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1

Industry Note

January 9, 2017

Wong Chi Man—Head of Research

(852) 3698-6317

[email protected]

Livy Lyu—Research Assistant

(852) 3698-6393

[email protected]

2017 Outlook: Limited Catalysts from Policy and Liquidity; Focus on Revenue Mix We don’t expect a major re-rating of the securities sector in 2017, since the policy outlook is

likely to remain stringent, while market liquidity will become tighter. Therefore, we believe a

strong recovery in the brokerage and margin financing businesses seems unlikely this year.

The investment banking and asset management businesses are less sensitive to trading

volume and still posted decent revenue growth in 2016. Therefore, we believe investors

should focus on companies with a diversified revenue mix and good ROE outlook. Taking

the latest valuations into account, we reiterate our BUY rating on GF Securities (GFS) and

HOLD ratings on CITIC Securities (CITICS) and Haitong Securities (HTS).

Both policy and liquidity look unfavourable in 2017. Policy direction clearly changed

after Liu Shiyu became chairman of the China Securities and Regulatory Commission

(CSRC) in Feb 2016. Given that the authorities’ focus is on the long-term healthy develop-

ment of the capital markets, we don’t believe there will be changes in stringent policy direc-

tion for at least the next six months. This suggests there will be limited room for financial

innovations. In addition, the chief economist of our A-share research team expects to see

tighter market liquidity this year because of inflation risk and interest rate hikes in the US.

Mild rebound in ADT and margin financing balance. Based on a conservative outlook on

policy and market liquidity, we expect average daily turnover (ADT) to rebound moderately

from RMB519bn in 2016 to RMB560bn in 2017E. We also project an increase in margin

financing from RMB940bn to RMB1.12trn in the same period. Taking the pressure on bro-

kerage commission rates into consideration, the outlook for brokerage business will be un-

exciting in 2017.

The investment banking and asset management businesses still maintained decent

growth. Although brokerage revenue in the industry dropped 63% YoY in 9M2016, revenue

from investment banking and asset management was less volatile, recording 52.5% and

12.3% growth YoY, respectively, in the same period. This suggests companies with a more

diversified revenue base will see less impact from the lacklustre brokerage business.

Waiting for an opportunity to re-enter. Following the share price rebound in the past two

weeks, the valuation of the sector does not look very appealing based on PBR. We main-

tain our HOLD ratings on CITICS (TP: HK$17, based on 1.23x 2017E PBR) and HTS (TP:

HK$14.90; based on 1.32x 2017E PBR). We reiterate our BUY rating for GFS (TP:

HK$20.7; based on 1.71x 2017E PBR) because of its diversified revenue base and higher

ROE. Its valuation premium narrowed in 2H16, which makes it looks more attractive.

China Securities Sector

Valuation Table

Source: CGIS Research estimates

Company Ticker Rating

(HK$) (HK$)

CITICS 6030 HK 16.1 17.0 HOLD

HTS 6837 HK 13.84 14.9 HOLD

GFS 1776 HK 16.56 20.7 BUY

Company PER PBR ROAA ROAE

(x) (x) (x) (%)

CITICS 13.87 1.17 2.21 8.68

HTS 14.15 1.23 1.73 8.95

GFS 11.66 1.37 2.46 12.22

Last Price TP

FY2017E

Sources: Company, CGIS Research

Updated as of January 6, 2017

Company Ticker Rating Price (HK$) Market cap (US$m) 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E

China Galaxy Securities 6881 HK Equity NR 7.32 8,950 5.9 12.8 13.1 1.01 1.04 1.02 5.4 2.3 2.3

CITIC Securities 6030 HK Equity HOLD 16.10 27,293 8.1 16.3 13.9 1.16 1.18 1.17 3.8 1.8 2.2

Haitong Securities 6837 HK Equity HOLD 13.84 23,911 8.3 16.0 14.2 1.22 1.25 1.23 3.9 1.9 2.1

GF Securities 1776 HK Equity BUY 16.56 18,087 7.9 13.4 11.7 1.35 1.41 1.37 5.8 3.0 3.4

Simple average 7.6 14.6 13.2 1.18 1.22 1.20 4.7 2.3 2.5

Weighted average 7.9 15.1 13.4 1.20 1.24 1.21 4.5 2.2 2.5

PER (x) PBR (x) Dividend yield (%)

2015 -2017E

Company Ticker 2016E 2017E CAGR (%) 2015 2016E 2017E 2015 2016E 2017E

China Galaxy Securities 6881 HK Equity (51.9) 3.0 (29.6) 22.9 8.2 8.3 4.1 1.7 1.9

CITIC Securities 6030 HK Equity (47.4) 23.6 (19.4) 16.6 7.4 8.7 3.7 1.8 2.2

Haitong Securities 6837 HK Equity (45.3) 19.0 (19.3) 18.0 7.9 9.0 3.4 1.5 1.7

GF Securities 1776 HK Equity (38.0) 21.0 (13.4) 22.5 10.5 12.2 4.0 2.1 2.5

Simple average (45.7) 16.7 (20.4) 20.0 8.5 9.5 3.8 1.8 2.1

Weighted average (45.1) 19.2 (19.1) 19.1 8.4 9.5 3.7 1.8 2.1

EPS Growth (%) ROAE (%) ROAA (%)

2

Limited Catalysts from Policy and Liquidity

Policy direction clearly changed after Liu Shiyu became the chairman of the China Se-

curities and Regulatory Commission (CSRC) in February 2016. In his speech in March

2016, he stated that the first mission of the new chairman was strict, full-fledged super-

vision. A series of new policies were released following his speech, covering a wide

range of areas, such as risk management, lower leverage, more regulations on back-

door listings, punishment for fraudulent IPOs, and revised regulations on asset man-

agement. Since the authorities’ focus is on the healthy long-term development of the

capital markets, we don’t believe there is likely to be a change in the stringent policy

direction for at least in the next six months. This suggests there will be limited room for

financial innovations.

