China Securities Sector - Oriental Patron Securities Sector - A... · we believe market turnover is somehow a lagging indicator for the sector's market returns. ... China Securities

Mon, 13 Mar 2017

Equi ty Research China Securities Sector Secur i t ies / China

A year for opportunists

Change is the only constant As history repeats itself in similar patterns, we

believe market volatility will increase in 2017, synchronizing the 10 year-cycle of

volatility spikes as occurred in 1987, 1997 and 2007. Driven by (1) the rising

protectionism in economic policies in US (2) potential new policies after the 19th

National Congress of CPC and (3) change in global liquidity after interest rate

hike by FED, we believe the brokerage sector is the best proxy to capture

opportunities in the shifting dynamics of the financial markets.

Market turnover is a lagging indicator In contrast to the general perception of

the strong link between market turnover and brokerage sector performance, we

have this other-worldly view that the market turnover is lagging behind the

actual sector performance. We believe the change in market turnover is more

about a result from, not a reason for, the change in the market performance and

volatility. Thus, as the brokerage sector normally offers higher than 1 beta

(relative change against market return) we think investing in market leaders of the

brokerage sector will offer investments with efficiency, leverage as well as

liquidity.

Exploiting the divergence Despite the market is building up momentum with

MSCI China up 10.1% YTD, the brokerage sector has been underperforming the

index by 8.1% since the average daily turnover (“ADT”) of A-shares market

dropped 30% yoy in 2M17 or 20% compared to the ADT of 2016. However, in

addition to a lagging indicator, we think ADT is only one of a few factors behind

the earnings of the brokerage sector, which is also dependent on market returns

and the bond market. With (1) the SHCOMP up 3.4% in 2M17 VS down -18.2% in

2M16, (2) robust growth in AUM (3) reactivation of IPO market and (4) liberation

of bond issuance, the brokerage sector's total revenue and net profits jumped

44% and 161% with higher income from asset management, investment banking

as well as net gains from investment in 2M17. By seeing through the market

concern on lower profitability of the brokerage sector in FY17E, we believe it

creates decent opportunities to invest in the brokerage sector to capture the

divergence between the market performance and the high beta of the sector.

What we pick In order to capture the opportunities from (1) higher adaptation of

mobile platform (2) robust growth in investable assets in China and (3)

reactivation of IPO market and development of bond market, we prefer brokers

with the core competitive advantages of (1) strength in technology integration (2)

high exposure in asset management business and (3) better client mix and

innovation in investment banking. Thus, we initiate our coverage on HTSC, GF

Securities and CITIC with BUY ratings and Haitong with a HOLD.

Bruce Yeung, CFA

+852 2135 0214

[email protected]

Daisy Wang

+852 2135 0212

[email protected]

Sector Report

Exhibit 1: Recommendations summary

Company Stock code Rating TP Close

FY17E

PE

FY17E

PB

FY17E

Yield

Upside

(%)

HTSC 6886 HK BUY HK$19.10 HK$15.30 14.2 1.12 2.1% +25%

GF Securities 1776 HK BUY HK$20.60 HK$16.90 10.6 1.32 2.8% +22%

CITIC Securities 6030 HK BUY HK$19.40 HK$16.50 14.1 1.19 2.1% +18%

Haitong Securities 6837 HK HOLD HK$14.80 HK$13.94 14.5 1.22 2.1% +6%

Galaxy Securities* 6881 HK NR n.a. HK$7.38 11.4 1.00 2.2% n.a.

Source: Bloomberg, OP Research, *Consensus estimate

Mon, 13 Mar 2017

China Securities Sector - A year for opportunists

Page 2 of 68

Table of Contents

Table of Contents ......................................................................................................................................... 2

Investment summary .................................................................................................................................... 3

Why invest in brokerage sector? .................................................................................................................. 7

What makes a better broker to invest? ........................................................................................................16

HTSC (6886 HK) – Leading technology integration .....................................................................................25

GF Securities (1776 HK) – Leading in asset management ..........................................................................36

CITIC Securities (6030 HK) – Leading in investment banking .....................................................................46

Haitong Securities (6837 HK) – Leading in diversification ...........................................................................56

Investment risks ..........................................................................................................................................66

Mon, 13 Mar 2017


Page 3 of 68

Investment summary

The art of differentiation

We initiate our coverage on the brokerage sector as we think the sector is the best

proxy to capture the opportunities arising from higher market volatility in 2017. We

expect this market volatility to increase in 2017 because of (1) higher international

political tensions after the US presidential election (2) potential new policies

announced after the 19th National Congress of CPC in China (3) change in

liquidity driven by the interest rate hike in FED and (4) 10-year cycle in market

sentiments where spikes in volatility occurred in 1987, 1997 and 2007.

Beta is more important than market turnover for brokers

The majority in the brokerage sector analysts is focusing on the change in

average daily turnover (“ADT”). However, in contrast to the mainstream opinion,

we believe market turnover is somehow a lagging indicator for the sector's market

returns. As the classic shift in market sentiments happened during 2015 – 2016,

Exhibit 8 clearly shows the sector performance always leads the change in

turnover. We believe that, as the investors always predicted the market

performance based on recent market momentum, market liquidity is always the

result of, but not the reason for, the change in the market performance. Thus,

even though both market turnover and market returns should have a positive

impact on broker earnings, we think correlation to the market returns (“beta”)

would be more crucial for investing in the brokerage sector. As shown in Exhibit 7,

when compared with the industry average market beta of 1.2, we believe the

market leaders in the brokerage sector with beta of 1.4 - 1.6 would offer higher

returns, liquidity as well as efficiency under positive market conditions, especially

in a higher volatility market in 2017E.

Differences in profit sensitivity

By breaking down the FY17E EPS sensitivity to the change of turnover and

returns in stock and bond markets, CITIC would have higher EPS sensitivity to

the change in market turnover as higher profitability through a client mix of more

institutional clients. Meanwhile, the profit of Haitong would have higher correlation

to the change in stock index as it has a higher investment proportion in equity.

However, in addition to the market angle, which only focuses on the stock market,

we believe bond markets have more significant impact on the brokerage sector's

profitability since brokers generally leverage up to invest in debt securities for

dividend income. The net gains from investments of brokers are generally more

sensitive to the change in the bond market index, while GF Securities showed

strong investment portfolio management capabilities by achieving higher

investment yields from financial assets held.

Exhibit 2:FY17E EPS sensitivity test

FY17E EPS change Stock turnover Stock index Bond turnover Bond index

+10% +5% +10% +1%

HTSC 2.9% 0.0% 0.0% 5.2%

GFS 2.4% 0.2% 1.9% 0.1%

CITIC 5.0% 1.2% -0.1% 6.0%

Haitong 3.4% 1.4% 0.7% 4.2%

Source: Company, OP Research

We initiate our coverage on the

brokerage sector as it is the best

proxy to capture the opportunities

arising from higher market

volatility in 2017

Beta is more important indicator

than market turnover for

brokerage sector performance

Bond market has greater

significant impact on brokerage

sector profitability

Mon, 13 Mar 2017


Page 4 of 68

12%

22%19%

7%4%

9%10%8%

13%

5% 6%

16%

0%

5%

10%

15%

20%

25%

HTSC GFS CITIC Haitong Galaxy Sectoraverage

Asset Management Investment Banking

(%)

Looking for alpha

Except for the market dependency factors, we believe (1) capability to capture

market share through technology integration (2) development in asset

management business and (3) innovation in investment banking business are

three key areas for brokers to outperform the market.

As shown in Exhibit 35, major brokers generally lose market share to smaller

competitors in the wake of freeing of multiple accounts for individual investors.

Unlike other industry peers, HTSC gained higher market share to rank first in the

total trading value though effective technology integration and having over 6.5mn

active users for their mobile APP with strong user stickiness. By owning majority

stake in GF Fund and China AMC, GF Securities and CITIC Securities are

expected to have 22% and 19% of total revenue contribution generated from

asset management business respectively, much higher than the industry average

of 9%. We believe strength in asset management development would offer better

growth for brokers given over 60% CAGR in asset management fees income in

China. With the reactivation of IPO market and more liberal bond issuance,

innovation in investment banking, such as green bond underwriting, would

provide strong growth in the segment. After the market stabilised with the

correction in mid-2015, we believe further controls with the policies on investment

banking business would be limited in the near future, favoring CITIC and Haitong.

Exhibit 3: Segment revenue contribution for asset management and

investment banking in FY16E

Source: Company data, OP Research,*1H16 results

HTSC, GFS, CITIC and Haitong

have a competitive edge in

technology integration, asset

management, investment banking

and diversification respectively

Mon, 13 Mar 2017


Page 5 of 68

Opportunities arising from the divergence in performance

Despite MSCI China and SHCOMP having built up momentum with 10.1% and

2.4% YTD performance, the brokerage sector's average YTD returns

underperformed the market by about 8.1%, which contrasts with the positive and

larger than 1x beta of the sector. We believe it is driven by the short term market

misperception of lower broker profits under lower market turnover, since the

A-share average daily turnover (“ADT”) in Jan-Feb 2017 dropped 30% and 20%

compared to the same period in 2016 and to the average in 2016 respectively.

According to the latest released financial results of the brokers in China for the

first two months of 2017, sector revenue jumped 44% despite the drop in market

turnover as we believe it was driven by (1) higher revenue from asset

management and (2) higher investment banking revenue from reactivation of IPO.

Besides, the sector profit also increased by 161% as we think there was a

turnaround in net investment gains since SHCOMP was up +3.4% in 2M17,

where it was down -18.2% in 2M16. Thus, as we said above, we think market

turnover would be a lagging indicator for the sector performance, where the

momentum in the market would trigger the sector to outperform in 2017E and the

short term divergence is raising investment opportunities.

Exhibit 4:FY17E PB band and YTD performance

Company FY17E PB Mean of forward PB band Std. dev. YTD Return Vs. MSCI China

HTSC 1.12 1.17 0.15 3.6% -6.4%

GFS 1.32 1.37 0.22 4.3% -5.8%

CITIC 1.19 1.42 0.46 4.7% -5.4%

Haitong 1.22 1.31 0.39 5.0% -5.1%

Galaxy 1.00 1.11 0.35 5.6% -4.5%

Sector average 1.17 n.a. n.a. 2.0% -8.1%

Source: Bloomberg, OP Research

Exhibit 5:Brokerage sector result summary in Jan- Feb 2017

(RMB mn) Revenue YoY Net profit YoY Net asset YoY

CITIC 2,273 102% 767 263% 125,038 4%

GFS 2,213 11% 968 15% 75,684 2%

HTSC 2,037 40% 878 78% 87,895 9%

Haitong 1,785 45% 793 189% 105,438 2%

Galaxy 1,570 -12% 582 -4% 62,177 9%

Sector total 22,262 44% 8,258 161% 1,026,996 12%


Brokerage sector underperformed

the market because of lower ADT,

but we think there are

opportunities.

Brokerage sector has solid

revenue and net profit growth in

2M17

Mon, 13 Mar 2017


Page 6 of 68

HTSC,8.1%, 1.12

GFS, 12.6%, 1.32

CITIC, 8.5%, 1.19

Haitong,8.0%, 1.22

Galaxy*, 9.2%, 1.00

Sector average* 9.6%, 1.17

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

6.0 8.0 10.0 12.0 14.0 16.0

PB (x)

ROE (%)

Our picks

We prefer HTSC (6886 HK) as the company has a strong edge in capturing new

retail accounts for higher market shares by leveraging the technology and mobile

app. Despite HTSC having high revenue contribution from brokerage business,

due to efficiency in operations, we believe the company is trading at a discount to

the industry average forward PB. Our TP represents FY17E 1.4x PB and 25%

upside.

We also prefer GF Securities (1776 HK) because of excellence in profitability and

attractiveness in business mix. With (1) higher contribution from the promising

asset management income (2) higher yield from financial assets held and (3) less

earnings sensitivity to the market, GFS has FY17E ROE of 13%, higher than the

industry average, and justifying a premium in valuation. Our TP represents

FY17E 1.6x PB and 22% upside.

We like CITIC Securities (6030 HK) as the company is the market leader with a

long history of development in institutional and professional clients. CITIC has a

well balanced exposure in asset management and investment banking segment

and its better client mix provides strong synergy through all segments of the

company. Our TP represents FY17E 1.4x PB and 18% upside.

Although Haitong Securities (6837 HK) has the most diversified income sources,

more innovation in investment banking and a well-developed overseas platform,

the company only achieved similar to average ROE even under higher leverage.

This may put a limit on the future growth of Haitong and our TP represents FY17E

1.3x PB and 6% upside.

Exhibit 6: Brokerage sectorFY17E ROE vs FY17E PB

Source: Company data, OP Research, *Consensus estimate

We initiate our coverage on

brokerage sector and prefer HTSC,

GFS and CITIC

Mon, 13 Mar 2017


Page 7 of 68

1.42

1.25

1.54 1.58

1.74

1.251.32

1.18

1.40 1.45

1.61

1.15

0.830.77

0.89 0.880.98

0.850.78 0.71

0.77 0.80 0.840.73

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

HTSC GFS CITIC Haitong Galaxy Sector average

HSI Index MSCI China Index SHCOMP SZCOMP

(X)

Why invest in brokerage sector?

Direct proxy to the growth of investable wealth and securitization in

China

Brokerage companies generally have three major income streams, namely,

commission and fee income, interest income and investment gains. In addition to

the positive correlation to the A-share market turnover and higher beta, we

believe investing in brokerage industry will also offer a direct proxy to the growth

of investable wealth and securitization in China.

Brokerage sector performance is more related to market sentiment than

turnover

Commission and fee income generally contribute about half of the total revenue

of a broker and mainly generated from commission on securities, especially in the

A-share market. Although brokers' commissions are highly related to market

turnover, the stock performance of the brokerage sector is more related to market

conditions. As the market turnover usually increases with investors’ sentiment

and market performance, the brokerage sector offers higher than 1 beta for

investment in market recovery. When comparing to the historical stock

performance of the listed brokers to the change of market turnover, we believe

market turnover is somehow a lagging indicator for the sector. Thus, we think the

core difference between the betas of each broker would be linked with their

business nature and prospect of future development.

Exhibit 7: Beta of the brokerage sector


Brokerage sector performance is

more related to the beta

Mon, 13 Mar 2017


Page 8 of 68

17.116.4

13.1

9.8

8.1 8.1 8.1

7.1

5.3

4.2

0

2

4

6

8

10

12

14

16

18

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(bps)

Exhibit 8: Brokers stock performance Vs A-share market turnover


Brokers are profitable even under keen competition because of huge

market size

With the help of online trading platform, Chinese brokers can offer trading

executions through automatic and scalable operations. Due to the homogenous

nature of securities brokerage business in China, average commission rate has

decreased by nearly 80% over the past 10 years. With price sensitive retail

customers and liberation of multiple securities accounts, the decline in average

commission rate was accelerated in 2013, making a CAGR of -14.6% during

2007-2016. It is expected that the average commission rate will drop to 4.2 bps in

2016, which would be 21% lower than 5.3 bps in 2015. As some brokers are

offering commission rate promotions of 3 bps for new accounts, it is expected the

average commission rate will continue to go down.

Exhibit 9: Averagecommission rate in China

Source: AMC, CRSC, OP Research

-18%

76%

-5%

-23%

-3% -4%5%

-15.6%

143%

165%

-16.7%

-44.8%

-0.9%-16.7%

-100%

-50%

0%

50%

100%

150%

200%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

1H14 2H14 1H15 2H15 1H16 2H16 1H17 (YTD)

HTSC GFS CITIC

Haitong Galaxy Avg. broker return

Market T/O chg (RHS)

(hoh%) (hoh%)

Even under highly competitive

environments, Chinese brokers

still have decent profits given

massive market size

Mon, 13 Mar 2017


Page 9 of 68

54.6 42.2 31.5 46.874.2

255.1

126.7-22.7% -25.4%

48.8%58.6%

243.6%

-50.3%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

0

50

100

150

200

250

300

2010 2011 2012 2013 2014 2015 2016

A-share market T/O yoy%

(RMB tn) (yoy%)

225.5 172.8 129.5 196.7303.0

1,045.3

519.4

242

244

243

238

245

244 244

234

236

238

240

242

244

246

0

200

400

600

800

1,000

1,200

2010 2011 2012 2013 2014 2015 2016

ADT Trading days

(RMB bn) (No. of days)

However, the market turnover of A-share has increased dramatically in recent

years. Despite the average daily turnover (“ADT”) dropping 50% to RMB 519bn in

2016 given an exceptionally high base, it also represented a 3-Year CAGR of

38.5% as supported by higher total market cap and velocity in A-share market.

The market velocity in China was 2.6x in 2016, which was 288% higher than that

in Hong Kong as it is supported by a huge number of retail investors. Although the

fierce competition may persist, given the relatively high velocity and share

turnover rate of the stock market in China, income from low single digit

commission rate is still well enough to cover brokers' fixed overheads to generate

decent profits and cashflow.

