Projected to be 14.9x for FY17E.
• P/B Ratio: Expected to be 1.60x for FY17E.
• Current Valuation: As of 10 June 2016, GFS was trading at 12.87x FY17E P/E and 1.41x FY17E P/B, indicating an upside of 16.1% from the current price to the revised TP.

Risks

• Weakening Position in SME-focused IPOs: May impact investment banking revenue.
• Larger-than-Expected Decline in Commission Rate: Due to increased competition and the popularity of online brokerage.
• Smaller-than-Expected Turnover in Stock Markets: Could affect interest income and overall profitability.
• Weaker-than-Expected Investment Income: Due to sluggish A-share markets and potential volatility in investment yields.

Business Structure and Shareholders

• Major Business Lines: Investment banking, wealth management, trading and institutional client services, and investment management.
• Top Shareholders: HKSCC Nominees Limited (22.31%), Jilin Aodong Pharmaceutical Group (16.69%), Liaoning Cheng Da Co., Ltd. (16.42%), and Zhongshan Public Utilities Group (10.12%). The top ten shareholders hold 76.53% of the total shares.

Company Profile

• Established in 1991, GFS became a joint stock company in 2001 and was listed on the Shenzhen Stock Exchange in 2010 and on the Hong Kong Stock Exchange in 2015.
• Total Assets: RMB419.097 bn in FY15, with a significant portion in investment assets.
• Market Share: RMB4.8% in stock and funds trading turnover in 2015.
• Key Subsidiaries: Includes Guangfa Fund, Guangfa Holdings (Hong Kong), Guangfa Futures, and others.
• Equity Interest in E Fund: 25% as of 2015, indicating a strategic investment in one of China's top fund management companies.

Industry Comparison

• Revenue and Net Profit: GFS had RMB33,447 mn in revenue and RMB13,612 mn in net profit in FY15, compared to other H-share brokers.
• Total Assets and Net Assets: GFS had RMB419,097 mn in total assets and RMB79,821 mn in net assets in FY15, indicating a strong financial position.
• Net Capital: RMB64,346 mn in FY15, placing it in the top four among H-share brokers.

Conclusion

GFS is positioned as a cost-efficient and profitable player in the H-share securities market, with a strong ability to manage expenses and maintain high ROE. Despite challenges such as declining commission rates and weak stock market demand, the company is expected to maintain a competitive edge through diversification of income streams and strategic expansion in investment banking and asset management. The revised target price and valuation metrics suggest potential for growth, although key risks must be monitored.