Date Major policies/actions

Feb 20, 2016 Liu Shiyu was appointed new chairman of the CSRC.

Apr 8, 2016 The CSRC proposed revising the Rules for the management of risk control indicators for

securities companies.

Apr 29, 2016 The CSRC released the Rules for securities investors protection fund to improve investor-

protection mechanisms.

May 26, 2016 The CSRC clarified the direction of supervision related to M&A and restructuring. The

regulator will apply the same standard to reviewing IPOs for backdoor listing approval.

May 31, 2016 The CSRC released Regulations on subsidiaries of securities investment fund manage-

ment companies and Guidelines on risk control indicators for specified client asset man-

agement subsidiaries under fund management companies.

Jun 16, 2016 The CSRC announced the Decisions on revisions related to management of risk control

indicators for securities companies. It introduced a capital leverage ratio to limit the gearing

level.

Jul 15, 2016 The CSRC released Regulations on the operations of private equity management business

under securities and futures companies. The regulations lower the upper limit of leverage

for financial products and clarify the asset-ratio limit of asset-management schemes.

Sep 8, 2016 The CSRC announced the Decisions related to the revisions of rules on major asset re-

structurings of listed companies. The announcement highlighted the responsibilities of

listed companies and financial intermediaries.

Sep 30, 2016 The Shanghai and Shenzhen Exchanges promulgated Guidelines for implementing book

building records for issuing corporate bonds. The guidelines highlighted the importance of

full and accurate information disclosure.

Oct 13, 2016 The State Council released proposals to regulate the internet finance business.

Oct 21, 2016 The CSRC released Working guidelines on on-site inspection for issuers of corporate

Nov 11, 2016 The CSRC and the Ministry of Finance jointly released Regulations on futures investors

protection fund.

Nov 18, 2016 The CSRC penalized the first case of market manipulation through Shanghai Stock Con-

Dec 2, 2016 The CSRC launched a consultation on Rules on compliance for institutions operating secu-

rities funds.

Figure 1: Major policies and regulatory action in 2016

Sources: CSRC, CGIS Research

3

Aside from the policy perspective, the chief economist of our A-share research team

expects liquidity in 2017 to become tighter and monetary policy to shift to a more neu-

tral stance because of (i) potential inflation pressure driven by a rebound in commodity

prices; and (ii) the combination of an interest rate upcycle in the US and pressure on

RMB depreciation limiting room for monetary easing.

Sources: WIND Info, CGIS Research

We Assume ADT at RMB560bn in 2017 Following a crazy 2015 with an ADT of RMB1.05trn, ADT in 2016 dropped 50.5% YoY

to RMB519bn. Trading velocity (full market-cap basis) fell from 5.64x in 2015 to 2.44x

in 2016. As we expect relatively tight liquidity this year, we assume ADT will increase

only moderately from RMB519bn in 2016 to RMB560bn in 2017. This implies trading

velocity will increase slightly from 2.44x in 2016 to 2.56x in 2017.

1.50

1.70

1.90

2.10

2.30

2.50

2.70

2.90

3.10

3.30

3.50

Figure 2: Yield-to-maturity of China 10-year government bond (%)


442

615

479410

483602569

429

569579 486

540

791

1,062

885

580

976

1,223

1,740

1,552 1,427

944

503

636

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2016

-12

2016

-11

2016

-10

2016

-9

2016

-8

2016

-7

2016

-6

2016

-5

2016

-4

2016

-3

2016

-2

2016

-1

2015

-12

2015

-11

2015

-10

2015

-9

2015

-8

2015

-7

2015

-6

2015

-5

2015

-4

2015

-3

2015

-2

2015

-1

Average Daily Turnover (RMB bn)

Figure 3: ADT of A-share market

173129

197

303

1045

519560

-

200

400

600

800

1,000

1,200

2011 2012 2013 2014 2015 2016 2017E

Figure 4: ADT of A-share market (annual)


4


End-2017E Margin Financing Balance: RMB1.12trn

The margin financing and securities lending (MFSL) balance dropped substantially

from RMB1,174bn at end-2015 to RMB909bn at end-January 2016 because of market

turmoil triggered by the circuit-breaker mechanism. The balance continued to decline in

1H16 and eventually stabilized at about RMB830bn. It gradually rebounded to

RMB940bn at end-2016, but still dropped 20% YoY. We expect only a moderate recov-

ery in 2017 to RMB1.12trn at year-end after taking tighter market liquidity into account.

Our end-2017E MFSL balance is equivalent to 2% of the total A-share market cap, up

from 1.85% at end-2016.

