Q2 2018 Net Profit: HK$2.48bn, up 39.5% YoY and down 3.2% QoQ.
Average Daily Turnover (ADT): HK$106.8bn, down 27% QoQ due to a more volatile market.
Total Revenue and Other Income: HK$4bn, down 2.6% QoQ, indicating resilience in non-trading revenue streams.
EBITDA Margin: 75.7%, down 1.8ppt QoQ from the previous quarter.
Full-Year ADT Assumption Revised: From HK$135bn to HK$110bn due to lower-than-expected performance.
EPS Revisions: 2018E EPS reduced by 5.2%, 2019E EPS reduced by 6.5%.
Investment Highlights
Stock Connect Trading:
Northbound ADT reached RMB19.8bn in 1H 2018, up 178% YoY.
Southbound ADT reached HK$16.3bn, up 114% YoY.
Revenue from Stock Connect was HK$365m in 1H 2018, up 125% YoY.
LME Business Recovery:
Commodities segment revenue increased 2.8% YoY to HK$362m.
ADV of metals contracts on LME rose 10.8% YoY, excluding non-fee generating trades.
Structural Growth of ADT:
The long-term growth potential of ADT due to listing reform remains intact.
ADT is expected to grow from HK$66.9bn in 2016 to HK$110bn in 2018E and HK$135bn in 2019E.
Financial Metrics and Valuation
Trading Fees and Tariff:
Increased by 42.2% YoY in 1H 2018 to HK$1,540m.
Stock Exchange Listing Fees:
Up 36.7% YoY in 1H 2018 to HK$395m.
Caring and Settlement Fees:
Increased by 36.5% YoY in 1H 2018 to HK$830m.
Depository, Custody and Nominee Services Fees:
Up 7.6% YoY in 1H 2018 to HK$368m.
Market Data Fees:
Increased by 5.7% YoY in 1H 2018 to HK$224m.
Other Revenue:
Up 17% YoY in 1H 2018 to HK$268m.
Revenue and Other Income:
HK$4,044m in Q2 2018, up 28.2% YoY.
Net Profit:
HK$2,479m in Q2 2018, up 39.5% YoY.
PER (2018E): 31.2x, slightly below the 7-year average.
EV/EBITDA (2018E): 23.4x, also below the 7-year average.
Target Price: Revised from HK$330.2 to HK$300.4, based on the Gordon Growth Model.
Gordon Growth Model Assumptions:
2018E PER: 40.9x
Beta: 1.38
Cost of Equity: 8.4%
Medium-term ROE: 20.5%
Key Financials (2015–2019E)
Metric
2015
2016
2017
2018E
2019E
Revenue (HK$ million)
12,233
10,398
11,574
14,103
16,127
Net Income (HK$ million)
7,956
5,769
7,404
9,127
10,661
Net Margin (%)
65%
55%
64%
65%
66%
Basic EPS (HKD)
6.70
4.76
6.03
7.34
8.47
YoY Change (%)
54.0%
-27.5%
28.3%
23.3%
16.8%
PER (x)
34.2
48.1
38.0
31.2
27.0
PBR (x)
10.8
9.0
8.2
7.3
6.5
ROAE (%)
31%
19%
21%
23%
24%
ROAA (%)
3.2%
2.4%
2.6%
2.8%
2.9%
Cash Flow and Balance Sheet
Metric
2015
2016
2017
2018E
2019E
Net Cash from Operations (HK$ million)
8,321
6,164
8,013
4,931
10,507
Free Cash Flow (HK$ million)
7,611
5,544
7,325
4,033
9,578
Net Cash/(Debt) (HK$ million)
9,335
5,864
13,313
7,899
10,304
Gross Gearing (%)
11%
11%
2%
5%
4%
Valuation Trends
PER Range:
2015: 34.2
2016: 48.1
2017: 38.0
2018E: 31.2
2019E: 27.0
PBR Range:
2015: 10.8
2016: 9.0
2017: 8.2
2018E: 7.3
2019E: 6.5
EV/EBITDA Range:
2015: 26.8
2016: 35.7
2017: 27.7
2018E: 23.4
2019E: 20.0
Investment Outlook
Investment Thesis: Remains unchanged, with structural growth in ADT due to listing reform.
Recommendation: BUY, with a target price of HK$300.4 (+31% from close of HK$229.0).
Price Performance: Expected to increase by >20% within 12 months.
Market Conditions: ADT growth slower than expected due to market volatility, but long-term growth is expected to continue.
Key Assumptions
Metric
2015
2016
2017
2018E
2019E
ADT of Equity Products (HK$ billion)
105.6
66.9
88.2
110.0
135.0
ADT of DWs, CBBCs & Warrants (HK$ billion)
25.7
16.7
17.0
22.5
27.0
ADT of Northbound (¥ billion)
6.4
4.7
9.6
20.5
25.0
ADT of Southbound (HK$ billion)
3.4
4.1
9.8
13.5
17.0
Southbound Contribution (%)
3.2%
6.1%
11.1%
12.3%
12.6%
Number of Newly Listed (Main Board)
104
81
94
100
110
Number of Newly Listed (GEM)
34
45
80
85
50
Analyst Disclaimer
The report is issued by Galaxy International Securities to institutional clients.
No guarantees or warranties are made regarding the accuracy or completeness of the information.
The report is not an offer to buy or sell any securities.
Past performance is not indicative of future results.
The report should be read in conjunction with the disclaimer.
Copyright
No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited.