Exhibit 10: Total market turnover of A-share

Source: SSE, SZSE, OP Research

Exhibit 11: Average daily trading value of A-share


A-share market has high velocity

even after correction in mid-2015

Mon, 13 Mar 2017


Page 10 of 68

2.64 2.38

1.58

2.05 1.83

5.25

2.60

0.82

1.74

0.61 0.64 0.68

1.06

0.67

0

1

2

3

4

5

6

2010 2011 2012 2013 2014 2015 2016

China HK

(x)

29 3750 59 68

79 9010246

54

6369

76

83

90

98

75

91

113

128

144

162

180

200

0

50

100

150

200

250

2013 2014 2015 2016E 2017E 2018E 2019E 2020E

High-net-wealth family Common family

(RMB tn)

Exhibit 12: Market velocity in China andHK

Source: Eastmoney, CSDC,HKEx, OP Research

Market velocity = Total annual market turnover / Tradable market cap in the year end

Robust growth in personal assets drives growth in asset management

With the rapidly increasing investable wealth of the middle class in China, asset

management fee income has been growing significantly in recent years. The total

number of China’s middle class and high-end affluent population with investment

assets per capita of more than RMB1.4 million will reach 12.3 million in 2016E.

With total personal investable assets of RMB 113 trillion in 2015, the total size will

continue to grow at a CAGR of 12% to RMB 200 trillion by 2020E. As more needs

to be invested in securitized assets other than fixed assets, such as property, we

believe stock and bond markets will capture the growth of investable wealth in

China, which is shown by the robust growth in the total size of the AUM of the

asset management industry. With annualized CAGR of 59% in AUM, we think it

will favour the management fee income from asset management in the long term.

It is expected that asset management will contribute around 20% - 30% of the

total fee income of the brokerage sector in the near future.

Exhibit 13: Personal investable assets in China

Source: BCG Analysis, OP Research

Asset management provides

another core revenue stream to

brokers

Mon, 13 Mar 2017


Page 11 of 68

7,946 8,794 10,247 10,967 11,895 13,729 15,003 15,767 17,578

10,420 12,202

16,167 16,866 20,995

22,112 24,422

26,226 26,045

2,130 2,795

3,892 4,774

5,210 5,702

6,827 6,659

7,891

20,508 23,818

30,348 32,688

38,203 41,683

46,480 48,920

51,794

0%

5%

10%

15%

20%

25%

30%

(5,000)

5,000

15,000

25,000

35,000

45,000

55,000

2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

Broker AUM Fund AUM PE AUM Futures AUM QoQ%

(RMB bn) (QoQ%)

Exhibit 14: AUM amount and QoQ growth in China

Source: AMAC, OP Research

CAGR is calculated by annualized data

Higher demand in investment banking in spite of tighter bank lending

regime

Despite suspension of IPO approval after the market crash in mid-2015, the

underwritten amount of investment banking has kept on growing, especially in the

debt issuance and equity refinancing. Due to more stringent credit risk controls of

the banks in China, corporations have been switching to financing by investment

banking products. In order to improve the sentiment of retail investors, the IPO

approval was suspended from 2H15 to 1H16, decreasing the amount

underwritten by IPO by 15% to RMB 151 bn in 2016. However, as debt issuance

and equity refinancing are targeting professional investors, the amount

underwritten by debt issuance and equity refinancing increased by 49% and

102% to RMB 3.08 trillion and RMB 1.36 trillion in 2016 respectively, to provide a

growth driver for brokerage in a consolidating market.

Exhibit 15: Underwritten amount in China

Source: CRSC, OP Research

0 67 177 151 280 419

675

1,362

408 357

2,063

3,080

688 843

2,915

4,592

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2013 2014 2015 2016

IPO Refinancing Debt

(RMB bn)

Debt issuance and equity

refinancing increased

significantly in tighter credit

market conditions

Mon, 13 Mar 2017


Page 12 of 68

Reactivation of IPO market in 2017

Although the IPO market has been re-activated since 2H16 after the market

stabilized, the huge number of IPO applications awaiting approval has formed an

IPO dam of “landslide proportions” (“IPO 堰塞湖”). Over 430 companies

have applied for IPO listing on the main board in China. We expect the total

amount for underwriting to be in the region of RMB 300 bn and it may represent a

pipeline of about 2 to 3 years of the capability of the market. Since the average

commission rate of IPO is much higher than debt issuance and equity refinancing,

we believe the reactivation of the IPO market will provide solid growth to the

brokers with strong investment banking business.

Exhibit 16: Re-activation of IPO market

Source: CFI data, OP Research

Interest income is related to the loan book as well as client deposit

For interest income, one-third is generated from interest received from the clients’

deposit and two-thirds generated by brokers’ loan book, which consists of

securities lending (margin financing) and stock resale agreement. Despite

brokers having to pay interests on clients’ money, the interest received from

banks for the clients deposit is usually much higher. Thus, by capturing new

accounts, the broker can not only gain from potential commission income from

trading, but also the interest spread generated from the deposits. The interest

spread would favor leaders in the brokerage industry which have more active

clients and higher amount of clients deposit for a stable stream of interest income.

38.9 43.5

146.4

12.528.9

121.852

73

187

32

61

166

0

20

40

60

80

100

120

140

160

180

200

0

20

40

60

80

100

120

140

160

1H14 2H14 1H15 2H15 1H16 2H16

Amount underwritten No. of IPO

(RMB bn) (No. of IPO)

A huge number of IPO

applications awaits approval

Interest income is generated from

the loans for leveraged trading

and client deposit

Mon, 13 Mar 2017


Page 13 of 68

80

85

90

95

100

105

110

115

120

125

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

May-1

5

Jun

-15

Jul-1

5

Au

g-1

5

Se

p-1

5

Oct-

15

Nov-1

5

Dec-1

5

Jan

-16

Fe

b-1

6

Ma

r-16

Ap

r-16

Ma

y-1

6

Jun

-16

Jul-1

6

Au

g-1

6

Se

p-1

6

Oct-

16

Nov-1

6

Dec-1

6

Jan

-17

Newly added account Total investor account

(mn) (mn)

-100%

0%

100%

200%

300%

400%

500%

0

500

1,000

1,500

2,000

2,500

Jan

-13

Ma

r-13

Ma

y-1

3

Ju

l-1

3

Se

p-1

3

Nov-1

3

Jan

-14

Ma

r-14

Ma

y-1

4

Ju

l-1

4

Se

p-1

4

Nov-1

4

Jan

-15

Ma

r-15

Ma

y-1

5

Ju

l-1

5

Se

p-1

5

Nov-1

5

Jan

-16

Ma

r-16

Ma

y-1

6

Ju

l-1

6

Se

p-1

6

Nov-1

6

Jan

-17

Margin financing & securities lending balance yoy%

(RMB bn) (yoy%)

Exhibit 17: New accounts opened and total A-share accounts in China

Source: Eastmoney, OP Research

The bulk of interest income accrues from advances to customers, even though

total margin financing usually changes on market sentiment. After the market

correction from the bullish sentiment in mid-2015, the balance of margin financing

and leverage ratio have been stabilized. Due to relatively higher liquidity and

velocity of the A-share market compared to other developed countries, we believe

the loan book will still have an uptrend in the long term. Additionally, more and

more major stakeholders of listed companies have been adopting stock

repurchase agreements with brokers to secure innovative and flexible equity

financing solutions. Interest income from stock resale business has become a

fast growing trend.

Exhibit 18: Margin financing balance in China


Brokers are offering flexible

equity financing solutions, such

as stock repurchase agreement

Mon, 13 Mar 2017


Page 14 of 68

2.6%

2.0%

0.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Jan

-13

Ma

r-13

Ma

y-1

3

Jul-1

3

Se

p-1

3

Nov-1

3

Jan

-14

Ma

r-14

Ma

y-1

4

Jul-1

4

Se

p-1

4

Nov-1

4

Jan

-15

Mar-

15

Ma

y-1

5

Jul-1

5

Se

p-1

5

Nov-1

5

Jan

-16

Ma

r-16

Ma

y-1

6

Jul-1

6

Se

p-1

6

Nov-1

6

Jan

-17

China (SSE+SZSE) US (NYSE) HK (HKEx)

2.2%

3.3%

2.6%

n.a.

3.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

HTSC GFS CITIC* Haitong Galaxy

Exhibit 19: Leverage ratio in China, US and HK

Source: SSE, SZSE, HKEx, Bloomberg, OP Research

Our view: Investment gains are part of the core profit

Investment gain is not a one-off item. We believe it is a part of core earnings of

brokers because investment gains are, generally, derived from market making

activities and interests spread between the investment yield and financing costs.

Although the net returns of the holding position is related to market performance,

we think stock and bond market turnovers are another crucial factor for gains in

market making activities. Besides, brokers generally leverage up to receive a

significant amount of dividend income from the financial assets held, which are

generally high grade bonds. We think the strength in low cost financing has direct

impact on profitability in investment gains.

Exhibit 20: Investment yield of financial assets in 1H16

Source: Company data, OP Research (*yield on available-for-sales financial assets only)

Market making activities and

investment yield bring recurring

investment gains

Mon, 13 Mar 2017


Page 15 of 68

2.8%

3.6%

4.5% 4.5%

5.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

HTSC GFS CITIC Haitong Galaxy

3.70

3.43

3.13

3.79

2.83

2.0

2.5

3.0

3.5

4.0

HTSC GFS CITIC Haitong Galaxy

(x)

Exhibit 21: Adjusted financing cost (exclude client money)in1H16

Source: Company data, OP Research

Exhibit 22: Adjusted leverage ratio (ex-client money) in1H16

Source: Company data, OP Research

Looking into the competitive edges of brokers

Therefore, in addition to the direct impact of average daily turnover (“ADT”) and

market performance (“beta”), we believe (1) development of asset management

business (2) strength in investment banking (3) ability to capture new accounts (4)

strength in financing costs (5) innovation on equity financing and (6) cost to

income ratio will directly impact on the broker’s earnings and valuation

Brokers are more than just ADT

and beta

Mon, 13 Mar 2017


Page 16 of 68

159.2

266.2

575.2

328.0

23.0%

67.2%

116.1%

-43.0%

-80%

-40%

0%

40%

80%

120%

160%

0

100

200

300

400

500

600

2013 2014 2015 2016Brokerage commission Underwriting fee Asset management feeFinancial advisory Interest income Investment gainsOthers Total revenue yoy%

(RMB bn) (yoy%)

48%39%

47%

32%

8%

9%

7%

16%

4%

5%5%

9%

3%

3%2% 5%

12%17% 10% 12%

19% 27% 25% 17%

6%1% 4% 9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016

Brokerage commission Underwriting fee Asset management fee

Financial advisory Interest income Investment gains

Others

What makes a better broker to invest?

Asset management, debt issuing and innovation in online platform

With the dramatic change in market volatility since mid-2015, the average market

daily turnover has decreased by about 50% to RMB519bn by the end of 2016.

Although the commission and fee income of brokers have dropped significantly in

2016, a few other segments have maintained robust growth. These are asset

management, debt underwriting and market share gains from online platform.

The industry total income dropped by about 43% in 2016, driven by decline in

brokerage commission. However, asset management fee, underwriting fee and

interest income are expected to maintain stable growth and increase the

contribution to 9%, 16% and 12% from 5%, 7%, 10% respectively.

Exhibit 23: Industry income of China brokers

Source: SAC, OP Research

Exhibit 24: Segment income contribution of China brokers


Some segments grew even ADT

dropped significantly

Mon, 13 Mar 2017


Page 17 of 68

1.11.4

1.82.0

2.32.6

2.93.3

0.2

0.2

0.2

0.3

0.3

0.4

0.4

0.5

0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

1.3

1.6

2.1

2.4

2.7

3.1

3.5

3.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2013 2014 2015 2016E 2017E 2018E 2019E 2020E

RMB5~30mn RMB30~100mn >RMB100mn

(mn)

75.9104.9

269.1

105.3

38.2%

156.4%

-60.9%-100%

-50%

0%

50%

100%

150%

200%

0

50

100

150

200

250

300

2013 2014 2015 2016

Brokerage commission fee income yoy%

(RMB bn) (yoy%)

Exhibit 25: Brokerage commission income in China


The tipping point for asset management

The rise of household wealth in China has driven a strong demand for wealth

management. It is reported China has over 2 million high net worth individuals

with total personal investable assets of RMB 113 trillion. It is expected the number

of high net worth individuals and total investable asset size will increase at a

CAGR of 13.4% and 12% to 3.88 million and RMB 200 trillion by 2020E

respectively. Given a strong rally in the property price and stringent control from

government in second house purchase, the Chinese middle class has a strong

desire to diversify its accumulated wealth into other areas for investment other

than the property market, which supports the growth of asset management

industry in China in recent years.

Exhibit 26: No. of high-net-wealth family in China

Source: BCG Analysis, OP Research

Increase in personal investable

assets drives growth in asset

management

Mon, 13 Mar 2017


Page 18 of 68

5.2 8.0

11.9

17.6

7.0 12.4

27.5 29.6

0

5

10

15

20

25

30

35

2013 2014 2015 2016

Broker AUM (RMB tn) Asset management inocme (RMB bn)

(RMB tn/ RMB bn)

Total commission income from securities trading is expected to decrease by 61%

to RMB 105 bn given 50% drop in ADT and 26% drop in average commission rate.

However, fee income from asset management segment maintained a stable

growth of 8% to RMB 30 bn in 2016 due to 48% increase in total AUM size. The

total AUM size in China has tripled from RMB 5.2 trillion in 2013 to RMB 17.6

trillion in 2016, which represents a CAGR of 50%. We believe the number of

middle class and the personal investable assets size have reached a tipping point

for an explosive growth of asset management industry in China. With the sharp

correction of stock market in 2015, we believe individual investors have taken a

more conservative approach by investing in actively managed funds rather than

individual stocks, which cost a lot more effort in analysis. Besides, since managed

funds would provide better liquidity and stable returns than property in an

overheated property market, we believe Chinese investors will be keen to

diversify their exposure into stock and bond market after the correction in

mid-2015.

Exhibit 27: Broker AUM and asset management income in China

Source: AMAC, SAC, OP Research

Thus, by acquiring majority interests in GF Fund in 2014, we prefer GF Securities

(1776 HK) given this strong exposure in asset management business, which is

expected to contribute 22% of total revenue in FY16E Vs 9% of the industry

average. We also prefer CITIC Securities (6030 HK), which owns majority stake

of the largest asset management company in China - China AMC. We believe

asset management segment will contribute 19% of the total revenue of CITIC in

FY16E.

Asset management segment is

expected to see8% growth in

2016E

GF Securities (1776 HK) has the

highest contribution from asset

management

Mon, 13 Mar 2017


Page 19 of 68

Exhibit 28: Asset management contribution of major listed brokers

Source: SAC, company data, OP Research

Higher penetration in debt issuance and equity refinancing

Under more liberal policies China has become the world’s third largest bond

market in terms of amount of bonds outstanding. The total amount of bonds

issued in China in 2016 jumped 42% to RMB 22,337 bn, representing a CAGR of

49% from 2013 to 2016E. As more bonds and securities are allowed to be issued

and offered to the public, corporates and enterprises are increasingly raising

funds through corporate bonds, financial bonds and asset-backed securities. With

easier access to bond markets for the individual investors, brokers have

increased bonds issuance market shares by 1.7pt to 21.1% in 2016, representing

RMB 4,710 bn, up 54% yoy. Total underwriting and sponsor fees of the industry

grew by 32% to RMB 52 bn in 2016, representing a CAGR of 59%. Thus, we

believe bond issuance may support brokers’ underwriting fee income in the near

future and more innovative brokers plus higher revenue contributions from bond

issues will outperform.