Figure 5: Total market cap of A-share market


Figure 7: MFSL balance of A-share market Figure 8: MFSL balance/A-share total market cap


38.5

40.8

47.7

56.3

62.7

58.5

50.5

43.8

42.0

47.7

50.4

53.1

40.439.7

45.4 44.8 44.946.3 46.6

49.248.5

50.5

53.1

50.8

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

Total Market Cap (RMB trn)

1.761.41

1.99

2.43

5.64

2.44 2.56

-

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016 2017E

Figure 6: Trading velocity of the A-share market (x)


1,132 1,158

1,494

1,840

2,080 2,049

1,339

1,059

907

1,033

1,196 1,174

909853 881 859 829 854 867 904 872 912

977 940

0

500

1,000

1,500

2,000

2,500

Margin Financing Balance (RMB bn)

2.94%2.84%

3.13%

3.27%3.31%

3.51%

2.65%

2.42%

2.16%2.17%

2.38%

2.21% 2.25%2.15%

1.94%

1.92%1.85%

1.84%1.86%

1.84% 1.80% 1.81% 1.84%1.85%

1.50%

2.00%

2.50%

3.00%

3.50%

Margin Financing Balance/Total Market Cap

5

2016 Performance Review

The share price of major securities companies generally followed the same direction in

2016; all of them posted a negative return because of the sharp correction in January

triggered by the circuit-breaker incident. However, HTS was the best performer, drop-

ping only 2.9% on a full-year basis. With the highest PBR in the sector, GFS was the

weakest of the three, although it posted one of the highest ROEs among its main

peers. We believe the weak performance of CITICS was attributable partly to a de-

rating process, as the company no longer enjoys a valuation premium, based on its

unexciting ROE outlook and more IPOs of securities companies in Hong Kong, i.e.

more choices.

Figure 9: Relative performance

Sources: Capital IQ, CGIS Research

-32.00%

-27.00%

-22.00%

-17.00%

-12.00%

-7.00%

-2.00%

3.00%

8.00%

13.00%

CITIC Securities Company Limited (SEHK:6030) - Share PricingGF Securities Co., Ltd. (SEHK:1776) - Share PricingHaitong Securities Co., Ltd. (SEHK:6837) - Share Pricing

6

Stock Recommendation: Focus on Revenue Mix

As we don’t expect to see a strong recovery in the brokerage and MFSL businesses

this year, we believe investors should focus on stocks with a more diversified revenue

mix. As shown in Figure 10, revenue from the brokerage business is highly sensitive to

market trading volume. Brokerage revenue for the whole industry dropped 63% YoY in

9M2016. Revenue from investment banking and asset management, in contrast, is

much less volatile and still recorded 52.5% and 12.3% growth YoY, respectively, in the

corresponding period.

Figure 10: Sub-segment revenue growth of the securities industry


-100.0%

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

2012 2013 2014 2015 9M2016

Brokerage IBD Asset management

0.0805%0.0781% 0.0786%

0.0665%

0.0498%

0.0391%

0.0300%

0.0400%

0.0500%

0.0600%

0.0700%

0.0800%

0.0900%

2011 2012 2013 2014 2015 9M2016

Figure 11: Average brokerage commission rate of the industry


CITIC Securities Haitong Securities GF Securities Huatai Securities China Galaxy Securities CICC Everbright Securities CMS China Securities

Ticker 6030 6837 1776 6886 6881 3908 6178 6099 6066

Revenue (RMB m) 22,464 17,395 13,835 11,448 9,218 3,168 6,474 8,688 8,557

YoY change -39.5% -37.9% -42.0% -45.2% -46.4% -34.7% -49.1% -57.5% -27.2%

Recurring net profit (RMB m) 5,242 4,264 4,031 2,841 2,255 574 1,515 2,242 2,777

YoY change -58.0% -58.0% -52.1% -57.4% -60.0% -49.5% -68.9% -69.4% -34.8%

Total assets (RMB m) 570,059 542,332 357,609 402,679 256,289 107,572 173,734 245,264 175,248

Total equity (RMB m) 136,220 105,087 73,599 78,802 54,730 17,037 38,412 47,812 32,606

Half-year ROE (%) 3.8% 4.0% 5.3% 3.6% 4.0% 3.4% 3.8% 4.7% 8.9%

Net commission rate (bps) 3.97 3.97 3.87 2.46 4.43 8.15 5.82 5.77 4.9

Change HoH (bps) (0.12) (0.57) (0.90) (0.17) (0.70) (0.72) 0.29 (0.62) (0.08)

Brokerage market share (1H16) 5.68% 4.67% 4.88% 8.45% 4.95% 0.66% 2.50% 3.67% 2.93%

Brokerage market share (2015) 6.43% 4.98% 4.71% 8.35% 5.09% 0.50% 2.81% 4.11% 3.18%

Net revenue breakdown

Brokerage 28.7% 29.7% 28.1% 40.6% 47.6% 30.9% 40.0% 47.3% 33.4%

Investment banking 18.0% 14.6% 13.9% 11.7% 7.5% 36.9% 18.5% 18.8% 27.6%

Asset management 19.1% 2.4% 19.8% 0.7% 3.3% 11.7% 6.9% 10.5% 7.8%

Others 3.2% 5.7% 0.9% 2.9% 3.2% 2.5% 6.9% 3.9% 0.7%

Commission and fee income 69.0% 52.4% 62.6% 55.9% 61.7% 82.0% 72.2% 80.5% 69.4%

Net interest income 6.0% 20.6% 1.6% 21.8% 17.1% -7.2% 16.8% 5.4% 12.6%

Net investment gains 25.4% 28.3% 35.3% 24.9% 21.2% 25.2% 9.9% 14.0% 18.0%

Others -0.3% -1.3% 0.5% -2.6% 0.0% 0.0% 1.1% 0.2% 0.0%

Figure 12: Peer comparison based on 1H16 data

Sources: Bloomberg, CGIS Research

7

The latest valuations of major securities companies do not look very attractive, as the

PBR has been relatively stable recently, while trading velocity has been falling. We

prefer to wait for better timing. On individual stock calls, we maintain our HOLD ratings

for CITICS and HTS and BUY rating for GFS, on the back of its stronger ROE and di-

versified revenue base. We lowered our target PBR for GFS from 1.94x to 1.71x to

reflect a more conservative medium-term ROE outlook (from about 13% to 12.3%),

based on the latest conditions of the China equity market.

