20170427-东英亚洲证券-China_Securities_Sector_25页_957kb

China Securities Sector Report - 2017

Sector Overview

The China securities sector experienced disappointing FY16 results, with major brokerage companies reporting significant declines in net profit. Specifically, HTSC, GFS, CITICS, and Haitong saw net profit drops of 41%, 39%, 48%, and 49%, respectively, to RMB 6.32 bn, RMB 8.03 bn, RMB 10.37 bn, and RMB 8.04 bn. These declines were largely due to a high base comparison from FY15 and were in line with consensus estimates, with reported EPS only slightly deviating from expectations. The sector underperformed the benchmark by 16.3% since March 2017, primarily due to the GTJA H-share IPO being priced at a discount, leading to money switching out from listed brokers, and sector rotation towards higher volatility sectors such as TMT and commodities.

The market showed signs of recovery, with the average daily turnover (ADT) for March 2017 increasing by 12% month-over-month (mom) to RMB 501 bn, only 3.4% lower than the 2016 level. The SHCOMP index gained 3.8% in the first quarter of 2017, indicating upward momentum. The brokerage sector is considered a better proxy for capturing market recovery and potential catalysts from new policies in the second half of 2017, especially after recent corrections.

Industry Performance

Despite a 9.8% year-over-year (yoy) decline in total revenue for major brokers in March 2017, total net profit increased by 16.9% due to higher returns from market performance. Brokerage profitability is also influenced by the equity and bond market performance. For the first three months of 2017 (3M17), total revenue growth dropped by 4.3%, while net profit growth surged by 22.1%.

Company Update - HTSC (6886 HK)

• Rating: BUY (unchanged)
• Target Price (TP): HK$18.86 (down from HK$19.10)
• Close Price: HK$15.24
• Upside: +24%
• FY17E PE: 14.3
• FY17E PB: 1.13
• FY17E Yield: 3.5%
• EPS revision%: -1.2

Key Data:

• Market Cap: HK$130,300.31 mn
• Issue Share: 1,719.05 mn
• 3M Avg Daily Vol.: 5.43 mn
• Major Shareholder: Jiangsu Guoxin Investment (17.46%)

Performance:

• Revenue: In line with estimates, driven by robust development in asset management and underwriting.
• Net Profit: Decreased by 41% to RMB 6.32 bn, in line with estimates, due to lower brokerage commission and higher costs, but offset by growth in other segments.

Exhibit 1: Recommendations Summary

Exhibit 2: Preliminary Monthly Results in Mar-17 and 3M17

Exhibit 3: Average Daily Turnover in Mar-17 and 1Q17

Exhibit 4: SHCOMP, T-Bond, C-Bond Index Returns

Exhibit 5: Margin Financing Balance

Exhibit 6: Brokerage Business Market Share in 1Q17

Exhibit 7: Number and Underwritten Amount of IPO in Mar-17 and 1Q17

Exhibit 8: Forecast and Valuation

Exhibit 9: Earnings Revision

Exhibit 10: Results Summary

Exhibit 11: Revenue Breakdown

Key Takeaways

• Sector Performance: The sector underperformed the benchmark in 2017 due to the GTJA H-share IPO and sector rotation.
• Market Recovery: Brokerage sector is seen as a leading indicator of market recovery and potential policy catalysts.
• HTSC Performance: HTSC's FY16 net profit dropped 41%, but the company's other revenue segments showed strong growth.
• Earnings Revisions: HTSC's FY17E EPS was revised down by 1.2% due to lower book value from higher dividend payout ratio.
• Dividend Policy: HTSC maintains a consistent dividend per share, which increases yield but reduces book value over time.
• Valuation Adjustments: Target price for HTSC was revised down to HK$18.86 based on FY17E 1.4x PB.
• Industry Trends: Despite revenue declines, net profit growth was robust, indicating improved efficiency and market returns.
• Market Volatility: The sector rotation towards TMT and commodities is expected to continue, affecting brokerage performance.