Due to tight credit control of the banks, we believe CITIC Securities (6030 HK) will

benefit from the robust growth of debt issuance and equity refinancing. CITIC has

the highest revenue contribution from investment banking business among other

competitors given their strong edge in institutional clients coverage, first mover

advantage and lower financing costs. With 13% of revenue from investment

banking in FY16E, we think CITIC may outperform its peers by capturing the

reactivation of IPO market and higher demand in debt issuance given more

restriction in equity refinancing

8%

16%

11%

15%

10%

12%

17%

21%

4%

9%

7%

13%

6%

11%

9%

4%

2% 2% 1%

4%

4% 5% 5%

10%

0%

5%

10%

15%

20%

25%

2013 2014 2015 1H16

CITIC GFS HTSC Haitong Galaxy Sector average

Brokers enjoy robust growth in

underwriting fees from bonds

issuance

CITIC Securities will benefit with

its strong edge in investment

banking

Mon, 13 Mar 2017


Page 20 of 68

1,172

1,997

3,054

4,710

70.4%

52.9%54.2%

50%

55%

60%

65%

70%

75%

-

1,000

2,000

3,000

4,000

5,000

2013 2014 2015 2016E

Commercial papers Corporate bonds Enterprise bonds

Financial bonds Convertible bonds Government bonds

Asset-backed securities Private placement notes Bond by brokers yoy%

(RMB bn) (yoy%)

12.9

24.0

39.4

52.0

86.7%

63.8%

32.1%

0%

20%

40%

60%

80%

100%

0

10

20

30

40

50

60

2013 2014 2015 2016

(RMBbn) (yoy%)

Exhibit 29: Amount of bonds issued by brokers in China

Source: WIND, OP Research

Exhibit 30: 2016E percentage of bond issued by brokers in China


Exhibit 31: Total underwriting and sponsor fee income of brokers in China


3%

100% 100%

13%

72%

0%

55%

11%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Commercialpapers

Corporatebonds

Enterprisebonds

Financialbonds

Convertiblebonds

Governmentbonds

Asset-backedsecurities

Privateplacement

notes

Mon, 13 Mar 2017


Page 21 of 68

HTSC, 7.87%

CITIC, 5.70%

GTJA, 5.44%

Galaxy, 4.83%

GFS, 4.58%

Haitong, 4.50%

SWHY, 4.40%

CMS, 3.88%

Guosen, 3.44%CSC, 3.00%

Others, 52.4%

11%

9%

6%

12%

4%

11%

6%

10%10%

9%

5%

9%

7%7%

5%

7%

5%

8%

2%

6%8%

9% 7%

15%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2013 2014 2015 1H16

CITIC GFS HTSC Haitong Galaxy Sector average

Exhibit 32: Investment banking revenue contribution


Online platform and off-site accounts opening give edge in market share

Since brokerage business for securities trading in China is homogeneous in

nature, brokers compete fiercely on lower commission rates for higher market

share. However, in addition to commission rate, we believe online platform and

setting up off-site accounts have given some an edge in capturing market share

since this measure was approved in 2013. With more integrated online platforms,

brokers not only provide securities trading services, but also trading and

subscriptions for other investment products, such as funds and high yield

products. As individual investors are allowed to open multiple securities accounts

through off-site channels, like PC and smartphone, having more branches no

longer gives any significant competitive edge other than higher operating costs.

On the other hand, more innovative brokers have been capturing market shares

by leveraging the online channel to offer innovative services and promotions at

lower costs. We believe the brokers with more active users of their online

platforms will keep on gaining market shares, while brokers burdened with higher

number of branches will suffer from lower financial performance.

Exhibit 33: Market shares of top 10 brokers in China in 2016


Penetration in online platform has

crucial impact on the change of

market share

Mon, 13 Mar 2017


Page 22 of 68

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

HTSC CITIC GTJA Galaxy GFS Haitong SWHY CMS Guosen CSC

(ppt)

During 2013 – 2016 HTSC gained 1.8ppt in market shares with its aggressive

development of an online platform. The mobile APP “ZhangLe Fortune Path” of

HTSC, ranked first and had over 6.5mn active users by the end of 2016. Besides,

there were also market share gains for GTJA and GF Securities given the keen

development of online platform to generate synergy with their edge products,

such as overseas investments and investment funds. Except HTSC, GTJA and

GF Securities, the top ten brokers lost market shares to smaller brokers, such as

Eastmoney, due to the development of mobile trading platforms. Eastmoney has

gained 1.0 ppt market shares by integrating innovations in their online trading

platform. The mobile platform of Eastmoney, Eastmoney.com, embeds a

discussion forum for individual stocks (股吧) and an investment portfolio follower

system (發現高手), which fits the appetite of Chinese investors to facilitate the

trading activities. Besides, as a pure online broker, their business can also

expand at a lower cost. Thus, we believe HTSC (6886 HK) and GF Securities

(1776 HK) have equipped themselves with a competitive edge over their peers by

becoming first movers in mobile APP development.

Exhibit 34: Online platform allows better promotion and operation

efficiency

Source: HTSC, OP Research

Exhibit 35: Market shares change from 2013 to 2016 for top 10 brokers


HTSC (6886 HK) has strong edge

in integrating different functions

into their mobile trading platform

to capture market share

Mon, 13 Mar 2017


Page 23 of 68

23.4

10.2

8.3

6.5

3.2 3.2 3.1 3.1 3.0 2.8 2.4 2.1 2.1

0

5

10

15

20

25(mn of active users)

Exhibit 36: No. of active APP users for major brokers by the end of 2016

Source: analysys, OP Research (*trading platform as channel only)

Exhibit 37: Investment funds

Source: GFS, OP Research

Mon, 13 Mar 2017


Page 24 of 68

Exhibit 38: IPO and money market fund subscription

Source: HTSC, OP Research

Exhibit 39: Discussion forum and follower system

Source: Eastmoney, OP Research

Mon, 13 Mar 2017

HTSC (6886 HK)

Page 25 of 68

HTSC (6886 HK) –Leading technology integration HTSC has captured the leading position through integrated financial

services with its trading platform and mobile app

HTSC achieves lower financing costs through use of investment products

Initiate a BUY rating with TP of HK$19.1 or 25% upside

Capturing market share to become leader By total trading value of stock,

HTSC is expected to increase its market share by 0.6 ppt to 7.9% to keep the No.

1 rank in the industry in 2016. We believe the core competitive edge of HTSC is

the successful integration of financial services with their trading platform,

especially in the mobile APP. Through (1) first mover advantage (2) easy access

of off-site account opening (3) wide range of investment products subscriptions

and (4) effective marketing and promotion, HTSC has leveraged on the mobile

platform to increase customer loyalty to differentiate itself in a homogeneous

market.

Competitive edge in financing costs By capturing higher market shares,

HTSC can capture more deposits from active customers. With a higher amount of

deposits, HTSC would generate higher interest income and profit from the

interest spread in the deposits. Besides, by offering money market investment

products to clients, HTSC has secured lower financing costs than its peers in the

industry. We believe some 50% of the total debts of HTSC is secured through

yield enhancing financing products, giving it significant advantage in financing

costs.

Initiate a BUY with TP of HK$19.1 HTSC is trading at FY17E 1.12x PB or 4%

discount to the industry average. We believe the current valuation is

undemanding given the leading position and rising trend of market share of HTSC.

We initiate our coverage on HTSC with target price of HK$19.1 based on FY17E

1.4x PB. We think HTSC is our top pick of the sector and our TP represents 25%

upside.

Initial Coverage

BUY

Close price: HK$15.30

Target Price: HK$19.10 (+25%)

Key Data

HKEx code 6886

12 Months High (HK$) 19.20

12 Month Low (HK$) 14.52

3M AvgDail Vol. (mn) 5.22

Issue Share (mn) 1,719.05

Market Cap (HK$mn) 134,943.32

Fiscal Year 12/2016

Major shareholder (s) Jiangsu Guoxin Investment (17.46%)

Source: Company data, Bloomberg, OP Research

Closing price are as of 10/03/2017

Price Chart

1mth 3mth 6mth

Absolute % -1.4 -8.6 -13.2

Rel. MSCI CHINA % -2.6 -14.7 -13.4

Forward PB Band

Company Profi le Huatai Securities Co., Ltd. provides financial

company. The Company provides securities

brokerage services, research consulting

services, investment banking and direct

investment services, fixed-income services

and asset management services.

Exhibit 40: Forecast and Valuation Year to Dec (RMBmn) FY14A FY15A FY16E FY17E FY18E

Revenue 15,656.9 38,851.3 24,491.3 25,590.9 27,330.9

Growth (%) 75.4 148.1 (37.0) 4.5 6.8

Net Profit 4,486.3 10,696.9 6,382.8 7,024.7 7,688.4

Growth (%) 102.1 138.4 (40.3) 10.1 9.4

Diluted EPS (HK$) 1.001 1.822 0.980 1.079 1.181

EPS growth (%) 102.1 81.9 (46.2) 10.1 9.4

Change to previous EPS (%)

0.0 0.0 0.0

Consensus EPS (HK$)

1.008 1.269 1.579

ROE (%) 11.4 17.3 7.7 8.1 8.3

P/E (x) 15.3 8.4 15.6 14.2 13.0

P/B (x) 1.7 1.1 1.2 1.1 1.1

Yield (%) 4.1 3.9 1.9 2.1 2.3

DPS (HK$) 0.625 0.591 0.294 0.324 0.354


12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

Mar/16 Jun/16 Sep/16 Dec/16 Mar/17

HK$6886 HK MSCI CHINA

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

Jun/15 Dec/15 Jun/16 Dec/16

Forward P/B Ratio

+1std.

avg.

-1std.

Mon, 13 Mar 2017

HTSC (6886 HK)

Page 26 of 68

65%74%

66% 67% 67%

9%

5%10% 10% 10%

9%7% 12% 11% 11%

14% 12% 10% 10% 9%

3% 4% 3% 3% 3%

-50%

0%

50%

100%

150%

200%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY14 FY15 FY16E FY17E FY18EBrokerage and wealth management Investment bankingAsset management Investment and tradingOverseas business and others YoY (%)

(RMB mn) (%)

6,423

17,947

8,324 9,131

9,854 10,254

28,569

16,069 17,083

18,272

50%

179%

-44%

6% 7%

-100%

-50%

0%

50%

100%

150%

200%

0

5,000

10,000

15,000

20,000

25,000

30,000

FY14 FY15 FY16E FY17E FY18E

Securities brokerage and advisory Segment revenue YoY (%)

(RMB mn) (%)

Leading technology integration

Flying high on a smart device

Although revenue from securities brokerage and advice are highly dependent on

market behaviour, HTSC has been consistently capturing market share from

other competitors in recent years. Since market trading value is expected to drop

some 50% in 2016, it is likely that income from brokerage wealth management of

HTSC will fall 44% to RMB 16.1bn in FY16E. However, with (1) higher mobile app

penetration and (2) new account opening promotion, HTSC has been gaining

market shares and benefiting from the synergy generated in other areas.

Exhibit 41: HTSC revenue contribution by segment


Exhibit 42: HTSC brokerage income and segment revenue


HTSC is consistently capturing

higher market share

Mon, 13 Mar 2017

HTSC (6886 HK)

Page 27 of 68

HTSC is ramping up the number of mobile APP users to about 10 million by the

end of 2016, which is nearly 100% higher than that in two years ago. HTSC has

been leading other major brokers in terms of mobile app users as (1) first mover

advantage (2) integrated functions to streamline investment transactions by

mobile device and (3) flexible promotion and marketing scheme offered through

mobile platform.

Exhibit 43: HTSC mobile app


HTSC is one of the few major brokers to gain market share in the past three years.

In terms of stock turnover, HTSC gained 0.5 ppt, 0.8 ppt and 0.6 ppt market

shares in FY14, FY15 and FY16E respectively. It is expected HTSC will rank first

with 7.9% market share in 2016E. Through developing mobile app, HTSC gained

early bird advantage by offering off-site account opening through PC or mobile

device in 2013 to capture new accounts after the relaxation of multiple accounts

for individual investors. Besides, the mobile app has also integrated different

financial products into one platform for more streamlined transactions. Investors

can easily switch their investments between stocks, investment funds, money

market funds, yield enhancement products and IPO subscription. Moreover, with

the flexibility to offer product promotion in online platform, HTSC would boost

their investment products subscription by offering discounts in a limited time and

limited quota. We believe the handiness of a mobile platform is an important

factor in gaining market share in a competitive market.

HTSC has about 10 million mobile

app users

HTSC ranked first in market share

in 2016

Mon, 13 Mar 2017

HTSC (6886 HK)

Page 28 of 68

5.18

3.97

3.40

3.20

3.00 6.5%

7.3%

7.9%

8.3%

8.6%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5


Commission rate (bps) Market share (%)

(bps) (%)

Exhibit 44: HTSC number of mobile app user


Exhibit 45: HTSC commission rate and market share


Synergy from more active clients

As stated earlier, interest income is one of the major revenue streams of a broker,

and is generated from deposits, margin financing and resale agreement. However,

interest income generated from margin financing is expected to drop by 41% to

RMB 4.1 bn in FY16E due to lower loan book balance and drop in market

sentiment. But HTSC has captured more new accounts through active marketing

and promotion so the level of cash held is expected to remain stable at about

RMB 171bn even the market turnover dropped 50% in 2016. With more cash in

hand, the interest generated from deposits would bring a stable income to HTSC

and lessen impact of changes in the market. In addition to the commission

income, we believe further growth in number of clients would make for higher

profitability and sharpen the competitive edge for HTSC.

5.6

7.2

8.3

9.1

10.0

4

5

6

7

8

9

10

11

2H14 1H15 2H15 1H16 2H16E

(mn of mobile APP user)

More client deposits bring higher

and more stable interest income

Mon, 13 Mar 2017

HTSC (6886 HK)

Page 29 of 68

1,458

3,907 3,175 3,218 3,170

2,467

6,888

4,081 4,369 4,914

497

1,052

1,462 1,645

1,810

4,851

11,894

8,764 9,278

9,940

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


Deposits Margin financing Resale agreement Others YoY (%)

(RMB mn) (%)

107.5

168.7 171.3 167.5 166.2

1.9%

1.7%

1.9% 1.9% 1.9%

1.55%

1.60%

1.65%

1.70%

1.75%

1.80%

1.85%

1.90%

1.95%

50

70

90

110

130

150

170

190


Interest receiving cash Yield on cash (%)

(RMB bn) (%)

Exhibit 46: HTSC interest income


Exhibit 47: HTSC interest receiving deposits


Strong edge on investment products

Apart from the stock trading function, the mobile app of HTSC has integrated a

wide range of investment products in one platform. Since investors in China are

more risk-averse, investing in stocks on a shorter term and focusing on market

conditions, they may sometimes have idle cash in their accounts in-between

investments. HTSC has been capturing new accounts by offering short term

yield-enhancing money market investment products. The mobile app also offers a

streamlined method for investors to complete the transactions easily. Besides,

the online platform can also allow HTSC to boost the number of active users by

offering more promotion of newly launched products.

HTSC has successfully leveraged

on investment products

Mon, 13 Mar 2017

HTSC (6886 HK)

Page 30 of 68

50.8

89.2 90.0 90.0 90.0

148.3

200.0 174.1 174.1 174.1

2.4%

4.2%

2.8% 2.8% 2.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

0

50

100

150

200

250


Payables of consolidated investment products Total debts Financing costs (%)

(RMB bn) (%)

Exhibit 48: HTSC money market investment products

Source: Company website, OP Research

A major portion of the other payables of HTSC are payables of consolidated

structured entities, which we believe is mostly about yield-enhancing investment

products. We include the payables as a part of the total debt since it provides a

large part of the working capital to HTSC. We expect 52% or RMB 90 bn of the

total debt of HTSC is secured through issuance of the investment products. As

the interest paid to the investors of money market is generally lower, it would

lower the average financing cost and provide a huge competitive edge to HTSC.

Exhibit 49: HTSC total debt, payables of consolidated investment products

and financing costs


With higher working capital provided, HTSC can re-invest in other financial assets

to receive dividend income. On one hand, HTSC may allow retail investors to

invest in yield-enhancing products in a smaller nominal amount. On the other

hand, the financial assets held would provide a stable interest spread for HTSC to

profit from. With less outsourcing of the money market investment products,

HTSC would provide better yield to investors, and would attract more active

brokerage clients, thus forming a positive cycle.

Money market products would

lower financing cost of HTSC

HTSC have more working capital

to invest in financial assets for

dividend income

Mon, 13 Mar 2017

HTSC (6886 HK)

Page 31 of 68

1,306

2,973

3,831 3,569 3,569

10%

128%

29%

-7%0%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


Dividend income YoY (%)

(RMB mn) (%)

65

169

132 132 132

2.7%

2.8%

2.7% 2.7% 2.7%

2.55%

2.60%

2.65%

2.70%

2.75%

2.80%

0

20

40

60

80

100

120

140

160

180


Financial assets held Yield from financial assets (%)

(RMB bn) (%)

Exhibit 50: HTSC dividend income from financial assets


Exhibit 51: HTSC total financial assets held


Initiating BUY rating with TP of HK$20.2

With (1) strong edge in technology integration (2) leader in market shares and (3)

utilization in investment products, we think HTSC would maintain the leading

position in the market in the near future. As the stock is trading at FY17E 1.12x

PB, 4% discount to industry average. Since HTSC has a strong record in

capturing higher market share than other peers, we believe HTSC a deserve

higher valuation based on higher growth. Our TP is based on FY17E 1.4x PB,

representing 2 standard deviations above the historical mean and 25% upside.

Mon, 13 Mar 2017

HTSC (6886 HK)

Page 32 of 68

Management profiles

Exhibit 52: Management profiles

Name Age Position Role and responsibilities Description

Mr. Zhou Yi 47 Chairman, Executive

Director

Overall business operations

and strategies

Mr. Zhou joined the group in 2007.

Mr. Zhou has over 15 years’ experience in the finance industry and

extensive experience in telecommunication industry. Before joining

the group, Mr. Zhou worked on technology management in several

telecommunication and mobile communication companies in

Jiangsu. Mr. Zhou holds Bachelor’s degree in computer

communications and taught at Jiangsu Posts &

Telecommunications School.

Ms. Pu Baoying 53 Non-executive Director,

Senior Accountant

Supervising the strategic

planning and financial

management

Ms. Pu was appointed to be the Chief accountant since 2015.

Before the appointment, Mr. Pu worked as the general manager of

the finance department of JaingsuGuoxin Assets Management.

Ms. Pu has over 30 years’ experience in accounting and finance

management.

Ms. Pu holds Master’s degree in accounting.

Mr. Sun Hongning 55 Non-executive Director General management of the

group’s business

Mr. Sun joined the group in 2007.