Figure 13: Stock recommendation

Source: CGIS Research

Figure 14: Peer valuations


Company HTS CITICS GFS

Ticker 6837.HK 6030.HK 1776.HK

Rating HOLD HOLD BUY

Beta 1.36 1.43 1.43

Cost of equity 9.7% 10.1% 10.1%

Medium-term ROE 10.6% 10.8% 12.3%

Growth rate 7% 7% 7%

PBR = (ROE-g)/(COE-g) 1.32 1.23 1.71

Target price (HK$) 14.9 17.0 20.7

Upside 7.3% 5.5% 25.2%

Company Ticker Rating

Price

(Local

currency)

Market

cap

(US$m)

2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E

China securities companies

CITIC 6030 HK Equity HOLD 16.10 27,293 8.1 16.3 13.9 1.16 1.18 1.17 16.6 7.4 8.7 3.7 1.8 2.2

Haitong 6837 HK Equity HOLD 13.84 23,911 8.3 16.0 14.2 1.22 1.25 1.23 18.0 7.9 9.0 3.4 1.5 1.7

China Galaxy 6881 HK Equity NR 7.32 8,950 5.9 12.8 13.1 1.01 1.04 1.02 22.9 8.2 8.3 4.1 1.7 1.9

Guangfa 1776 HK Equity BUY 16.56 18,087 7.9 13.4 11.7 1.35 1.41 1.37 22.5 10.5 12.2 4.0 2.1 2.5

HTSC 6886 HK Equity NR 15.28 17,538 7.5 14.1 11.3 1.13 1.16 1.08 17.5 8.4 10.1 3.0 1.6 2.0

CICC 3908 HK Equity NR 10.90 3,223 7.9 15.6 12.9 1.28 1.30 1.16 16.0 8.4 9.9 2.7 1.3 1.7

Everbright 6178 HK Equity NR 12.52 10,028 4.7 13.7 11.5 n.a. 1.08 1.01 23.1 7.7 8.7 4.9 1.8 2.3

China Merchants 6099 HK Equity 12.08 15,044 5.2 12.2 10.1 n.a. 1.22 1.13 24.3 9.8 10.9 4.5 2.1 2.6

Simple average 7.0 14.3 12.3 1.19 1.20 1.15 20.1 8.5 9.7 3.8 1.7 2.1

PER (x) PBR (x) ROE (%) ROA (%)

8

Figure 15: PBR range of CITICS


0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9

Feb-

12

May

-12

Aug-

12

Nov

-12

Feb-

13

May

-13

Aug-

13

Nov

-13

Feb-

14

May

-14

Aug-

14

Nov

-14

Feb-

15

May

-15

Aug-

15

Nov

-15

Feb-

16

May

-16

Aug-

16

Nov

-16

Rolling forward PBR (x) Average

+1 Standard deviation -1 Standard deviation

8.0

13.0

18.0

23.0

28.0

33.0

38.0

43.0

48.0

Feb-

12

May

-12

Aug-

12

Nov

-12

Feb-

13

May

-13

Aug-

13

Nov

-13

Feb-

14

May

-14

Aug-

14

Nov

-14

Feb-

15

May

-15

Aug-

15

Nov

-15

Feb-

16

May

-16

Aug-

16

Nov

-16

Rolling forward PER (x) Average


Figure 16: PER range of CITICS


0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

Apr-

12

Jul-1

2

Oct

-12

Jan-

13

Apr-

13

Jul-1

3

Oct

-13

Jan-

14

Apr-

14

Jul-1

4

Oct

-14

Jan-

15

Apr-

15

Jul-1

5

Oct

-15

Jan-

16

Apr-

16

Jul-1

6

Oct

-16



Figure 17: PBR range of HTS


5.0

10.0

15.0

20.0

25.0

30.0

35.0Ap

r-12

Jul-1

2

Oct

-12

Jan-

13

Apr-

13

Jul-1

3

Oct

-13

Jan-

14

Apr-

14

Jul-1

4

Oct

-14

Jan-

15

Apr-

15

Jul-1

5

Oct

-15

Jan-

16

Apr-

16

Jul-1

6

Oct

-16



Figure 18: PER range of HTS


0.5

1.0

1.5

2.0

2.5

3.0

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Oct

-16

Dec

-16



Figure 19: PBR range of GFS


5.0

7.0

9.0

11.0

13.0

15.0

17.0

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Oct

-16

Dec

-16



Figure 20: PER range of GFS


9

Figure 21: PBR range of CGS


Figure 22: PER range of CGS


Figure 23: A-share market trading velocity and PBR of CITICS and HTS


0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

May

-13

Aug

-13

Nov

-13

Feb-

14

May

-14

Aug

-14

Nov

-14

Feb-

15

May

-15

Aug

-15

Nov

-15

Feb-

16

May

-16

Aug

-16

Nov

-16



3.0

5.0

7.0

9.0

11.0

13.0

15.0

May

-13

Aug

-13

Nov

-13

Feb-

14

May

-14

Aug

-14

Nov

-14

Feb-

15

May

-15

Aug

-15

Nov

-15

Feb-

16

May

-16

Aug

-16

Nov

-16



0

1

2

3

4

5

6

7

8

9

0

0.5

1

1.5

2

2.5

3

3.5

PBR of CITICS (x) (LHS) PBR of HTS (x) (LHS) Trading velocity (annualized 20-day average turnover/total A-share market cap)

