20170124-三星证券-Expectations_of_industry_shift_take_the_wheel_16页_521kb

Sector Update Summary: Securities Brokers (OVERWEIGHT)

Core Content

This document provides an analysis of the Korean securities brokers sector, focusing on financial performance, regulatory changes, and future outlook. It outlines the performance of several major brokers for the fourth quarter of 2016 and adjusts target prices and earnings forecasts based on new business opportunities and industry shifts.

Main Points

1. Industry Performance in 4Q16

• Combined Net Profit: The brokers under analysis recorded a combined net profit of KRW217.7b, which missed the consensus of KRW292.1b.
• Key Factors Affecting Earnings:
  • Decline in average daily trading value by 11.8% q-q.
  • Increase in market yields affecting bond trading gains.
  • One-off gains and increased IB commission income partially offset the decline.
• Broker-Specific Performance:
  • NH Investment & Securities: Net profit fell 38.4% q-q to KRW41.8b, mainly due to an early retirement program.
  • Korea Investment Holdings (KIH): Net profit dropped 27.2% q-q to KRW63.8b, but real estate-related IB commission income helped offset the decline.
  • Kiwoom Securities: Net profit declined 21% q-q to KRW33.9b, but its online operations and subsidiaries contributed positively.
  • Meritz Securities: Net profit slightly decreased to KRW60.6b, with corporate financing being a key revenue driver.
  • Daishin Securities: Net profit fell 8.3% q-q to KRW17.8b, impacted by NPL sales uncertainty and market conditions.

2. Regulatory Changes and Mega-IBs

• Government's FISCMA (2005): Aimed to foster a Korean broker model similar to Goldman Sachs.
• Aug 2016 Measures: Introduced rules allowing brokers with KRW4t in shareholder equity to engage in new businesses such as CP issuance, forex operations, and unlisted share trading.
• Capital Thresholds:
  • KRW3t-4t: Allowed existing businesses.
  • KRW4t-8t: Allowed new businesses with relaxed leverage regulations.
  • KRW8t and above: Allowed even more extensive operations.

3. Capital Increases and Rights Offerings

• Most major brokers conducted rights offerings to reach the KRW4t shareholder equity threshold.
• Capital Increases (2016-2017):
  • Mirae Asset Daewoo: Expected capital after rights offering of KRW4.03t.
  • NH Investment & Securities: Expected capital after rights offering of KRW4.15t.
  • Kiwoom Securities: Expected capital after rights offering of KRW354.4b.
• Historical Capital Increases (2011):
  • Brokers raised significant capital through rights offerings, but ROE declined in the following years.

4. Target Price Adjustments

• Target Prices for the brokers are adjusted based on expected ROE and risk profiles:
  • Mirae Asset Daewoo: Target price KRW11,000 (27%).
  • Korea Investment Holdings: Target price KRW57,000 (23.9%).
  • NH Investment & Securities: Target price KRW12,000 (9.1%).
  • Kiwoom Securities: Target price KRW90,000 (23.3%).
  • Meritz Securities: Target price KRW4,200 (17.5%).
  • Daishin Securities: Target price KRW14,000 (29%).

5. CP Issuance and Earnings Sensitivity

• CP Issuance Margins: Market estimates of 200bps are considered too aggressive.
• Reasons for Caution:
  • Mega-IBs are new to the CP market and may struggle to attract investors.
  • Regulatory Caps:
    • Real estate investments are limited to 10% of CP funds.
    • At least 50% of CP funds must go to corporate financing.
• Earnings Sensitivity Analysis:
  • Best Case: CP could increase pre-tax income by KRW70b (Mirae Daewoo) and KRW40b (KIH) in 2017.
  • Normal Case: CP would contribute KRW20b (Mirae Daewoo) and KRW13b (KIH).
  • Worst Case: CP may not contribute significantly to earnings, with KRW0b in some cases.

6. Strategic Shifts and Hybrid Wealth Management Models

• Agency Model Decline: Due to technological advancements, increased access to information, and the rise of ETFs and ETNs.
• Hybrid WM Model: Brokers are shifting from agency to hybrid models, where they assume risks via principal investments (PI).
• Success Factors:
  • Capital Power.
  • Organic Linkage between PI, IB, and WM operations.
  • Simple Decision-Making.
  • Established Networks and Knowhow.
• Recommendation: Focus on clear investment themes rather than a sector-wide bet.

Key Information

• Sector Outlook: Despite short-term earnings challenges, the shift toward hybrid wealth management models is viewed as a positive long-term development.
• Investment Strategy: Advises investors to select stocks based on clear investment themes rather than general sector optimism.
• Risk Considerations: CP issuance is not a guaranteed growth engine, and ROE erosion is expected in the short term.
• Long-Term Perspective: The rights offerings and regulatory changes are seen as growing pains for the sector, with the potential for sustainable growth over time.

Conclusion

The Korean securities brokers sector is undergoing a significant transformation, driven by regulatory changes and the pursuit of becoming mega-IBs. While CP issuance is a focal point, the agency model's decline and the need for a hybrid WM model are key strategic shifts. Brokers with strong capital power, organic integration, and established networks are expected to lead the transition. The sector is advised to focus on specific investment themes and temper expectations for CP-related earnings.