Mr. Sun had been working in Jiangsu Secrets Protection Bureau

and Jiangsu Provincial Party Committee as secretary and general

manager before he joined the group.

Mr. Sun holds MBA degree.

Mr. Zhou Yong 50 Non-executive Director,

Principal senior economist

Business operation and

management, mainly

responsible for investment

business

Mr. Zhou was joined the group in 2015.

Mr. Zhou has over 25 years’ experience in international investment

management. Before appointed as director in 2015, Mr. Zhou had

been working in Jiangsu Holly International Group for 17 years and

worked as the chairman of Jiangsu Holly Futures Brokerage Co.

Ltd. and general manager of Jiangsu Holly International Investment

Management Co. Ltd.

Mr. Zhou holds post-doctoral degree.

Mr. Gao Xu 52 Non-executive Director Strategies planning and

management of the asset

management business

Mr. Gao was appointed to be the director of the group and served

as a supervisor in 2013.

Before joining the group, Mr. Gao worked as general management

in the asset management department of Jiangsu Guoxin

Investment Group for 6 years and served in several State-owned

assets operation enterprises in Jiangsu for over 20 years.

Mr. Gao holds Bachelor’s degree.


Mon, 13 Mar 2017

HTSC (6886 HK)

Page 33 of 68

4.78%

Public

2.45% 1.45% 59.53%

6.26%

17.46%

Jiangsu High

Hope

International – A

shs

Jiangsu

Communication

Holdings – A shs

Jiangsu Guoxin

Investment

Group – A shs

China Securities

Finance Corp. –

A shs

Blackrock Inc. –

H shs

Govtor Capital

Group – A shs

Jiangsu SOHO

Holdings – A shs

3.22%

2.86%

National Social

Security Fund –

H shs

1.99%

Appendix

Exhibit 53:Shareholding structure


Exhibit 54: Core assumptions

FY16E FY17E FY18E

Securities brokerage and advisory 8,324 9,131 9,854

Avg. comm. Rate (bps) 3.4 3.2 3.2

ADT (RMB bn) 517.2 569.0 625.9

Stock market share (%) 7.9 8.3 8.6

Underwriting and sponsorship 1,477 1,569 1,666

Equity underwritten amount (RMB bn) 69.6 73.5 77.7

Comm. Rate (%) 1.1 1.1 1.1

Debt underwritten amount (RMB bn) 114.5 120.2 126.3

Comm. Rate (%) 0.45 0.45 0.45

Asset management 477.5 578.9 661.5

Asset mgmt AUM (RMB bn) 879.5 1,059.9 1,177.2

Asset mgmt fee (%) 0.22 0.20 0.20

Interest from financial institutions 3,175.5 3,218.0 3,169.7

Deposits (RMB bn) 171.3 167.5 166.2

Interest rate (%) 1.9 1.9 1.9

Interest from margin account 4,080.6 4,368.8 4,914.0

Margin financing (RMB bn) 56.4 65.0 71.5


Interest from securities-back lending 1,461.7 1,645.2 1,809.7

Stock resale balance (RMB bn) 44.8 49.2 54.2


Net gains from financial assets (573.5) 945.7 945.7

Stock market T/O (RMB tn) 126.7 139.4 153.3

SHCOMP change (%) (12.3) 5.0 5.0

Bond market T/O (RMB tn) 238.4 262.2 288.5

T-bond change (%) 3.4 3.0 3.0

C-bond change (%) 6.0 5.0 5.0

Dividend income from financial assets 3,830.8 3,569.4 3,569.4

Financial assets held (RMB bn) 132.2 132.2 132.2

Yield (%) 2.7 2.7 2.7

Net gains from derivatives 1,304.9 (530.2) (530.2)

Sensitivity to stock market return (106.0) (106.0) (106.0)


Mon, 13 Mar 2017

HTSC (6886 HK)

Page 34 of 68

Financial Summary–HTSC(6886 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E

Year to Dec FY14A FY15A FY16E FY17E FY18E

Income Statement (RMB mn)

Ratios

Fee and commission income 8,127 20,200 11,165 12,328 13,406

Gross margin (%) n.a. n.a. n.a. n.a. n.a.

Interest income 4,851 11,894 8,764 9,278 9,940

Operating margin (%) 51.7 55.7 56.8 56.1 55.8

Net investment gains 2,679 6,757 4,562 3,985 3,985

Net margin (%) 28.7 27.5 26.1 27.5 28.1

Turnover 15,657 38,851 24,491 25,591 27,331

Staff cost/Sales (%) 24.7 21.0 22.7 22.8 23.1

YoY% 75 148 (37) 4 7

Admin exp/Sales (%) n.a. n.a. n.a. n.a. n.a.

Other income 322 564 363 368 388

Payout ratio (%) 62.4 32.4 30.0 30.0 30.0

Fee & commission exp (1,650) (5,676) (2,851) (3,146) (3,417)

Effective tax (%) 24.4 25.0 25.0 25.0 25.0

Staff costs (3,875) (8,141) (5,555) (5,844) (6,303)

Total debt/equity (%) 353.5 245.3 206.0 193.8 182.0

Dep. & Amort. (312) (333) (337) (343) (354)

Net debt/equity (%) 267.6 200.2 133.5 129.8 123.3

Business taxes & surcharges (660) (1,723) (735) (640) (683)

Current ratio (x) 1.3 1.5 1.3 1.4 1.4

Other opex (1,367) (1,815) (1,384) (1,531) (1,620)

Quick ratio (x) 1.3 1.5 1.3 1.4 1.4

Total opex (7,865) (17,687) (10,862) (11,504) (12,377)

Inventory T/O (days) 0 0 0 0 0

Impairment loss (18) (73) (90) (90) (90)

AR T/O (days) 8 6 6 6 6

Operating profit (EBIT) 8,096 21,656 13,902 14,365 15,251

AP T/O (days) 0 0 0 0 0

Operating margin 51.7% 55.7% 56.8% 56.1% 55.8%

Cash conversion cycle (days) 8 6 6 6 6

Finance costs (2,466) (7,812) (5,655) (5,261) (5,261)

Asset turnover (x) 0.1 0.1 0.1 0.1 0.1

Profit after financing costs 5,630 13,843 8,248 9,104 9,991

Financial leverage (x) 4.9 5.9 5.2 4.8 4.6

Associated companies & JVs 285 420 399 419 440

EBIT margin (%) 51.7 55.7 56.8 56.1 55.8

Pre-tax profit 5,915 14,263 8,647 9,523 10,431

Interest burden (x) 0.7 0.7 0.6 0.7 0.7

Tax (1,375) (3,466) (2,062) (2,276) (2,498)

Tax burden (x) 0.8 0.7 0.7 0.7 0.7

Minority interests (54) (101) (202) (222) (245)

Return on equity (%) 11.4 17.3 7.7 8.1 8.3

Net profit 4,486 10,697 6,383 7,025 7,688

ROIC (%) 5.6 8.1 4.7 5.3 5.4

YoY% 102 138 (40) 10 9

Net margin 28.7% 27.5% 26.1% 27.5% 28.1%


EBITDA 8,408 21,988 14,240 14,708 15,605

Balance Sheet (RMB mn)

EBITDA margin 53.7% 56.6% 58.1% 57.5% 57.1%

Fixed assets 3,304 3,379 3,683 3,993 4,319

EPS (RMB) 0.801 1.493 0.891 0.981 1.073

Intangible assets & goodwill 453 476 405 343 290

YoY% 102 82 (46) 10 9

Associated companies & JVs 1,874 2,674 2,933 3,206 3,492

DPS (HK$) 0.625 0.591 0.294 0.324 0.354

Long-term financial assets 4,969 26,824 29,200 29,200 29,200

Other non-current assets 7,850 11,450 12,017 11,937 11,857


Non-current assets 18,450 44,804 48,238 48,680 49,158

Cash Flow (RMB mn)

EBITDA 8,408 21,988 14,240 14,708 15,605

Margin account 64,637 67,432 56,355 65,000 71,500

Chg in working cap (15,445) (61,150) 43,370 (8,883) (6,876)

Short-term financial assets 60,307 142,532 103,000 103,000 103,000

Others (2,059) (1,079) 0 0 0

Repurchase agreements 18,310 21,791 26,945 26,945 26,945

Operating cash (9,095) (40,241) 57,610 5,825 8,730

Cash held for customers 71,536 131,945 110,000 110,000 110,000

Tax (1,195) (2,360) (2,193) (2,062) (2,276) Other current assets 2,985 7,404 7,739 8,087 8,637

Interests paid (884) (3,817) (2,827) (2,630) (2,630)

Cash 36,002 36,707 61,258 57,480 56,173

Net cash from operations (11,173) (46,418) 52,590 1,133 3,823

Current assets 253,777 407,811 365,297 370,512 376,254

Capex (658) (837) (490) (512) (547)

Payable to brokerage client 70,228 128,367 110,000 110,000 110,000

Investments 2,180 (24,688) (2,881) 0 0


Dividends received 101 135 140 147 154

Tax 359 2,193 2,062 2,276 2,498

Sales of assets 15 4 0 0 0

Accruals & other payables 5,978 10,150 8,000 8,000 8,000

Interests received 0 0 0 0 0

Bank loans & leases 0 813 900 900 900

Others 687 4,264 0 0 0

Bonds, CBs& other debts 77,111 96,222 121,500 121,500 121,500

Investing cash 2,325 (21,122) (3,231) (365) (393)

Other current liabilities 2,481 19,748 4,449 4,559 4,733

FCF (8,849) (67,540) 49,358 768 3,430

Current liabilities 200,825 279,885 272,651 272,975 273,371

Issue of shares 0 30,588 0 0 0

Buy-back 0 0 0 0 0

Bank loans & leases 139 360 300 300 300

Minority interests 0 51 0 0 0


Dividends paid (850) (2,800) (3,581) (1,915) (2,107)

Deferred tax & others 7,972 21,467 31,052 31,052 31,052

Net change in bank loans 28,284 28,800 (18,398) 0 0

Non-current liabilities 29,456 91,201 56,352 56,352 56,352

Others (975) (2,805) (2,827) (2,630) (2,630)

Financing cash 26,460 53,833 (24,807) (4,545) (4,738)

Total net assets 41,944 81,529 84,532 89,864 95,690

Net change in cash 17,611 (13,707) 24,551 (3,778) (1,307)

Shareholder's equity 41,944 81,529 84,532 89,864 95,690

Exchange rate or other Adj 1,210 14,412 0 0 0

Share capital 5,600 7,163 7,163 7,163 7,163

Opening cash 17,180 36,002 36,707 61,258 57,480

Reserves 35,699 73,622 76,424 81,533 87,114

Closing cash 36,002 36,707 61,258 57,480 56,173

MI 646 744 946 1,168 1,413

CFPS (HK$) (2.494) (7.906) 8.076 0.174 0.587

BVPS (HK$) 9.22 13.76 12.84 13.62 14.48

Segment Revenue (RMB mn)

Total debts 148,263 199,961 174,140 174,140 174,140

Brokerage and wealth

management

10,254 28,569 16,069 17,083 18,272

Net cash/(debts) (112,262) (163,254) (112,882) (116,660) (117,967)

Investment banking 1,389 1,897 2,393 2,482 2,627

Asset management 1,374 2,540 2,829 2,879 3,101

Adj. leverage ratio (ex-client

money)

4.78 3.93 3.59 3.44 3.30

Investment and trading 2,230 4,483 2,391 2,432 2,594

Overseas business and others 410 1,362 809 714 736


Mon, 13 Mar 2017

HTSC (6886 HK)

Page 35 of 68

Exhibit 55: Peer Comparison

Company Ticker Price

Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x)

PER FY1

(x)

PER

FY2

(x)

EPS

FY1

YoY%

EPS

FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

DivyldHist

(%)

Divyld

FY1

(%)

P/B

Hist

(x)

P/B

FY1

(x)

EV/

EbitdaHist

EV/

Ebitda

Cur Yr

Net

gearing

Hist

(%)

Gross

margin

Hist

(%)

Net

margin

Hist

(%)

ROE

Hist

(%)

ROE

FY1

(%)

Shpx

1-mth

%

Shpx

3-mth

%

HuataiSecurit-H 6886 HK 15.30 17,382 10.5 8.4 15.6 14.2 (46.2) 10.1 (13.5) (1.16) 3.9 1.9 1.11 1.19 12.4 15.6 200.2 n.a. 27.5 17.3 7.7 (4.7) (8.9)

HSI 23,568.67 13.0 11.8 10.8 10.2 9.4 10.7 1.10 3.5 3.5 1.23 1.16 9.4 9.8 (0.0) 3.5

HSCEI 10,069.10 8.3 8.2 7.5 1.1 9.0 9.9 0.83 3.6 3.6 1.00 0.92 12.0 11.2 (0.6) 2.0

CSI300 3,427.89 15.3 13.0 11.4 17.8 13.8 10.5 1.24 2.0 2.2 1.86 1.59 12.1 12.2 0.4 (1.9)

Adjusted sector avg* 8.5 14.6 12.4 (52.0) 18.7 (10.1) 0.62 3.2 2.4 1.28 1.21 6.9 18.9 59.8 N/A 32.0 11.3 8.7 (1.0) (3.8)

Citic Sec-H 6030 HK 16.50 27,944 21.4 8.6 16.2 12.8 (46.8) 25.9 (7.8) N/A 3.5 1.9 1.28 1.25 5.6 15.2 0.0 N/A 27.8 8.6 7.7 (1.8) (3.7)

HaitongSecuri-H 6837 HK 13.94 24,257 20.0 8.4 16.1 13.0 (48.0) 23.9 (9.5) N/A 3.7 2.0 1.36 1.27 6.3 20.9 50.2 N/A 28.8 9.6 8.1 (2.2) (3.2)

HuataiSecurit-H 6886 HK 15.30 17,382 10.5 8.3 14.9 11.8 (44.5) 26.0 (4.5) N/A 3.8 2.2 1.19 1.17 2.0 5.0 59.4 N/A 27.1 8.6 7.9 (4.7) (8.9)

Gf Securities-H 1776 HK 16.90 18,485 6.8 8.1 14.5 12.1 (43.8) 19.1 (6.3) N/A 5.5 2.4 1.56 1.45 7.8 19.5 90.7 N/A 31.0 12.1 10.1 (2.0) (4.9)

China Merchan-H 6099 HK 11.98 15,264 2.4 5.7 12.4 10.5 (54.1) 17.4 (12.3) N/A N/A 2.4 1.26 1.19 6.3 20.5 75.4 N/A 31.3 12.8 9.6 0.0 (2.6)

Dfzq-H 3958 HK 7.88 12,475 1.7 4.8 16.6 14.5 (71.0) 14.7 (25.7) N/A N/A 1.9 1.06 1.06 9.2 N/A 105.6 N/A 35.8 27.5 6.7 1.8 (3.2)

Everbright Sec-H 6178 HK 12.30 10,029 1.2 5.1 14.2 12.3 (63.9) 15.8 (18.7) N/A N/A 2.0 1.08 1.05 3.6 N/A 112.2 N/A 32.8 9.6 7.3 (2.4) 4.8

Csc Financial-H 6066 HK 6.90 6,439 2.9 4.3 8.4 7.6 (48.1) 9.5 (12.0) N/A N/A 2.1 1.25 1.20 1.3 N/A 0.0 N/A 35.4 36.9 15.6 (0.9) 1.3

China Internat-H 3908 HK 11.14 3,309 3.5 8.9 18.2 14.9 (51.3) 22.4 (9.5) N/A N/A 0.5 1.34 1.33 7.0 N/A 0.0 N/A 20.6 10.2 7.0 0.9 1.3

Cc Securities-H 1375 HK 4.15 4,905 2.8 7.5 14.6 14.2 (48.4) 2.8 (19.6) N/A 8.8 3.4 1.53 1.36 13.6 N/A 27.7 N/A 29.6 9.8 8.3 2.0 (8.4)

Kingston Financi 1031 HK 3.19 5,593 3.8 32.6 N/A N/A N/A N/A N/A N/A 0.6 N/A 2.31 N/A 22.1 N/A 53.5 N/A 54.6 8.2 N/A (7.5) (11.9)

HaitongInt'L 665 HK 4.55 3,127 9.0 14.3 9.6 8.3 49.6 15.8 26.6 0.36 2.5 4.7 1.14 1.00 12.9 14.1 72.1 N/A 43.2 5.6 10.1 (1.9) (6.0)

GuotaiJunan 1788 HK 2.56 2,299 7.5 18.2 13.3 11.5 36.9 15.5 15.1 0.88 2.7 3.8 2.18 1.77 21.6 22.8 130.1 N/A 40.7 13.0 13.1 (8.2) (3.0)

* Outliners and "N/A" entries are in red and excl. from the calculation of averages


Mon, 13 Mar 2017

GF Securities (1776 HK)

Page 36 of 68

GF Securities (1776 HK) –Leading in asset management GFS has higher revenue contribution from asset management

segment to capture the rising investable assets in China

GFS has better management to generate stable profit from balance sheet

Initiate a BUY rating with TP of HK$20.6

Higher contribution from asset management By consolidating the income

from GF Fund, we expect segment revenue contribution from asset management

of GFS would increase to 22% of total revenue in FY16E, much higher than the

industry average of 9%. With robust growth of investable asset in China, we

expect the growth in AUM would drive the asset management fee income of GFS

to increase by 35% to RMB 4.8bn in FY16E. With higher contribution from asset

management, GFS has the competitive advantage for higher valuation as their

growth is less dependent on the market turnover.