10

Key financials CITIC Securities (6030.HK)

Income Statement

(RMB'000, except for per share amount)

Year ended 31 Dec 2013 2014 2015 2016E 2017E 2018E

Investment banking 2,217,436 3,516,440 4,563,090 5,494,297 6,284,341 7,259,279

Brokerage 6,493,275 10,365,206 22,713,891 11,507,069 11,726,755 11,906,216

Trading 398,525 230,864 287,057 574,114 688,937 826,724

Asset management 1,489,344 4,503,850 6,449,325 6,966,755 7,599,892 8,306,636

Others 100,255 298,998 239,160 300,000 400,000 450,000

Commission and fee income 10,698,835 18,915,358 34,252,523 24,842,235 26,699,924 28,748,856

Interest income 4,089,746 7,850,808 15,621,547 12,264,776 12,332,191 13,659,048

Net investment gains 5,259,499 10,204,336 19,510,014 7,699,160 11,311,477 13,460,962

Total revenue 20,048,080 36,970,502 69,384,084 44,806,172 50,343,593 55,868,865

Other income and gains 230,657 375,356 3,537,585 3,000,000 3,000,000 3,000,000

Total revenue and other income 20,278,737 37,345,858 72,921,669 47,806,172 53,343,593 58,868,865

Staff cost (5,076,588) (9,463,242) (14,797,624) (11,664,586) (13,076,272) (14,800,824)

Commission and fee expenses (1,060,676) (1,798,997) (4,621,076) (2,485,201) (2,393,331) (2,374,965)

Interest expenses (3,260,336) (6,900,792) (12,830,544) (9,905,540) (10,656,357) (11,765,911)

Others (4,246,060) (6,569,743) (14,033,038) (9,513,157) (9,782,477) (9,985,701)

Operating expenses (13,643,660) (24,732,774) (46,282,282) (33,568,484) (35,908,437) (38,927,400)

Operating profit 6,635,077 12,613,084 26,639,387 14,237,688 17,435,155 19,941,466

Share of profits of associates 166,360 638,022 664,352 300,000 350,000 400,000

Share of profits of JCEs 44,654 (8,616) (18,821) 3,000 - -

Exceptional items - 2,179,457 2,226 189 - -

Income before tax 6,846,091 15,421,947 27,287,144 14,540,877 17,785,155 20,341,466

Income tax expense (1,538,044) (3,560,448) (6,926,800) (3,635,219) (4,446,289) (5,085,366)

Minority interests (64,130) (524,305) (560,551) (490,755) (466,860) (533,963)

Net income 5,243,917 11,337,194 19,799,793 10,414,903 12,872,006 14,722,136

Recurring net income 5,243,917 9,702,601 19,797,567 10,414,714 12,872,006 14,722,136

EPS (RMB) 0.476 1.029 1.634 0.860 1.062 1.215

Recurring EPS (RMB) 0.476 0.881 1.634 0.860 1.062 1.215

DPS (RMB) 0.150 0.310 0.500 0.258 0.319 0.365

A-share average daily turnover 196,668,908 303,014,286 1,045,302,582 519,090,730 560,000,000 600,000,000

Brokerage market share CITICS 6.2% 6.5% 6.3% 5.9% 5.9% 5.9%

Margin f inancing balance 33,420,286 72,101,290 74,010,000 65,747,430 78,096,086 90,178,202

Staff cost-to-income 31.8% 33.0% 26.7% 32.9% 32.5% 33.1%

Cost-to-income 58.4% 56.0% 52.0% 59.8% 56.7% 55.4%

Cost-to-income (ex-impairment) 56.2% 53.9% 47.5% 57.0% 55.0% 53.9%

Growth Rates:

Commission and fee income 50.9% 76.8% 81.1% -27.5% 7.5% 7.7%

Interest income 88.3% 92.0% 99.0% -21.5% 0.5% 10.8%

Net investment gains 44.2% 94.0% 91.2% -60.5% 46.9% 19.0%

Total revenue and other income 55.1% 84.2% 95.3% -34.4% 11.6% 10.4%

Recurring EPS 23.8% 85.0% 85.5% -47.4% 23.6% 14.4%

Margins and Ratios:

Adjusted operating margin 40.7% 43.3% 44.5% 34.7% 38.7% 40.6%

Adjusted net margin 33.8% 36.2% 39.2% 33.6% 35.8% 36.6%

Effective tax rate 22% 23% 25% 25% 25% 25%

Sources: Company data, CGIS Research estimates

11

Key financials CITIC Securities (6030.HK)

Balance Sheet Finance Ratios

(RMB'000 , except for per share amount)

As at 31 Dec 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E

Financial assets 121,176,514 214,302,052 264,784,357 273,265,686 316,121,569 350,786,275 PER(x) 26.8 14.4 8.1 16.3 13.9 12.5

Advances to customers 34,301,932 74,135,256 75,523,403 66,947,430 79,296,086 91,378,202 EPS grow th (%) 24 85 86 47- 24 14

