20150608-大和证券-Initiation_wealth_management_is_a_long-term_catch_26页_705kb_705kb

GF Securities Summary

Core Content

GF Securities (GFS) is a full-service investment bank in China, established in Guangzhou in 1991 and listed on the Shenzhen and Hong Kong Stock Exchanges in 2010 and 2015, respectively. It is the only non-State-Owned Enterprise (SOE) large China securities firm with a strong focus on SME underwriting and long-term potential in wealth management.

Main Points

Strengths

• SME Underwriting Leadership: GFS has a strong leadership position in SME underwriting, with a history of sponsoring numerous IPOs. By the end of 2014, it had sponsored 53 companies on the SME Board and 23 on the ChiNext Board. In 2015 YTD, it ranked second among all China securities firms and first among H-share-listed ones in terms of IPOs sponsored.
• Geographic Presence: GFS operates primarily in the affluent Pearl River Delta and other tier-1 cities, which supports its long-term wealth management potential.
• Asset Management: GFS has a comprehensive asset management business, including mutual funds, private equity, and alternative investments, with a total AUM of CNY536.4bn at the end of 2014, ranking first in mutual fund and CAM schemes.

Weaknesses

• Commission Rate Decline: GFS has experienced a significant drop in commission rates, which is not offset by meaningful market share gains.
• Overseas Capital Allocation: A large proportion of its capital has been allocated overseas, which could impact its ROE due to uncertainties in overseas M&A.

Key Information

Financial Highlights

• Revenue and Profit Growth: In 2015, GFS is forecasted to have a 101% net profit growth, with lending-related revenue contributing 37% of total revenue, up from 22% in 2014.
• Valuation: GFS is currently trading at a 2.0x 2015E PBR and a 14.1x 2015E PER. The target price is HKD26.00, implying a 2.2x 2015E PBR.
• EPS and Dividend Yield: Core EPS is forecasted to be CNY1.403 in 2015, with a dividend yield of 2.1%.
• Market Share: Brokerage market share is expected to grow from 4.3% in 2014 to 4.6% in 2015.

Catalysts

• H-Share IPO: GFS raised USD4.1bn from its H-share IPO in April 2015, which could help it gain market share in margin loans.
• Registration-Based IPO Reform: The upcoming reform is expected to lower barriers for SMEs to go public, benefiting GFS due to its strong SME focus.

Risks

• Upside Risk: Conversion of affluent clients to margin finance business.
• Downside Risk: Overpayment for overseas acquisitions.

Valuation and Methodology

• Valuation: GFS is considered fairly valued, trading at a 2.0x 2015E PBR.
• Gordon Growth Model: Used to calculate a 12-month target price of HKD26.00.
• Sector Comparison: GFS is in line with sector averages, but the report suggests it deserves only sector-average valuation in a cyclical market.

Investment Rating

• Initiation Rating: Hold (3)
• Target Price (HKD): 26.00
• Upside: 5.5%

Summary Table

Appendix

• Share Price Performance: 12-month range is 23.55-26.50.
• Market Cap (USDbn): 24.23.
• 3m Avg Daily Turnover (USDm): 116.32.
• Shares Outstanding (m): 7,621.
• Major Shareholder: Liaoning Cheng Da Co., Ltd (16.4%).

Investment Case

• SME Underwriting: Strong and sustainable growth potential.
• Wealth Management: Long-term potential due to its geographic presence in affluent areas.
• Lending Business: Expected to become the largest revenue contributor in 2015.
• Brokerage Business: Expected to see 64% YoY growth in 2015.
• Valuation: Sector-average in a cyclical market.
• Risks: Commission rate decline and overseas capital allocation.

Key Assumptions and Ratios

• Growth in Revenue and Profit: Expected to be driven by lending and brokerage businesses.
• ROE and ROAA: Expected to decline due to commission rate decline and overseas capital allocation.
• Cost-to-Income: Expected to remain relatively stable.
• Net Capital Ratio: Expected to fluctuate due to changes in leverage and financial liabilities.