Solid management in financial assets investment GFS has substantial

capital injected from IPO to leverage on the balance sheet to generate stable

dividend income. With the stringent control in financial assets, GFS achieved

much less sensitivity in earnings against market volatility in the investment. We

expect GFS EPS change to be only 0.2% and 0.1% with 5% and 1% change in

stock market and bond market return respectively. With solid balance sheet, we

expect GFS to see 30% growth in dividend income to RMB 5.6 bn in FY16E. We

believe it would be one of the crucial factors for higher ROE in GFS.

Initiate with a BUY with TP of HK$20.6 Although GFS is trading at FY17E

1.32x PB or 12% premium to industry average, we believe the premium is

justified as GFS has (1) the highest exposure from the stable growth of asset

management business (2) the lowest earnings sensitive against the change in

market return and (3) the highest ROE among our coverage. GFS is our top pick

of the sector and we initiate coverage on GFS with a BUY rating. Our target price

of HK$20.6 is based on FY17E 1.6x PB, representing 22% upside.

Initial Coverage

BUY



Key Data

HKEx code 1776






Fiscal Year 12/2016

Major shareholder (s) Jilin Aodong Pharm. (16.43%)



Price Chart

1mth 3mth 6mth

Absolute % -0.1 -5.1 -5.3

Rel. MSCI CHINA % -1.3 -11.2 -5.5

Forward PB Band

Company Profi le GF Securities Company Limited is a

securities firm. The Company offers

investment banking services including equity

and bond underwriting, mergers and

acquisitions consulting, financial consulting,

brokerage services, and asset management

services.


Revenue 16,146.9 42,778.9 31,537.4 34,412.7 36,773.2

Growth (%) 74.1 164.9 (26.3) 9.1 6.9

Net Profit 5,022.6 13,201.0 9,315.8 11,073.1 12,265.8

Growth (%) 78.6 162.8 (29.4) 18.9 10.8

Diluted EPS (HK$) 1.061 2.113 1.345 1.598 1.770

EPS growth (%) 78.6 99.2 (36.4) 18.9 10.8


0.0 0.0 0.0

Consensus EPS (HK$)

1.144 1.363 1.673

ROE (%) 13.2 21.8 11.4 12.6 12.7

P/E (x) 15.9 8.0 12.6 10.6 9.5

P/B (x) 2.0 1.4 1.5 1.3 1.2

Yield (%) 1.5 5.8 2.4 2.8 3.1

DPS (HK$) 0.250 0.976 0.403 0.479 0.531


12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0



0.5

1.0

1.5

2.0

2.5

Jun/15 Dec/15 Jun/16 Dec/16

Forward P/B Ratio

+1std.

avg.

-1std.

Mon, 13 Mar 2017


Page 37 of 68

11%5% 8% 8% 8%

54%55%

38% 35% 35%

21%22%

28%28% 27%

12%14%

22% 26% 26%

2% 4% 3% 3% 3%

-50%

0%

50%

100%

150%

200%

0%

20%

40%

60%

80%

100%

FY14 FY15 FY16E FY17E FY18EOthers Investment managementTrading and institutional client services Wealth managementInvestment banking YoY (%)

(RMB mn) (%)

Leading in asset management

Premium is justified

As the market turnover and average commission rate dropped 50% and 21%

respectively in 2016, it is expected GFS would report a decline in total revenue

and net profit due to drop in commission income. As the commission on securities

of GFS is expected to go down by 61% to RMB 5.41bn in FY16E due to keen

market competition, the contribution from wealth management is expected to

drop from 55% in FY15 to 38% in FY16E. However, we believe GFS would

perform better than industry peers due to (1) higher contribution from asset

management segment (2) robust growth in debt issuance underwriting and (3)

solid balance sheet to generate dividend income from financial assets.

Exhibit 57: GF Securities revenue contribution by segment


Highest proportion of revenue contributed by asset management

By increasing equity interest and consolidating income of GF Fund since August

2014, revenue contribution from investment management in GFS is relatively

higher than peer average. With robust growth in personal investable assets in

China, we think the total AUM of GF Asset Management and GF Fund will reach

RMB 1.59 tn in FY18E, representing a 3-Year CAGR of 22.5%. Under lower

market turnover, lower commission rate and keen competition, the robust growth

in investment management would favor brokers, like GFS, with higher portion of

revenue coming from asset management business.

With higher total AUM size, we expect asset management fee income of GFS will

increase by 35% growth to RMB 4.84bn in FY16E, we expect the investment

management segment revenue contribution to total revenue ratio will increase

from 14% in FY15 to 22% FY16E, much higher than the sector average and

supporting the overall growth.

Investment management and

investment banking will lead GF

Securities to outperform

GFAM and GF Fund are expected

to have robust CAGR in AUM size

Investment management would

contribute over 20% of total

revenue

Mon, 13 Mar 2017


Page 38 of 68

197

532

791

1,024

1,147

133

330 380

417 438

1.6%

2.3% 2.3%2.3% 2.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0

200

400

600

800

1,000

1,200

1,400


GF Asset Management GF Fund Market share (%)

(RMB bn) (%)

1,124

3,597

4,842

6,462

7,108 448%

220%

35% 33%10%

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


Asset management Fund management YoY (%)

(RMB mn) (%)

We believe larger contribution from investment management would give a

competitive edge to brokers as (1) asset management is a scalable business with

lower staff cost and (2) more investment products, such as money market funds,

funds, would generate better commission income by offering flexible investment

solution. Besides, since investment management fee is largely dependent on the

AUM size, but slightly related to market performance due to high water marks,

investment management fee income generally fluctuates to a much smaller

degree than commission income. Thus, brokers, such as GFS, which have higher

exposure in asset management business would offer better cost to income ratio

and expected growth.

Exhibit 58: GF Securities asset management fee income


Exhibit 59: GF Securities AUM size


Higher contribution from

investment offers stable growth

Mon, 13 Mar 2017


Page 39 of 68

1,034 951 952 1,040 1,137

406 344

734 808

888 113

147

187

205

225

1,552 1,442

1,873

2,053

2,251 404%

-7%

30%10% 10%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

0

500

1,000

1,500

2,000

2,500


Equity financing Debt financing Others YoY (%)

(RMB mn) (%)

3.0%

1.8%1.7% 1.7% 1.7%

0.6% 0.7%

0.5% 0.5% 0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%


Equity comm rate (%) Debt comm rate (%)

(%)

Debt issuance supports growth in investment banking

Underwriting and sponsor fees from equity financing is expected to have low

growth in 2016E due to suspension of IPO approvals in 1H16 but higher equity

refinancing amount. However, it is expected that the total underwriting fee will

increase by 30% to RMB 1.87 bn in FY16E. Although the average commission

rate of debt underwriting dropped to 0.52% in 1H16, the debt underwriting

amount increased by 3.9x to RMB 75.4 bn. We believe this growth in debt

issuance was driven by (1) reduced restrictions on investments by foreign entities

(2) more corporate bond issuances were approved (3) more restrictions on the

sale of shares. Thus, we think investment banking would partly support the

growth of GFS and increase the contribution from 5% of total revenue to 8% in

FY16E.

Exhibit 60: GF Securities underwriting and sponsor fee


Exhibit 61: GF Securities investment banking commission rate


Debt issuance will drive growth in

underwriting and sponsor fee in

FY16E

Mon, 13 Mar 2017


Page 40 of 68

2,286

4,353

5,645 5,544 5,544

35%

90%

30%

-2% 0%

-20%

0%

20%

40%

60%

80%

100%

0

1,000

2,000

3,000

4,000

5,000

6,000


Dividend income YoY (%)

(RMB mn) (%)

61

180 168 168 168

4.3%

3.7%

3.3% 3.3% 3.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0

20

40

60

80

100

120

140

160

180

200


Financial assets held Yield from financial assets (%)

(RMB bn) (%)

Solid balance sheet to generate dividend income from financial assets

Because of the (1) fund raised through IPO and (2) respectable profitability and

market performance, GFS significantly increased the total amount of financial

assets held in 2H15. Unlike other consensus analyses, we believe dividend

income from financial assets is core income. Since brokers generally hold low risk

securities, such as government bonds, as financial assets, the yield spread is

mainly determined by their borrowing costs and the dividend yield of the assets

held. With IPO in 2015, it enabled GFS to (1) secure a respectable capital and (2)

lower financing costs as a listed company. Since higher dividend income only

factored in half year result in FY15, we believe it would still have 30% growth to

RMB 5.6 bn in FY16E for full year effect. Besides, as the interest rate in China is

expected to be stable, yield from financial assets would provide a stable income

source for the market leaders, like GFS, with a solid balance sheet to invest.

Exhibit 62: GF Securities dividend income from financial assets


Exhibit 63: GF Securities amount of financial assets held


Solid balance sheet provides

stable dividend income for GFS

Mon, 13 Mar 2017


Page 41 of 68

Premium is justified

GFS is trading at FY17E 1.32x PB, which is 12% higher than industry average.

Since GFS has (1) higher revenue contribution from robust growing asset

management business (2) respectable development in debt issuance

underwriting and (3) solid balance sheet to generate stable dividend income, we

believe the premium is justified. With FY17E 1.6x PB or 1 standard deviation from

the historical mean, our TP of HK$20.6 implies FY17E 12.9x PE and 22% upside.

With strong competitive edge, our

TP implies 12% premium to

industry average and 22% upside

Mon, 13 Mar 2017


Page 42 of 68

Management profiles


Name Position Role and responsibilities Description

Mr. Sun Shuming Chairman, Executive

Director


and strategies

Mr. Sunwas appointed as the Chairman and Executive Director of the

group in 2012.

Mr. Sun has over 30 years’ experience in the finance industry. Before

joining the group, Mr. Sun had been working in the government

institutions such as Ministry of Finance of the PRC, CSRC and the

People’s Government of Zhuozhou, Hebei for 25 years and worked as

supervisor of China Galaxy Securities Co. Ltd from 2003 to 2006.

Mr. Sun obtained Bachelor’s degree in Economics from the Hubei

Institute of Finance and Economics (now known as Zhongnan University

of Economics and Law) in 1984, Doctorate degree in Economics from the

Research Institute for Fiscal Science of the Ministry of Finance in 1997.

Mr. Lin Zhihai CEO, Executive Director,

General Manager


management of the group,

strategies planning of GF

Asset Management

Mr. Lin joined the group in 1996.

Mr. Lin has over 20 years’ experience in the finance industry. Mr. Lin is

also the Chairman of GFHK since 2011 and worked as Chairman of GF

Asset Management in 2014.

Mr. Lin obtained Bachelor’s, Master’s and Doctorate degree in Economics

from the Dongbei University of Finance and Economics. Mr. Lin also

obtained the senior management executive MBA degree from the Hong

Kong University of Science and Technology.

Mr. Qin Li Executive Director, Deputy

General Manager


management, mainly

responsible for investment

business

Mr. Qin joined the group in 1997.

Mr. Qin has over 20 years’ experience in the finance industry. Before

appointed as Executive Director in 2011, Mr. Qin had been working as

general manager of investment banking department and fund manager of

E Fund and GF Xinde.

Mr. Qin obtained Bachelor’s degree in Economics from the Shanghai

University of Finance and Economics, Master’s degree in Economics

from the Jinan University and Doctorate in Economics from the Renmin

University of China. Mr. Qin also completed the course of senior

management executive MBA from the Cheung Kong Graduate School of

Business.

Ms. Sun Xiaoyan CFO, Executive Director Supervising the strategic

planning and financial

management

Ms. Sun joined the group in 1993. Ms. Sun was appointed as CFO of the

group since 2011 and also the director of GFHK since 2013

Ms. Sun has over 20 years’ experience in the finance industry. and had

been working in the capital operation, finance department, investment

banking department as deputy general manager.

Ms. Sun obtained Bachelor’s degree in Economics from the Renmin

University of China, MBA from the China Europe International Business


Mon, 13 Mar 2017


Page 43 of 68

10.18%

Public

2.03% 1.35% 53.61%16.40%16.43%

Zhongshan

Public Utilities

- A&H shs

Liaoning Cheng

Da – A shs

Jilin Aodong

Pharmaceutical

Group – A shs

Fubon Life

Insurance

- H shs

L.R. Capital

- H shs

Appendix

Exhibit 65: Shareholding structure



FY16E FY17E FY18E

Commission on securities 5,413 5,401 5,628


ADT (RMB bn) 517.2 569.0 625.9


Underwriting and sponsors fees 1,873 2,053 2,251


Comm. Rate (%) 1.7 1.7 1.7


Comm. Rate (%) 0.5 0.5 0.5

Asset management fee income 4,842 6,462 7,108


Asset mgmt fee (%) 0.3 0.3 0.3

Fund mgmt AUM (RMB bn) 379.5 417.5 438.4

Fund mgmt fee (%) 0.9 0.9 0.8

Interest from deposits 2,651 2,799 2,866

Deposits (RMB bn) 125.4 129.1 131.5


Interest from advances to clients 3,855 3,878 4,200



Net gains from financial assets 5,330 6,277 6,947


SHCOMP change (%) (12.3) 5.0 5.0


T-Bond index change (%) 3.4 3.0 3.0

C-Bond index change (%) 6.0 5.0 5.0

Dividend income from financial assets 5,645 5,544 5,544

Financial assets held (RMB bn) 168.0 168.0 168.0

Yield (%) 3.3 3.3 3.3


Mon, 13 Mar 2017


Page 44 of 68

Financial Summary–GF Securities(1776 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E



Ratios

Commission and fee income 8,217 20,046 13,229 15,102 16,272


Interest income 4,325 12,336 7,191 7,377 7,835



Net margin (%) 31.1 30.9 29.5 32.2 33.4

Turnover 16,147 42,779 31,537 34,413 36,773

Staff cost/Sales (%) 26.9 25.5 24.3 23.4 23.2

YoY% 74 165 (26) 9 7


Other income 17 (46) (385) (480) (480)

Payout ratio (%) 23.6 46.2 30.0 30.0 30.0

Commission and fee expenses (241) (461) (378) (413) (441)

Effective tax (%) 23.8 23.9 23.9 23.9 23.9

Staff costs (4,346) (10,914) (7,659) (8,050) (8,539)


Depreciation &Amortisation (257) (279) (282) (280) (286)

Net debt/equity (%) 243.3 228.4 183.1 161.7 144.3

Other opex (2,100) (4,337) (3,262) (3,682) (3,989)

Current ratio (x) 1.4 1.5 1.4 1.4 1.5

Total opex (6,944) (15,992) (11,582) (12,425) (13,255)

Quick ratio (x) 1.4 1.5 1.4 1.4 1.5

Impairment loss (150) (282) (100) (100) (100)



AR T/O (days) 29 21 21 21 21


AP T/O (days) 0 0 0 0 0

Finance costs (2,758) (8,943) (7,193) (6,726) (6,726)



Asset turnover (x) 0.1 0.1 0.1 0.1 0.1



Pre-tax profit 6,649 17,806 12,625 15,064 16,633

EBIT margin (%) 56.2 61.9 61.7 62.2 62.4

Tax (1,503) (4,193) (2,939) (3,515) (3,881)



Tax burden (x) 0.8 0.7 0.7 0.7 0.7

Net profit 5,023 13,201 9,316 11,073 12,266

Return on equity (%) 13.2 21.8 11.4 12.6 12.7

YoY% 79 163 (29) 19 11

ROIC (%) 6.4 10.0 5.9 6.8 7.1

Net margin 31.1% 30.9% 29.5% 32.2% 33.4%

EBITDA 9,326 26,738 19,752 21,687 23,224


EBITDA margin 57.8% 62.5% 62.6% 63.0% 63.2%


EPS (RMB) 0.849 1.732 1.222 1.453 1.609

Fixed assets 1,287 1,580 1,676 1,798 1,933

YoY% 79 99 (36) 19 11

Intangible assets & goodwill 155 216 165 119 77

DPS (HK$) 0.250 0.976 0.403 0.479 0.531





Cash Flow (RMB mn)


EBITDA 9,326 26,738 19,752 21,687 23,224

Chg in working cap (20,163) (20,118) 11,426 (3,670) (5,907)

Margin account 64,696 68,970 53,805 57,312 63,085

Others (2,004) (6,337) 0 0 0


Operating cash (12,841) 283 31,178 18,017 17,317


Tax (1,019) (4,314) (983) (2,939) (3,515)


Interests paid (1,181) (3,660) (7,193) (6,726) (6,726) Other current assets 8,104 11,858 10,390 12,164 13,299

Net cash from operations (15,040) (7,691) 23,003 8,352 7,076

Cash 18,974 20,382 25,385 29,098 31,484

Current assets 233,661 392,855 351,750 360,744 370,039

Capex (235) (390) (315) (344) (368)