Others 12,181,898 22,007,589 17,930,312 31,000,000 36,150,000 36,250,000 Yield (%) 1.2 2.4 3.8 1.8 2.2 2.4

Cash held on behalf of customers 40,125,321 96,840,688 143,553,897 112,031,656 122,458,134 131,205,144 Payout ratio (%) 31.5 30.1 30.6 30.0 30.0 30.0

Bank balances and cash 27,684,624 37,967,189 68,906,892 36,830,682 24,063,696 20,000,000 PBR(x) 1.61 1.41 1.16 1.18 1.17 1.12

Total current assets 235,470,289 445,252,774 570,698,861 520,075,454 578,089,485 629,619,620 Total asset/equity (x) 3.09 4.84 4.43 4.00 4.15 4.21

Non-client asset/net asset (x) 2.53 3.74 3.29 3.08 3.21 3.26

PPE, net 3,637,404 1,222,324 3,856,121 3,781,332 3,555,240 3,313,147 ROAA (%) 2.41 2.72 3.72 1.83 2.21 2.30

Financial assets 13,009,348 10,863,766 12,508,463 21,489,474 24,681,818 27,774,163 ROAE (%) 6.0 10.4 16.6 7.4 8.7 9.3

Others 19,237,208 22,287,586 29,044,797 28,636,835 29,086,835 29,586,835

Total non-current assets 35,883,960 34,373,676 45,409,381 53,907,641 57,323,893 60,674,145 Revenue breakdown (%)

Investment banking 11.1 9.5 6.6 12.3 12.5 13.0

Total assets 271,354,249 479,626,450 616,108,242 573,983,095 635,413,378 690,293,765 Brokerage 32.4 28.0 32.7 25.7 23.3 21.3

Trading 2.0 0.6 0.4 1.3 1.4 1.5

Accounts payable 45,196,159 101,845,838 150,456,676 122,031,656 132,458,134 141,205,144 Asset management 7.4 12.2 9.3 15.5 15.1 14.9

Financial assets sold under repo 55,704,255 124,914,446 127,788,537 147,000,000 168,000,000 185,500,000 Others 0.5 0.8 0.3 0.7 0.8 0.8

Due to banks and other f inancial institutions 4,710,000 11,751,000 18,033,000 8,000,000 12,000,000 12,000,000 Commission and fee income 53.4 51.2 49.4 55.4 53.0 51.5

Others 47,097,184 89,053,707 103,934,854 74,432,538 84,621,948 85,165,163 Interest income 20.4 21.2 22.5 27.4 24.5 24.4

Total current liabilities 152,707,598 327,564,991 400,213,067 351,464,195 397,080,082 423,870,307 Net investment gains 26.2 27.6 28.1 17.2 22.5 24.1

Bonds payable 26,177,108 43,167,363 67,835,803 70,000,000 75,000,000 75,000,000

Others 3,067,448 7,762,611 6,322,274 5,934,598 6,534,598 23,230,262

Total non-current liabilities 29,244,556 50,929,974 74,158,077 75,934,598 81,534,598 98,230,262

Total liabilities 181,952,154 378,494,965 474,371,144 427,398,793 478,614,680 522,100,570

Shareholders' equity 87,688,485 99,098,670 139,137,787 143,494,237 153,241,772 164,102,306

Minority interests 1,713,610 2,032,815 2,599,311 3,090,066 3,556,926 4,090,889

Book value per share (HK$) 10.03 11.42 13.89 13.62 13.82 14.36

Dupont analysis (as % of average total assets)

Investment banking 1.0% 0.9% 0.8% 0.9% 1.0% 1.1%

Brokerage 3.0% 2.8% 4.1% 1.9% 1.9% 1.8%

Trading 0.2% 0.1% 0.1% 0.1% 0.1% 0.1%

Asset management 0.7% 1.2% 1.2% 1.2% 1.3% 1.3%

Others 0.0% 0.1% 0.0% 0.1% 0.1% 0.1%

Commission and fee income 3.0% 5.0% 6.3% 4.2% 4.4% 4.3%

Interest income 1.1% 2.1% 2.9% 2.1% 2.0% 2.1%

Net investment gains 1.5% 2.7% 3.6% 1.3% 1.9% 2.0%

Other income and gains 0.1% 0.1% 0.6% 0.5% 0.5% 0.5%

Total revenue and other income 5.6% 9.9% 13.3% 8.0% 8.8% 8.9%

Operating expenses -3.8% -6.6% -8.4% -5.6% -5.9% -5.9%

Operating profit 1.8% 3.4% 4.9% 2.4% 2.9% 2.6%

Income tax expense -0.4% -0.9% -1.3% -0.6% -0.7% -0.7%

Recurring net profit (ROAA) 2.4% 2.7% 3.7% 1.8% 2.2% 2.3%

Leverage (x) 2.5 4.0 4.6 4.2 4.1 4.2


ROAE 6.0% 10.4% 16.6% 7.4% 8.7% 9.3%


12

Key financials

Haitong Securities (6837.HK)

Income Statement



Equities 4,228,623 5,939,819 15,852,454 6,547,794 6,470,166 6,344,565

Investment banking 736,777 1,309,095 1,644,980 2,354,704 2,704,583 3,123,865

Asset management 731,324 1,202,203 2,465,127 1,613,900 1,982,400 2,279,000

Futures/derivatives 461,784 404,187 479,974 871,900 1,001,735 1,151,995

Others 592,680 660,866 1,370,081 1,845,451 2,304,364 2,762,177


Interest income 3,670,965 7,699,971 18,322,037 17,419,477 18,222,510 20,186,666


Total revenue 12,572,191 22,924,803 51,191,786 36,131,991 40,247,782 44,904,065

Other income and gains 230,543 742,063 4,093,767 5,000,000 5,000,000 5,000,000


Staff costs (2,621,465) (4,131,308) (7,829,712) (6,421,485) (7,217,064) (7,948,972)

Commission and fee expenses (848,704) (1,295,519) (3,842,160) (2,133,295) (2,225,045) (2,320,830)


Others (2,510,387) (3,646,790) (9,409,814) (7,923,600) (8,399,450) (8,882,114)



Share of profits of associates 116,940 167,334 481,445 410,120 449,701 472,186

Non-recurrent items - - - - - -


Income tax expense (1,173,754) (2,301,371) (4,277,553) (2,325,708) (2,926,798) (3,311,495)

Minority interests (245,970) (408,400) (1,022,465) (651,198) (715,672) (809,739)

Net income 4,035,024 7,710,623 15,818,851 8,651,633 10,294,662 11,647,790


EPS (RMB) 0.421 0.804 1.375 0.752 0.895 1.013


DPS (RMB) 0.120 0.250 0.450 0.226 0.269 0.304


Brokerage market share of Haitong (%) 4.8 4.8 5.0 4.7 4.8 4.8

Net commission rate of Haitong (%) 0.072 0.061 0.043 0.037 0.033 0.030


Staff cost-to-income (%) 25.0 22.9 20.7 25.1 24.8 24.7

Cost-to-income (%) 49.0 43.1 45.5 56.1 53.7 52.4

Cost-to-income (ex-impairment) 49.0 43.1 45.5 56.1 53.7 52.4

Growth Rates:

Commission and fee income 30% 41% 129% -39% 9% 8%

Interest income 28% 110% 138% -5% 5% 11%

Net investment gains -11% 166% 94% -50% 38% 20%

Total revenue and other income 19% 85% 134% -26% 10% 10%

Operating profit 31% 92% 101% -46% 20% 13%

Recurring net income 33% 91% 105% -45% 19% 13%

Recurring EPS 33% 91% 71% -45% 19% 13%

Margins and Ratios:





13

Key financials Haitong Securities (6837.HK)



As at 31 Dec 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E



Others 20,019,422 41,889,579 71,333,111 77,497,043 86,888,365 96,937,885 Yield (%) 1.1 2.3 3.9 1.9 2.1 2.3

Cash held on behalf of customers 33,777,588 62,592,458 112,066,661 83,341,055 90,865,600 97,356,000 Payout ratio (%) 29 31 33 30 30 30




PPE, net 1,171,604 1,210,145 1,317,178 1,307,937 1,258,302 1,208,219 ROAA (%) 2.73 2.96 3.41 1.52 1.73 1.78


Others 6,831,580 38,761,337 67,842,816 74,016,622 85,014,077 97,062,264


Equities 33.6 25.9 31.0 18.1 16.1 14.1

Total assets 169,123,603 352,622,149 576,448,892 564,256,755 626,619,453 682,530,921 Investment banking 5.9 5.7 3.2 6.5 6.7 7.0

Asset management 5.8 5.2 4.8 4.5 4.9 5.1

Accounts payable to brokerage clients 40,429,567 80,766,843 129,026,336 94,865,747 103,250,240 110,482,400 Futures/derivatives 3.7 1.8 0.9 2.4 2.5 2.6


Due to banks and other f inancial institutions 6,916,395 34,077,574 32,799,527 48,000,000 53,500,000 59,000,000 Commission and fee income 53.7 41.5 42.6 36.6 35.9 34.9



Bank and other borrow ings - 4,537,684 9,330,007 10,000,000 12,000,000 14,000,000

Others 18,360,543 54,696,006 114,168,665 136,220,549 143,151,783 154,621,141




Minority interests 2,598,167 3,899,772 9,233,126 9,884,324 10,599,996 11,409,735



Equities 2.9% 2.3% 3.4% 1.1% 1.1% 1.0%



Futures/derivatives 0.3% 0.2% 0.1% 0.2% 0.2% 0.2%

Others 0.4% 0.3% 0.3% 0.3% 0.4% 0.4%


Interest income 2.5% 3.0% 3.9% 3.1% 3.1% 3.1%







Recurring net income (ROAA) 2.9% 3.1% 3.6% 1.6% 1.8% 1.9%

Leverage (x) 2.5 4.0 5.3 5.2 5.2 5.3


ROAE 6.7% 11.9% 18.0% 7.9% 9.0% 9.5%


14

Key financials

GF Securities (01776.HK)

Income Statement



Equities 3,439,400 4,949,900 13,803,088 5,192,873 5,125,394 5,044,387

Investment banking 308,100 1,552,300 1,441,856 2,299,576 2,656,083 3,007,585

Futures and options 279,300 230,500 320,170 300,000 320,000 340,000

Asset management 205,100 1,124,500 3,597,426 4,276,914 5,033,015 5,896,558

Others 167,500 360,100 883,900 1,035,543 1,206,883 1,401,790


Interest income 2,349,217 4,324,638 12,336,200 8,421,094 8,451,347 9,671,174


Total revenue 9,273,748 16,146,894 42,778,855 28,437,831 31,777,123 35,978,093

Other income and gains 58,114 16,581 (46,040) 20,000 50,000 50,000


Staff costs (2,947,619) (4,345,926) (10,913,683) (6,656,854) (7,371,791) (8,064,485)