Investments (9,307) (59,439) 8,583 0 0





Tax 1,081 983 2,939 3,515 3,881



Others 817 2,189 (1,900) (1,500) (1,000)

Bank loans & leases 1,286 896 3,000 3,000 3,000

Investing cash (8,723) (57,620) 6,367 (1,844) (1,368)


FCF (23,764) (65,311) 29,370 6,507 5,708


Issue of shares 0 25,396 0 0 0


Buy-back 0 0 0 0 0


Bank loans & leases 3,000 3,469 2,500 2,500 2,500

Dividends paid (1,226) (1,293) (6,097) (2,795) (3,322)



Deferred tax & others 4,162 278 278 278 278

Others 113 339 (158) 0 0


Financing cash 36,107 66,680 (24,367) (2,795) (3,322)

Total net assets 41,377 79,821 83,410 92,164 101,594

Net change in cash 12,343 1,368 5,003 3,713 2,386

Exchange rate or other Adj 2 40 0 0 0


Opening cash 6,629 18,974 20,382 25,385 29,098

Share capital 5,919 7,621 7,621 7,621 7,621

Closing cash 18,974 20,382 25,385 29,098 31,484

Reserves 33,692 69,898 73,117 81,396 90,339

MI 1,767 2,302 2,672 3,148 3,633

CFPS (HK$) (3.176) (1.231) 3.320 1.205 1.021

BVPS (HK$) 8.36 12.41 11.65 12.85 14.14



Total debts 120,027 202,918 178,500 178,500 178,500

Wealth management 8,672 23,529 11,977 12,211 12,871

Net cash/(debts) (100,653) (182,293) (152,715) (149,002) (146,616)

Trading and institutional client

services

3,415 9,506 8,966 9,492 10,107

Investment management 1,890 6,128 7,078 8,856 9,634


money)

4.09 3.78 3.33 3.12 2.93

Others 387 1,523 1,098 1,191 1,254


Mon, 13 Mar 2017


Page 45 of 68

Exhibit 67: Peer Group Comparison


Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x)

PER FY1

(x)

PER

FY2

(x)

EPS

FY1

YoY%

EPS

FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

DivyldHist

(%)

Divyld

FY1

(%)

P/B

Hist

(x)

P/B

FY1

(x)

EV/

EbitdaHist

EV/

Ebitda

Cur Yr

Net

gearing

Hist

(%)

Gross

margin

Hist

(%)

Net

margin

Hist

(%)

ROE

Hist

(%)

ROE

FY1

(%)

Shpx

1-mth

%

Shpx

3-mth

%

Gf Securities-H 1776 HK 16.90 18,485 6.8 8.0 12.6 10.6 (36.4) 18.9 (5.7) (2.19) 5.8 2.4 1.36 1.45 11.6 14.3 228.4 n.a. 30.9 21.8 11.4 (2.0) (4.9)

HSI 23,568.67 13.0 11.8 10.8 10.2 9.4 10.7 1.10 3.5 3.5 1.23 1.16 9.4 9.8 (0.0) 3.5

HSCEI 10,069.10 8.3 8.2 7.5 1.1 9.0 9.9 0.83 3.6 3.6 1.00 0.92 12.0 11.2 (0.6) 2.0

CSI300 3,427.89 15.3 13.0 11.4 17.8 13.8 10.5 1.24 2.0 2.2 1.86 1.59 12.1 12.2 0.4 (1.9)





Cgs-H 6881 HK 7.38 15,915 19.8 5.9 13.2 11.4 (55.2) 16.3 (15.6) N/A 5.3 2.3 1.15 1.06 4.7 16.0 0.0 N/A 29.2 12.0 8.1 (1.5) (3.4)












Mon, 13 Mar 2017

CITIC Securities (6030 HK)

Page 46 of 68

CITIC Securities (6030 HK) –Leading in investment banking CITIC has highest total revenue in brokerage sector

CITIC has strong edge in client mix and business coverage

Initiate a BUY with TP of HK$19.4

Industry leader Driven by progressive development, CITIC has taken the

leading position of the industry by offering a wide range of professional

value-added services. With strong edge in investment banking and equity

research, CITIC has a solid mix of institutional clients to generate higher average

commission rate and market share than its peers. CITIC also has strong

exposure in asset management business with a leading size in AUM. With a

well-balanced business portfolio, we believe CITIC would maintain their leading

position in total revenue in near future.

Riding on the growth in investment banking With the reactivation of IPO

market and higher demand in debt issuance and equity financing, CITIC is

capturing the robust growth in investment banking given higher exposure to

institutional clients. We expect CITIC will have 21% increase in investment

banking income to RMB 5.5bn in FY16E, which would contribute around 13% of

total revenue and higher than the peer average.

Strong position in asset management CITIC owns majority stake of China

AMC, which is one of the largest fund management companies in China.

Including the AUM under directly held asset management business, we think

CITIC is the leader in asset management with AUM of RMB 2.9tn or market share

of 5.7%. We expect the revenue from asset management of CITIC will increase

by 12% to RMB 7.2bn in FY16E even if the market turnover declined by a

significant degree.

Initiate a BUY We initiate our coverage on CITIC with a BUY rating and target

price of HK$19.4 based on FY17E 1.4x PB or par to the historical average. We

believe CITIC would maintain the leading position and profitability given the

strong edge in business coverage and client mix and our TP represents 18%

upside.

Initial Coverage

BUY



Key Data

HKEx code 6030






Fiscal Year 12/2016

Major shareholder (s) CITIC Corp. (16.50%)



Price Chart

1mth 3mth 6mth

Absolute % 1.5 -3.7 -8.8

Rel. MSCI CHINA % 0.3 -9.8 -9.0

Forward PB Band

Company Profi le CITIC Securities Co., Ltd. provides securities

brokerage, trading, underwriting, investment

banking, asset management, and investment

consulting services.


Revenue 36,970.5 69,384.1 43,824.6 47,910.2 51,280.8

Growth (%) 84.4 87.7 (36.8) 9.3 7.0

Net Profit 11,337.2 19,799.8 9,670.5 12,911.0 14,241.3

Growth (%) 116.2 74.6 (51.2) 33.5 10.3

Diluted EPS (HK$) 1.286 1.994 0.878 1.172 1.293

EPS growth (%) 116.2 55.0 (56.0) 33.5 10.3


0.0 0.0 0.0

Consensus EPS (HK$)

1.000 1.258 1.475

ROE (%) 11.9 16.3 6.7 8.5 8.8

P/E (x) 12.8 8.3 18.8 14.1 12.8

P/B (x) 1.5 1.2 1.3 1.2 1.1

Yield (%) 2.1 3.6 1.6 2.1 2.4

DPS (HK$) 0.350 0.589 0.263 0.352 0.388


12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0



0.5

1.0

1.5

2.0

2.5

3.0

Dec/14 Jun/15 Dec/15 Jun/16 Dec/16

Forward P/B Ratio

+1std.

avg.

-1std.

Mon, 13 Mar 2017


Page 47 of 68

10% 7%13% 14% 15%

32% 39%35% 33% 32%

35%

42%28% 27% 26%

17%

11%

19% 20% 20%

6% 2% 5% 6% 6%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY14 FY15 FY16E FY17E FY18EInvestment banking Brokerage Trading

Asset management Others YoY (%)

(RMB mn) (%)

10,365

22,714

11,788 12,527 12,795

11,938

26,715

15,298 16,026 16,620

58%

124%

-43%

5% 4%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

0

5,000

10,000

15,000

20,000

25,000

30,000


Brokerage commission income Segment revenue YoY (%)

(RMB mn) (%)

Leading in investment banking

Strong edge in client mix and balanced business portfolio

Although CITIC only ranks second in terms of trading value, CITIC is expected to

have higher total revenue than other peers since CITIC has some strong

competitive edges, especially on (1) a better client mix of institutional clients (2)

higher average commission rate as institutional clients need a wider range of

services (3) greater client loyalty because it provides value-added services, such

as research reports (4) more synergy from different segments, especially in

investment banking and (5) holding majority stake of a leading and well

established asset management company. Despite the challenging year for

brokers in 2016, CITIC is expected to outperform by better investment banking

segment and asset management segment.

Exhibit 69: CITIC Securities revenue contribution by segment


Exhibit 70: CITIC Securities brokerage commission income


CITIC has strong edge in client

mix and business mix

Mon, 13 Mar 2017


Page 48 of 68

10.58

6.72

7.50 7.00

6.50

6.2%

6.2%

5.7%

5.9% 5.9%

5.4%

5.5%

5.6%

5.7%

5.8%

5.9%

6.0%

6.1%

6.2%

6.3%

-

2.00

4.00

6.00

8.00

10.00

12.00


Commission rate (bps) Market share (%)

(bps) (%)

In line with the drop in market turnover, CITIC is expected to have a 44% drop in

brokerage segment revenue with around 35% contribution in FY16E. Since CITIC

has more institutional clients, average commission rate of CITIC is higher than

industry peers. Although many brokers in the market are competing for new

accounts of retail customers by offering commission rate of as low as 3 bps, it is

expected that CITIC would improve the average commission rate to 7.5 bps in

FY16E due to higher contribution from institutional clients, which may have lower

drop in trading value in 2016. CITIC is also offering industry leading value-added

services, such as equity research reports and investment banking service, which

would enhance the loyalty of intuitional clients. We think CITIC would keep their

market share at 5.7% in FY16E even under keen market competition.

Exhibit 71: CITIC Securities average commission rate and market share


Synergy from investment banking

CITIC has a long history of being the first mover in professional financial services

development. By offering innovative and industry-leading corporate financing

solutions, CITIC has a strong edge in investment banking segment. The

investment banking income of CITIC is expected to increase by 21% to RMB

5.5bn in FY16E from a 15% increase in underwriting amount. Given (1)

reactivation of IPO in 2H16E (2) higher debt issuance amount and (3) increase in

equity refinancing, CITIC's total underwriting amount is expected to jump to RMB

648 bn. For debt issuance and equity refinancing, most of the subscribers are

institutional clients due to relatively large investment size. With a better client mix

and management background, CITIC is strongly capable of providing corporate

finance solutions to many corporates by locating suitable clients as well as

providing related supporting services. Thus, among the top industry leaders,

CITIC is expected to have the highest revenue contribution by investment

banking, which would be 13% in FY16E.

CITIC has higher average

commission rate with decent

market share

CITIC has higher revenue

contributions from investment

banking

Mon, 13 Mar 2017


Page 49 of 68

3,516

4,563

5,511

6,793

8,283

59%

30%

21%23% 22%

0%

10%

20%

30%

40%

50%

60%

70%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


Investment banking commission income YoY (%)

(RMB mn) (%)

6.3 12.1 12.1 15.1 18.9 89.7

165.2 231.3 254.5 279.9

334.8

385.7

405.0 445.5

490.0

430.7

563.0

648.4

715.1

788.8 101%

31%

15%

10% 10%

0%

20%

40%

60%

80%

100%

120%

0

100

200

300

400

500

600

700

800

900


IPO Equity refinancing Debt financing YoY (%)

(RMB bn) (%)

Exhibit 72: CITIC Securities investment banking income


Exhibit 73: CITIC Securities underwriting amount


CITIC has strong asset management exposure

CITIC has both asset management business and fund management. By acquiring

a majority stake in China AMC, CITIC holds 62.2% stake in China AMC, which

has AUM of around RMB 1.2 tn, ranking second in China. By including the RMB

1.7tn AUM directly managed under CITIC’s asset management business, CITIC

is expected to have a leading position in the industry with 5.7% market share. As

asset management is enjoying huge demand and good prospects from

increasingly investable wealth in China, we think CITIC will see a 12% rise in

asset management revenue to RMB 7.2bn in FY16E. Since we expect the total

revenue contribution by asset management to be as high as 19% in FY16E, we

also think CITIC will enjoy a stable and profitable income stream from asset

management in the near future.

CITIC has majority stake of China

AMC

Mon, 13 Mar 2017


Page 50 of 68

4,504

6,449

7,192

8,055

8,787

202%

43% 12% 12% 9%

0%

50%

100%

150%

200%

250%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000


Asset management Fund management YoY (%)

(RMB mn) (%)

755

1,071

1,757

2,027

2,230

458

864

1,167 1,284

1,412

5.9%

5.1%

5.7%

5.3% 5.3%

4.6%

4.8%

5.0%

5.2%

5.4%

5.6%

5.8%

6.0%

0

500

1,000

1,500

2,000

2,500


Citic Asset Management China AMC Market share (%)

(RMB bn) (%)

Exhibit 74: CITIC Securities asset management revenue


Exhibit 75: CITIC Securities asset management AUM


The drop in trading revenue

We expect the segment revenue of trading to decrease by 58% to RMB 12.1bn in

FY16E due to lower market turnover and investment returns. It would be the

major drag on the FY16E revenue, where the total revenue contribution of trading

would decrease to 28%in FY16E from 42%. Although we expect the dividend

income from financial asset would remain stable in FY16E, we expect the net

gains from financial assets to decrease significantly to RMB 2.0bn in FY16E due

to -12% in stock index return. However, we expect the net losses from derivatives

and others to turn around in FY16E since we believe the derivatives were mainly

used in hedging activities. Thus, despite a likely drop in trading revenue, we

believe the revenue will remain stable in the near future given that volatility in the

market has receded.

Trading revenue is a mixed result

from market turnover and

investment return

Mon, 13 Mar 2017


Page 51 of 68

17,428 20,254

2,017

6,559 6,559

506%

16% -90%

225%

0%

-200%

0%

200%

400%

600%

0

5,000

10,000

15,000

20,000

25,000


Net gains from financial assets YoY (%)

(RMB mn) (%)

(9,000)

(2,081)

2,853

(1,159) (1,159)

29% 29%

-12%

5% 5%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

(10,000)

(8,000)

(6,000)

(4,000)

(2,000)

0

2,000

4,000


Net gains from derivatives and others Stock index return (%)

(RMB mn) (%)

Exhibit 76: CITIC Securities net gains from financial assets


Exhibit 77: CITIC Securities net gains from derivatives and others


Initiate BUY with TP of HK$19.4

We initiate our cover on CITIC Securities with TP of HK$19.4 since CITIC has

strong edge in investment banking and asset management. As CITIC has already

built up a large revenue chest, we believe CITIC will have more stable growth

than its peers. CITIC is trading at FY17E 1.19x PB or 16% lower than the

historical mean. With a more balanced revenue mix and higher average expected

growth, our target price is based on FY17E 1.4x PB, which represents a par to the

mean of the forward PB band, 20% premium to the industry average and 18%

upside.

Mon, 13 Mar 2017


Page 52 of 68

Management profiles



Mr. Zhang Youjun 51 Chairman, Executive

Director


and strategies

Mr. Zhang joined at the establishment of the group in 1995.

Mr. Zhang has over 20 years’ experience in the finance industry

with the growth of the group. Mr. Zhang also concurrently serves as

the director of Hunan Valin Iron & Steel Group Co. ltd.

Mr. Zhang obtained Bachelor’s degree in Economics with major in

money and banking from Renmin University of China in 1987. And

Master’s degree in Economics from Central University of Finance

and Economics in 1990.

Mr. Yin Ke 53 Vice President, Executive

Director

Supervising the strategic

planning and management

Mr. Yin joined the group in 2007.

Mr. Yin is also the CEO of CITIC Securities International and

director of CITIC CLSA Limited. Before joining the group, Mr. Yin

worked in the investment banking, brokerage and overseas

business department of Guotai Jun’an Securities Co. Ltd for 10

years and worked as the assistant of the CEO of Shenzhen Stock

Exchange for 2 years.

After that Mr. Yin had been the director of 4 listed companies from

2002 to 2014.

Mr. Yin obtained Bachelor’s degree in Engineering in 1985 and

Master’s degree in Economics in 1991 from Zhejiang University.

Mr. Yang Minghui 55 Executive Director Business operation and

strategies planning in Asset

and Fund Management.

Mr. Yang joined the group in 1995.

Mr. Yang also served as the chairman of China AMC.

Mr. Yang has over 20 years’ experience in asset management with

the growth of the group.

Mr. Yang obtained a Bachelor’s degree and Master’s degree in

Engineering in 1982 and 1985 from the East China Institute of

Textile Science and Technology. Mr. Yang was granted the title of

senior economist by CITIC Group in 1996.


Mon, 13 Mar 2017


Page 53 of 68

Appendix




FY16E FY17E FY18E

Brokerage 5,511 6,793 8,283


ADT (RMB bn) 517.2 569.0 625.9


Investment banking 11,788 12,527 12,795



Avg. comm. Rate (%) 0.85 0.95 1.05

Asset management 7,192 8,055 8,787

Asset mgmt AUM (RMB bn) 1,757.1 2,027.1 2,229.8

Asset mgmt fee (%) 0.16 0.15 0.16

Fund mgmt AUM (RMB bn) 1,166.9 1,283.6 1,412.0

Fund mgmt fee (%) 0.77 0.73 0.70

Interest from deposits 4,063 3,864 3,797

Deposits (RMB bn) 184.7 183.3 178.4


Interest from margin account 7,083 7,594 8,437



Net gains from financial assets 2,017 6,559 6,559


SHCOMP change (%) (12.3) 5.0 5.0


T-bond change (%) 3.4 3.0 3.0

C-bond change (%) 6.0 5.0 5.0

Dividend income from financial assets 2,524 2,565 2,565

Financial assets held (RMB bn) (AFS only) 95.0 95.0 95.0

Yield (%) 2.7 2.7 2.7

Net gains from derivatives and others 2,853 (1,159) (1,159)

Sensitivity to stock market return (231.8) (231.8) (231.8)


2.67%

Public

5.70% 1.12% 71.28%2.73%16.50%

China Securities

Finance Corp.

- A shs

China Life

Insurance – A

shs

CITIC

Corporation – A

shs

National Sociery

Security Fund

- H shs

FIL Limited

- H shs

Mon, 13 Mar 2017


Page 54 of 68

Financial Summary–CITIC Securities(6030 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E



Ratios

Fee and commission income 18,915 34,253 25,403 28,378 30,970


Interest income 7,851 15,622 11,190 11,503 12,282


Investment income 10,204 19,510 7,232 8,029 8,029

Net margin (%) 26.2 30.7 28.5 22.1 26.9

Turnover 36,971 69,384 43,825 47,910 51,281

Staff cost/Sales (%) 25.3 25.6 21.3 24.8 25.3

YoY% 84 88 (37) 9 7


Other income and gains 2,555 3,540 3,600 3,600 3,600

Payout ratio (%) 31.8 27.2 29.5 30.0 30.0

Fee and commission expenses (1,799) (4,621) (2,667) (2,980) (3,252)

Effective tax (%) 23.2 24.1 26.0 25.0 25.0

Staff costs (9,463) (14,798) (10,867) (12,107) (13,018)


Business tax and surcharges (1,257) (2,768) (1,315) (1,198) (1,282)

Net debt/equity (%) 82.8 165.0 116.2 105.8 99.5

Depreciation (377) (285) (393) (409) (430)

Current ratio (x) 1.5 1.4 1.4 1.4 1.5

Other opex (4,336) (8,499) (8,012) (8,317) (8,604)

Quick ratio (x) 1.5 1.4 1.4 1.4 1.5

Total opex (17,232) (30,971) (23,255) (25,010) (26,586)


Impairment loss (600) (2,481) (1,096) (575) (615)

AR T/O (days) 8 7 6 6 6


AP T/O (days) 0 0 0 0 0



Finance costs (6,901) (12,831) (9,617) (8,160) (8,160)

Asset turnover (x) 0.1 0.1 0.1 0.1 0.1




EBIT margin (%) 49.4 58.7 56.9 52.7 54.1

Pre-tax profit 15,422 27,287 13,595 17,930 19,716


Tax (3,560) (6,927) (3,364) (4,441) (4,880)

Tax burden (x) 0.8 0.7 0.7 0.7 0.7


Return on equity (%) 5.9 11.9 16.3 6.7 8.5

Net profit 11,337 19,800 9,670 12,911 14,241

ROIC (%) 4.7 7.6 10.2 5.7 6.3

YoY% 116 75 (51) 34 10

Net margin 30.7% 28.5% 22.1% 26.9% 27.8%

Year to Dec FY13A FY14A FY15A FY16E FY17E

EBITDA 22,338 40,070 23,840 26,678 28,431


EBITDA margin 60.4% 57.8% 54.4% 55.7% 55.4%

Fixed assets 4,070 1,296 3,927 4,059 4,226

EPS (RMB) 1.029 1.634 0.798 1.066 1.175

Intangible assets & goodwill 11,963 11,962 14,251 13,879 13,535

YoY% 116 55 (56) 34 10


DPS (HK$) 0.350 0.589 0.263 0.352 0.388





Cash Flow (RMB mn)

EBITDA 22,338 40,070 23,840 26,678 28,431

Margin account 34,302 74,135 75,523 62,297 66,327

Chg in working cap (103,688) 16,458 (26,807) (13,137) (16,208)


Others 58,039 (10,597) 0 0 0


Operating cash (23,312) 45,931 (2,967) 13,541 12,223



Net cash from operations (26,283) 39,533 (7,586) 10,176 7,781

Cash 25,669 35,569 65,671 34,722 33,262

Current assets 235,470 445,253 570,699 531,414 543,255

Capex (479) (4,279) (526) (575) (615)

Investments 503 (33,631) (2,865) 0 0





Short-term financial liabilities 19,283 28,418 24,799 28,200 28,200


Tax 2,203 3,295 4,619 3,364 4,441

Others 0 0 0 0 0


Investing cash 24 (37,910) (3,391) (575) (615)


FCF (26,259) 1,623 (10,976) 9,601 7,166


Issue of shares 0 0 0 0 0


Buy-back 0 0 0 0 0



Dividends and interest paid (4,185) (7,970) (15,675) (11,061) (12,033)

Bank loans & leases 567 2,314 2,345 1,000 1,000



Others 8,779 15,544 13,688 0 0

Long-term financial liabilities 1,487 2,647 1,141 1,400 1,400

Financing cash 36,273 27,309 (19,973) (11,061) (12,033)

Deferred tax & others 1,013 2,801 2,836 2,836 2,836


Net change in cash 10,013 28,932 (30,949) (1,460) (4,867)

Exchange rate or other Adj (114) 1,170 0 0 0

Total net assets 89,402 101,131 141,737 145,910 156,497

Opening cash 25,669 35,569 65,671 34,722 33,262

Closing cash 35,569 65,671 34,722 33,262 28,395


Share capital 11,017 11,017 12,117 12,117 12,117

CFPS (HK$) (2.982) 3.980 (0.689) 0.924 0.706

Reserves 76,672 88,082 127,021 130,633 140,643

MI 1,714 2,033 2,599 3,160 3,737



BVPS (HK$) 9.95 11.24 14.01 12.96 13.87

Brokerage 11,938 26,715 15,298 16,026 16,620

Trading 12,996 29,039 12,140 12,866 13,282

Total debts 101,682 204,796 233,572 192,750 192,750

Asset management 6,187 7,814 8,422 9,649 10,442

Net cash/(debts) (73,997) (166,829) (164,665) (154,328) (155,788)

Others 2,234 1,252 2,363 2,759 3,152


money)

2.59 3.79 3.33 2.98 2.85


Mon, 13 Mar 2017


Page 55 of 68



Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x)

PER FY1

(x)

PER

FY2

(x)

EPS

FY1

YoY%

EPS

FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

DivyldHist

(%)

Divyld

FY1

(%)

P/B

Hist

(x)

P/B

FY1

(x)

EV/

EbitdaHist

EV/

Ebitda

Cur Yr

Net

gearing

Hist

(%)

Gross

margin

Hist

(%)

Net

margin

Hist

(%)

ROE

Hist

(%)

ROE

FY1

(%)

Shpx

1-mth

%

Shpx

3-mth

%

Citic Sec-H 6030 HK 16.50 27,944 21.4 8.3 18.8 14.1 (56.0) 33.5 (13.4) (1.40) 3.6 1.6 1.18 1.27 9.1 14.9 116.2 n.a. 28.5 16.3 6.7 (1.8) (3.7)

HSI 23,568.67 13.0 11.8 10.8 10.2 9.4 10.7 1.10 3.5 3.5 1.23 1.16 9.4 9.8 (0.0) 3.5

HSCEI 10,069.10 8.3 8.2 7.5 1.1 9.0 9.9 0.83 3.6 3.6 1.00 0.92 12.0 11.2 (0.6) 2.0

CSI300 3,427.89 15.3 13.0 11.4 17.8 13.8 10.5 1.24 2.0 2.2 1.86 1.59 12.1 12.2 0.4 (1.9)





Cgs-H 6881 HK 7.38 15,915 19.8 5.9 13.2 11.4 (55.2) 16.3 (15.6) N/A 5.3 2.3 1.15 1.06 4.7 16.0 0.0 N/A 29.2 12.0 8.1 (1.5) (3.4)












Mon, 13 Mar 2017

Haitong Securities (6837 HK)

Page 56 of 68

Haitong Securities (6837 HK) –Leading in diversification Haitong has the most diversified sources of interest income and

multiple asset classes for investment

Haitong has innovative approaches to capture the robust growth in investment banking

Initiate a HOLD with TP of HK$14.8

More diversified sources of income In addition to margin financing and resale

agreement, Haitong has diversified its capital into multiple asset classes, such as

finance lease and other loans and receivables. It would make the growth of

interest income less dependent on market sentiments and enhance the yield

return. We expect Haitong would only record a 9.9% drop in interest income in

FY16E, where its peers would record 30% - 40% decrease.

Innovation in investment banking Haitong has been developing its pioneer

position in investment banking through innovation, such as issuance of green

bonds and project bonds. Given the reactivation of IPO market in 2H16E, we

believe Haitong would enjoy 26% growth in investment banking income to RMB

2.1 bn in FY16E.

Asset management dragged down by lower market returns Despite total

AUM of HT Asset Management and HFT Fund is expected to jump 79% to RMB

1.06 bn, we expect Haitong would generate 22% less asset management income

of RMB 1.91 bn in FY16E due to (1) absent of performance fee from lower market

returns in 2016 and (2) significant drop in asset management fee rate due to

higher contribution from private placement in total AUM.

Initiate a HOLD with TP of HK$14.8 Despite Haitong having similar ROE and

valuation to other industry peers, the adjusted leverage ratio of Haitong is 10%

higher than the others. Since the competitive edges of Haitong are more

diversified investment and overseas operations, we believe the higher than

average leverage ratio may limit Haitong in improving their ROE. We initiate our

coverage on Haitong with a HOLD and TP of HK$14.8 based on FY17E 1.3x PB,

representing 6% upside.

Initial Coverage

HOLD



Key Data

HKEx code 6837






Fiscal Year 12/2016

Major shareholder (s) Bright Food (3.50%) Shanghai Haiyan

(3.48%)

Source: Company data, Bloomberg, OP Research Closing price are as of 10/03/2017

Price Chart

1mth 3mth 6mth

Absolute % -1.0 -3.1 -1.0

Rel. MSCI CHINA % -2.2 -9.2 -1.2

Forward PB Band

Company Profi le Haitong Securities Co., Ltd. is a securities

firm which acts as a broker, dealer for

securities. The Company also provides

investment advisory, placing and

underwriting, nominee and custodian

services.


Revenue 22,924.8 51,191.8 35,477.1 37,939.1 41,231.6

Growth (%) 82.3 123.3 (30.7) 6.9 8.7

Net Profit 7,710.6 15,838.9 9,312.5 10,032.3 11,552.2

Growth (%) 91.1 105.4 (41.2) 7.7 15.1

Diluted EPS (HK$) 1.006 1.680 0.891 0.959 1.105

EPS growth (%) 91.1 67.1 (47.0) 7.7 15.1


0.0 0.0 0.0

Consensus EPS (HK$)

0.846 1.048 1.206

ROE (%) 11.3 16.7 7.8 8.0 8.6

P/E (x) 13.9 8.3 15.7 14.5 12.6

P/B (x) 1.6 1.2 1.3 1.2 1.1

Yield (%) 2.3 3.8 1.9 2.1 2.4

DPS (HK$) 0.317 0.533 0.267 0.288 0.331


10.0

11.0

12.0

13.0

14.0

15.0

16.0



0.5

1.0

1.5

2.0

2.5

3.0

Dec/14 Jun/15 Dec/15 Jun/16 Dec/16

Forward P/B Ratio

+1std.

avg.

-1std.

Mon, 13 Mar 2017


Page 57 of 68

42%51%

41% 39% 38%

8%

7%

7% 8% 8%

16%13%

11% 12% 12%

6% 4%

5% 6% 6%

1% 2%

2% 2% 2%

9% 8%

11% 10% 10%

6% 4%6% 7% 8%

11% 12% 17% 16% 16%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Securities and futures brokerage Asset managementProprietary trading Investment bankingDirect investment Headquarters and othersFinance lease Overseas operationsYoY (%)

(RMB mn) (%)

Leading in diversification

Bridging the domestic and overseas markets

In addition to the traditional businesses of domestic brokers, such as brokerage,

asset management and investment banking, Haitong has been expanding

aggressively in overseas operations and emerging financial services, such as

finance leasing. Haitong has higher overseas business exposure by acquiring

Haitong International (665 HK) in 2009. The revenue contribution from overseas

operations is expected to increase to 17% from 12% of total revenue in FY16E by

leveraging higher interest income and flexibility to structure financing solutions

offshore. Besides, Haitong has also developed finance lease business, which is

expected to have double digit revenue growth in the near future.

Exhibit 83: Haitong Securities segment revenue contribution


Most diversified sources of interest income

Haitong has higher diversification in sources of interest income than its peers,

making revenue less dependent on market conditions. Apart from advances to

customers in margin financing, which is highly dependent on market sentiments,

Haitong also receives interest income from finance leases and investment in

other loans and receivables, which cover longer terms and offer better yields.

Besides, with the access of offshore platform, Haitong has aggressively

developed the loans from resale agreements. We think the interest income of

Haitong will enjoy a more stable growth rate than its peers as more sources of

interest income would compensate the drop in margin financing balance since the

massive correction of the market in mid-2015. Thus, we expect the interest

income of Haitong would only drop around 9.9% to RMB 16.5 bn in FY16E, which

would be much lower than 30% - 40% drop for its competitors.

Haitong covers a wide spread of

the business segment

Haitong diversified to invest

multiple asset classes for interest

income

Mon, 13 Mar 2017


Page 58 of 68

1,708 3,596 3,243 2,861 2,870

3,093

7,964

5,505 5,058 5,513 1,458

4,530

4,915 5,369

5,905

1,429

1,987

2,329 2,825

3,236

0

145

438 450

450

7,700

18,322

16,511 16,642

18,054

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

FY14 FY15 FY16E FY17E FY18EDeposits Margin account Resale agreementsFinance lease Loan and advances OthersYoY (%)

(RMB mn) (%)

Exhibit 84: Haitong Securities interest income


Exhibit 85: Haitong Securities finance lease


Innovating for the growth in investment banking

With the innovation in debt financing business, Haitong gained market shares by

involving in underwriting project yield bonds and asset-backed securitization.

With the rising trend of green bonds and equity refinancing, we expect Haitong to

maintain its leading position in investment banking by increasing the total

underwriting amount by 29% to RMB 258bn in FY16E. As the IPO market is

reactivated in 2H16, we believe the investment banking income of Haitong would

jump 26% to RMB 2.1 bn in FY16E.

20.2

27.4

34.2

41.1 45.2

8.1%

8.4%

7.5% 7.5% 7.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

0

5

10

15

20

25

30

35

40

45

50


Balance of finance leases Interest rate (%)

(RMB bn) (%)

Haitong has strong innovations in

debt financing, such as issuing

green bonds and project bonds

Mon, 13 Mar 2017


Page 59 of 68

1,309 1,645

2,067

2,635

3,349

78%

26% 26%

28% 27%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


Underwriting and sponsors fees YoY (%)

(RMB mn) (%)

37.4 50.8 55.9 67.1 80.5

54.8

150.0

202.5

243.0

291.6

92.2

200.8

258.4

310.1

372.1

33%

118%

29%20% 20%

0%

20%

40%

60%

80%

100%

120%

140%

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0


Equity financing Debt financing YoY (%)

(RMB bn) (%)

Exhibit 86: Haitong Securities underwriting and sponsor fee


Exhibit 87: Haitong Securities underwriting amount


Asset management is riding on market demand

Haitong has developed its asset management business through different vehicles.

HT Asset Management is wholly owned by Haitong and enjoys the robust growth

under strong market demand. The AUM of HT Asset Management is expected to

jump 100% to RMB 876bn in FY16E. Apart from a 27.8% stake in Fullgoal Fund,

Haitong also consolidates the results from HFT Investment Management by

owning 51% stake. Although the total AUM of the asset management would grow

in FY16E, we expect the revenue from asset management would drop 22% to

RMB 1.91bn in FY16E due to lack of performance fee from low market returns in

2016.

Revenue from asset management

would be affected by lower market

returns in FY16E

Mon, 13 Mar 2017


Page 60 of 68

1,202

2,465

1,912

2,650 2,884

64%

105%

-22%

39%

9%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

0

500

1,000

1,500

2,000

2,500

3,000

3,500


Asset & fund management YoY (%)

(RMB mn) (%)

294

438

876

1,051

1,156

107 156 187

224 247

2.0%

1.6%

2.1% 2.1% 2.1%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

0

200

400

600

800

1,000

1,200

1,400


Haitong Asset Management HFT Investment Management Market share (%)

(RMB bn) (%)

Exhibit 88: Haitong Securities asset management fee income


Exhibit 89: Haitong Securities asset management AUM


Investment gains from multiple asset classes

In addition to the traditional equity and debt financial assets, Haitong has been

investing in other loans and receivables for yield enhancement. Since the

dividend income from financial assets would be included in the net gains from

investment in Haitong, we believe the net gains from financial assets in Haitong

would drop 54% to RMB 4.7bn in FY16E due to lower leverage ratio and lower

market returns. However, Haitong is investing into other loans and receivables,

such as structured products, trust products, factoring receivable and entrusted

loan, for yield enhancement. We believe these would compensate for part of the

drop in investment gains and it may help Haitong profitability in the long term

despite bearing higher volatility.