Commission and fee expenses (105,542) (240,813) (461,441) (327,623) (358,534) (392,258)


Others (1,815,828) (2,507,650) (4,898,877) (3,114,808) (2,965,558) (3,232,015)



Non-recurrent items - - - - - -


Income tax expense (664,747) (1,503,082) (4,193,359) (2,474,767) (3,065,452) (3,486,833)

Minority interests (65) (122,945) (411,339) (340,968) (359,191) (408,566)

Net income 2,812,501 5,022,568 13,201,014 8,183,231 9,903,409 11,264,746


EPS (RMB) 0.475 0.849 1.732 1.074 1.299 1.478


DPS (RMB) 0.200 0.200 0.800 0.430 0.520 0.591


Brokerage market share of GFS (%) 4.0 4.3 4.7 4.7 4.8 4.8

Net commission rate of GFS (%) 0.086 0.070 0.051 0.037 0.033 0.030


Staff cost-to-income (%) 37.6 33.0 32.7 32.6 31.6 30.9

Cost-to-income (%) 60.7 52.1 47.4 47.9 44.3 43.3

Cost-to-income (ex-impairment) 59.2 50.9 46.6 47.2 43.7 42.7

Growth Rates:

Commission and fee income 10% 87% 144% -35% 9% 9%

Interest income 52% 84% 185% -32% 0% 14%

Net investment gains 50% 43% 188% -34% 30% 18%

Total revenue and other income 28% 73% 164% -33% 12% 13%

Operating profit 33% 105% 178% -39% 22% 14%

Recurring net income 28% 79% 163% -38% 21% 14%

Recurring EPS 28% 79% 104% -38% 21% 14%

Margins and Ratios:





15

Key financials

GF Securities (01776.HK)



As at 31 Dec 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E



Others 10,652,117 30,234,496 42,709,314 21,388,391 23,452,865 25,314,028 Yield (%) 1.5 1.5 5.8 3.0 3.4 3.8

Cash held on behalf of customers 25,227,415 48,995,919 88,640,516 82,293,339 90,138,675 96,577,152 Payout ratio (%) 42 24 46 40 40 40




PPE, net 1,043,274 1,287,461 1,579,745 1,424,172 1,482,957 1,535,105 ROAA (%) 2.72 2.81 4.01 2.05 2.46 2.51


Others 3,313,977 2,403,306 4,476,890 7,181,437 7,547,000 7,929,090


Equities 37.1 30.7 32.3 18.3 16.1 14.0

Total assets 117,292,171 240,099,776 419,097,015 379,173,254 427,517,105 470,341,987 Investment banking 3.3 9.6 3.4 8.1 8.4 8.4

Futures and options 3.0 1.4 0.7 1.1 1.0 0.9

Accounts payable to brokerage clinets 31,609,231 71,465,563 118,137,085 97,151,673 106,222,843 113,667,332 Asset management 2.2 7.0 8.4 15.0 15.8 16.4


Due to banks and other f inancial institutions 5,300,000 1,123,000 1,750,000 - - - Commission and fee income 47.4 50.9 46.9 46.1 45.1 43.6



Bank and other borrow ings 11,979,740 26,030,664 72,270,186 70,000,000 97,000,000 116,000,000

Others 57,802 7,161,539 3,747,530 2,778,362 2,278,362 2,278,362




Minority interests 138,310 1,766,576 2,301,555 2,642,523 3,001,714 3,410,280



Equities 3.3% 2.8% 4.2% 1.3% 1.3% 1.1%


Futures and options 0.3% 0.1% 0.1% 0.1% 0.1% 0.1%


Others 0.2% 0.2% 0.3% 0.3% 0.3% 0.3%


Interest income 2.3% 2.4% 3.7% 2.1% 2.1% 2.2%







Recurring net income (ROAA) 2.7% 2.9% 4.1% 2.1% 2.5% 2.6%

Leverage (x) 3.1 4.8 5.6 5.1 5.0 5.1


ROAE 8.3% 13.5% 22.5% 10.5% 12.2% 12.8%


16

Disclaimer

This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any juris-diction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy Inter-national Securities (Hong Kong) Co., Limited (“Galaxy International Securities”) and/or its group companies to any registration or licensing requirement within such jurisdiction.

This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International Finan-cial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly or im-plied) is made as to their accuracy, correctness and/or completeness.

This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and where necessary consult their own independent financial advisers prior to any investment decision.

Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this re-port, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings Limited and any of its subsidiaries (“China Galaxy International”), directors, officers, agents and employees (“the Relevant Parties”).

All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy Interna-tional and/or the Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer.

Disclosure of Interests

China Galaxy Securities (6881.hk) is the direct and/or indirect holding company of the group of companies under China Galaxy International.

China Galaxy International may have financial interests in relation to the subjected company(ies) the securities in respect of which are reviewed in this report, and such interests aggregate to an amount may equal to or more than 1 % of the subjected company(ies)’ market capitalization.

One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies) men-tioned in this report.

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China Galaxy International may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or invest-ment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in this re-port.

Furthermore, China Galaxy International may have received compensation for investment banking services from the company(ies) mentioned in this report within the preceding 12 months and may currently seeking investment banking mandate from the subject company(ies).

Analyst Certification

The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report.

Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies covered in this report.

Explanation on Equity Ratings

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No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited.

China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459

Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888.

BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :

company ticker rating (hk$) (hk$) industry note€¦ · we also project an increase in margin...

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