Lower investment gains as lower

leverage ratio

Mon, 13 Mar 2017


Page 61 of 68

7.8

18.2

20.5 20.5 20.5

9.0%

8.5%

7.2% 7.2% 7.2%

3%

4%

5%

6%

7%

8%

9%

10%

0

2

4

6

8

10

12

14

16

18

20


Other loans and receivables Yield (%)

(RMB bn) (%)

5,183

10,134

4,670 5,074 5,313

526

923

1,406 1,476 1,476

5,709

11,057

6,076 6,550 6,789

166%

94%

-45%

8% 4%

-100%

-50%

0%

50%

100%

150%

200%

0

2,000

4,000

6,000

8,000

10,000

12,000


Financial assets Other loans and receivables YoY (%)

(RMB mn) (%)

Exhibit 90: Haitong Securities net investment gains


Exhibit 91: Haitong Securities investment in other loans and receivables


Initiate HOLD with TP of HK$14.8

Since Haitong has the major competitive edge in the investment diversification

and innovation in investment banking, we believe it would maintain its leading

position in the near future. However, compared to its peers with similar ROE,

such as CITIC, Haitong is trading at higher FY17E PB. We initiate our coverage of

Haitong at HOLD, since our TP of HK$14.8 is based on FY17E 1.3x PB, which

represents par to the historical mean and only 6% upside.

Mon, 13 Mar 2017


Page 62 of 68

Management profiles



Mr. Zhou Jie 50 Chairman, Executive

Director


and strategies

Mr. Zhou was appointed as the Chairman of the group in Sep 2016.

Before joining the group, Mr. Zhou served as the vice chairman and

CEO of Shanghai Industrial Holdings LTD (363 HK) from 2004 to

July 2016. Mr. Zhou had served as the director of Shanghai

Pharmaceuticals Holding Co., Ltd. (2607 HK) and Semiconductor

Manufacturing International Corporation (981 HK).

Mr. Zhou obtained Master’s degree of management engineering

from Shanghai Jiao Tong University in 1992.

Mr. Qu Qiuping 56 General Manager,

Executive Director, Deputy

Secretary of CPC Party

Committee

General management of the

group’s business operations

Mr. Qu joined the group in 2014.

Mr. Qu has worked in banking industry for more than 30 years

before he joined the group. Mr. Qu also worked for CSRC from

2010 to 2014.

Mr. Qu holds Master’s degree in Economics.

Ms. QiuXiaping 57 Supervisor Supervising investment

management business of the

group

Ms. Qiu joined the group in 2007.

MsQiu has over 25 years’ experience in banking and finance

industry. Ms. Qiu has been a director of Haitong Futures since

2005, a director of Haitong Capital Investment and a supervisor of

Haitong Jihe Private Equity Investment Fund Management since

2008, and a supervisor of Haitong Creative Capital Fund

Management since 2012.

Ms. Qiu is a holder of an MBA degree and recognized as a senior

accountant.

Ms. Wang Meijuan 53 Supervisor Supervising finance lease

business of the group

Ms. Wang joined the group in 2001.

Ms. Wang now work as supervisor of Haitong UniTrust Finance &

Leasing Corporation (Shanghai) since 2014.

Ms. Wang has over 15 years’ experience in finance industry and

had been working in Haitong Futures, Haitong Innovation Securities

Investment, Haitong International Securities as supervisor from

2005 to 2012.

Ms. Wang holds Master’s degree in Economics and recognized as

a senior accountant.


Mon, 13 Mar 2017


Page 63 of 68

3.33%

Public

2.47% 1.94% 77.56%

3.48%

3.50%

Shanghai

Electric – A shs

Shanghai Haiyan

Investment

Management – A

shs

Bright Food – A

shs

Maunakai

Capital Partners

(HK) – H shs

Insight Capital

Management

(HK) – H shs

China Securities

Finance Corp. –

A shs

Shenergy

Group – A shs

2.80%

2.76%

Shi Jing – H shs

2.16%

Appendix




FY16E FY17E FY18E

Commission on securities 6,723 6,976 7,367


ADT (RMB bn) 517.2 569.0 625.9


Underwriting and sponsors fees 2,067 2,635 3,349



Avg. comm. Rate (%) 0.80 0.85 0.90

Financial advisory and consultancy fee income 1,440 1,665 1,890

No. of deals 160 185 210

Avg. fee per deal (Rmbmn) 9.0 9.0 9.0

Asset management fee income 1,912 2,650 2,884


Fund mgmt AUM (RMB bn) 187.0 224.4 246.8

Avg. mgmt fee (%) 0.24 0.23 0.22

Bank interest income 3,243 2,861 2,870

Deposits (RMB bn) 135.9 136.5 136.8


Interest from margin account 5,505 5,058 5,513



Interest from resale agreements 4,915 5,369 5,905

Resale agreements (RMB bn) 85.2 93.7 103.1


Interest from finance leases 2,329 2,825 3,236

Finance leases (RMB bn) 34.2 41.1 45.2


Net gains from financial assets/liabilities 4,670 5,074 5,313


SHCOMP change (%) (12.3) 5.0 5.0


T-bond change (%) 3.4 3.0 3.0

C-bond change (%) 6.0 5.0 5.0

Net gains from other loan and receivables and others 1,406 1,476 1,476

Other loan and receivables (RMB bn) 20.5 20.5 20.5

Yield (%) 7.2 7.2 7.2


Mon, 13 Mar 2017


Page 64 of 68

Financial Summary–Haitong Securities(6837 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E



Ratios

Commission and fee income 6,751 9,516 21,813 12,890 14,747


Interest income 3,671 7,700 18,322 16,511 16,642



Net margin (%) 32.1 33.6 30.9 26.2 26.4

Turnover 12,572 22,925 51,192 35,477 37,939

Staff cost/Sales (%) 20.9 18.0 15.3 18.3 20.1

YoY% n.a. 82 123 (31) 7


Other income and gains 231 742 4,094 4,921 4,944

Payout ratio (%) 28.7 31.5 31.7 30.0 30.0

Fee and commission expenses (334) (427) (1,192) (773) (885)

Effective tax (%) 22.0 22.4 20.7 16.0 18.0

Staff costs (2,621) (4,131) (7,830) (6,490) (7,636)


Business tax and surcharges (514) (868) (2,650) (1,370) (1,527)

Net debt/equity (%) 52.9 204.3 185.7 181.8 172.6

Depreciation (307) (284) (300) (295) (286)

Current ratio (x) 1.8 1.4 1.4 1.5 1.5

Other opex (2,203) (3,362) (9,110) (7,950) (8,416)

Quick ratio (x) 1.8 1.4 1.4 1.5 1.5

Total opex (5,981) (9,074) (21,082) (16,879) (18,751)


Impairment loss 0 0 0 0 0

AR T/O (days) 48 70 45 90 90


AP T/O (days) 0 0 0 0 0



Finance costs (1,484) (4,340) (13,566) (11,908) (11,355)

Asset turnover (x) 0.1 0.1 0.1 0.1 0.1




EBIT margin (%) 54.3 63.7 66.8 66.3 63.6

Pre-tax profit 5,455 10,420 21,119 11,972 13,174


Tax (1,174) (2,301) (4,278) (1,858) (2,300)

Tax burden (x) 0.7 0.7 0.7 0.8 0.8

Minority interests (246) (408) (1,002) (802) (842)

Return on equity (%) 6.3 11.3 16.7 7.8 8.0

Net profit 4,035 7,711 15,839 9,313 10,032

ROIC (%) 5.4 7.1 9.8 5.8 5.7

YoY% n.a. 91 105 (41) 8

Net margin 32.1% 33.6% 30.9% 26.2% 26.4%


EBITDA 7,129 14,878 34,504 23,814 24,418


EBITDA margin 56.7% 64.9% 67.4% 67.1% 64.4%

Fixed assets 1,258 1,231 1,336 1,470 1,626

EPS (RMB) 0.421 0.804 1.377 0.810 0.872

Intangible assets & goodwill 879 2,855 4,207 4,134 4,071

YoY% n.a. 91 67 (47) 8


DPS (HK$) 0.151 0.317 0.533 0.267 0.288





Cash Flow (RMB mn)

EBITDA 7,129 14,878 34,504 23,814 24,418

Advances to customers 26,531 64,883 76,325 69,504 75,000

Chg in working cap (22,662) (40,185) (57,114) (39,294) (7,622)


Others (1,145) (957) (2,825) 0 0


Operating cash (16,677) (26,265) (25,435) (15,480) 16,796



Interests paid (1,150) (1,721) (6,002) (5,954) (5,677)

Cash 20,373 24,392 52,660 21,500 22,132

Net cash from operations (18,842) (29,338) (33,990) (25,330) 9,261

Current assets 156,046 303,626 473,766 420,726 433,464

Capex (328) (248) (339) (355) (379)


Investments 1,461 (8,996) (28,733) (10,510) 0



Short-term financial liabilities 6,507 14,782 24,837 33,000 33,000


Tax 395 817 3,895 1,858 2,300



Others (632) (3,107) (7,219) (2,305) 0


Investing cash 559 (12,294) (35,966) (12,968) (158)


FCF (18,283) (41,633) (69,956) (38,298) 9,103

Other current liabilities 0 0 2,098 3,200 3,200

Issue of shares 0 0 26,045 0 0


Buy-back 0 0 (107) 0 0

Minority interests 574 780 2,737 0 0

Bank loans & leases 0 4,538 15,512 11,000 11,000

Dividends paid (1,258) (1,309) (3,324) (5,176) (2,794)


Net change in bank loans 23,435 48,155 77,211 18,268 0

Repurchase agreements 335 14,910 7,625 3,000 3,000

Others (260) (2,053) (5,483) (5,954) (5,677)

Long-term financial liabilities 0 1,008 6,188 5,000 5,000

Financing cash 22,491 45,573 97,078 7,138 (8,471)

Deferred tax & others 86 3,002 4,368 3,285 3,383


Net change in cash 4,208 3,940 27,122 (31,160) 632

Exchange rate or other Adj (198) 79 1,145 0 0

Total net assets 64,105 72,264 116,928 121,866 129,947

Opening cash 16,362 20,373 24,392 52,660 21,500

Closing cash 20,373 24,392 52,660 21,500 22,132


Share capital 9,585 9,585 11,502 11,502 11,502

CFPS (HK$) (2.457) (3.826) (3.605) (2.422) 0.886

Reserves 51,922 58,780 96,193 100,330 107,568

MI 2,598 3,900 9,233 10,035 10,877


Securities and futures brokerage 5,693 9,723 26,031 14,384 14,757

BVPS (HK$) 8.02 8.92 11.42 10.70 11.39

Asset management 585 1,878 3,450 2,307 2,900

Proprietary trading 2,278 3,718 6,688 4,056 4,578

Total debts 54,303 172,035 269,824 243,000 246,400

Investment banking 709 1,327 1,851 1,826 2,210 Net cash/(debts) (33,931) (147,643) (217,164) (221,500) (224,268)

Direct investment 275 306 900 808 803

Headquarters and others 1,633 2,048 4,295 3,911 3,895


money)

2.05 3.83 3.85 3.45 3.34

Finance lease 0 1,447 1,987 2,261 2,721

Overseas operations 1,398 2,477 5,990 5,923 6,075


Mon, 13 Mar 2017


Page 65 of 68



Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x)

PER FY1

(x)

PER

FY2

(x)

EPS

FY1

YoY%

EPS

FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

DivyldHist

(%)

Divyld

FY1

(%)

P/B

Hist

(x)

P/B

FY1

(x)

EV/

EbitdaHist

EV/

Ebitda

Cur Yr

Net

gearing

Hist

(%)

Gross

margin

Hist

(%)

Net

margin

Hist

(%)

ROE

Hist

(%)

ROE

FY1

(%)

Shpx

1-mth

%

Shpx

3-mth

%

HaitongSecuri-H 6837 HK 13.94 24,257 20.0 8.3 15.7 14.5 (47.0) 7.7 (13.0) (1.20) 3.8 1.9 1.22 1.30 10.9 16.0 185.7 n.a. 30.9 16.7 7.8 (2.2) (3.2)

HSI 23,568.67 13.0 11.8 10.8 10.2 9.4 10.7 1.10 3.5 3.5 1.23 1.16 9.4 9.8 (0.0) 3.5

HSCEI 10,069.10 8.3 8.2 7.5 1.1 9.0 9.9 0.83 3.6 3.6 1.00 0.92 12.0 11.2 (0.6) 2.0

CSI300 3,427.89 15.3 13.0 11.4 17.8 13.8 10.5 1.24 2.0 2.2 1.86 1.59 12.1 12.2 0.4 (1.9)





Cgs-H 6881 HK 7.38 15,915 19.8 5.9 13.2 11.4 (55.2) 16.3 (15.6) N/A 5.3 2.3 1.15 1.06 4.7 16.0 0.0 N/A 29.2 12.0 8.1 (1.5) (3.4)












Mon, 13 Mar 2017


Page 66 of 68

Investment risks

Drop in stock market turnover Brokerage commission income and interest

income from margin financing is highly dependent on the market turnover and

sentiment. Any drop in market velocity and leverage ratio would have a negative

impact in the profits of the brokers. However, with the aggressive development of

(1) asset management business (2) equity refinancing and debt issuance

business (3) higher market shares in capturing new accounts, we believe the

company in our coverage will have an edge in a competitive market.

Higher volatility in the market As investment gains of brokers are highly

related to the debt and equity market returns, significant increase in the market

volatility may have huge impact on broker earnings. As the brokers mainly invest

in debt financing assets, we believe brokers having less EPS sensitivity to stock

market returns would benefit in a bear market.

Lower commission rate The average commission rate of brokerage sector

has been dropping at a CAGR of double digit rate due to keen market competition.

With aggressive promotion from smaller brokers to capture market shares, some

of the leading brokers have been dropping market share due to higher adoption of

mobile trading. With the intensive investment in technology integration, we

believe the brokers on our coverage list have developed advance trading app to

maintain market share through integrating stock trading with other value-added

services.

Delay in IPO approval process The IPO market has been reactivated since

after the market stablised in 2H16. Any major setback in the stock market may

trigger another suspension of IPO market by the regulatory department, which

would adversely affect brokers' investment banking business. With innovative

development for more products, such as debt issuance and equity refinancing,

we believe the brokers on our coverage list will have better competitive edge in

the market.

More regulations from policy change The regulatory department may change

the limit of margin financing to regulate the trading activities and lower the level of

speculation in the equity and futures markets. However, since the market

correction in mid-2015, we believe there is less chance for more new regulations

in the near future as the market has been stabilised.

Besides, since CSRC has reduced the maximum number of shares that can be

issued in placement and increased the time gap between two consecutive new

share issuances by listed companies, it would lower the future growth of the

equity refinancing in the near future.

Mon, 13 Mar 2017


Page 67 of 68

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27/02/2017 UMP 722 1H17 results miss BUY Chloe Liu/Yuji Fung

17/02/2017 Canvest 1381 Profit surprise with new revenue stream BUY Bruce Yeung/Daisy Wang

07/02/2017 Dynagreen Environmental 1330 Expecting a strong result in FY16E BUY Bruce Yeung/Daisy Wang

26/01/2017

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Waste-To-Energy (WTE)

- Higher aims for 13th Five-Year-Plan BUY Bruce Yeung/Daisy Wang

24/01/2017 TCL Multimedia 1070 FY16E results preview BUY Chloe Liu/Yuji Fung

20/01/2017 TCL Display 334 Good start in 2017 BUY Chloe Liu/Yuji Fung

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11/01/2017 Q Tech 1478 Upgrade on upbeat 4Q16 shipments BUY Chloe Liu/Yuji Fung

10/01/2017 Sunny Optical 2382

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penetration

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21/12/2016 UMP 722 Going asset light, stabilizing profitability in China BUY Chloe Liu/Yuji Fung

12/12/2016 Sunny Optical 2382

November hanset camera module shipments

better than expected

SELL Yuji Fung

08/12/2016 TCL Multimedia 1070 Nov overseas shipments exceed target BUY Chloe Liu/Yuji Fung

08/12/2016 TCL Display 334 Nov shipments ahead expectation BUY Chloe Liu/Yuji Fung

21/11/2016 Sinosoft Tech 1297

Jiangsu player surging ahead with export tax

solution

BUY Chloe Liu/Yuji Fung

17/11/2016 Harmonicare 1509

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insurance

HOLD Chloe Liu/Yuji Fung

17/11/2016 Truly Intl 732 3Q16 earnings miss on GPM BUY

Chloe Liu/Daisy Wang/Yuji

Fung

11/11/2016 C Cheng 1486 The Living Blueprint BUY Bruce Yeung

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showcase


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Rating and Related Definitions

Buy (B) We expect this stock outperform the relevant benchmark greater than 15% over the next 12 months. Hold (H) We expect this stock to perform in line with the relevant benchmark over the next 12 months. Sell (S) We expect this stock to underperform the relevant benchmark greater than 15% over the next 12 month. Relevant Benchmark Represents the stock closing price as at the date quoted in this report.

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