CITICS reported 1H19 net profit of RMB 6.5bn, up 16% YoY, in-line with prelim announcement and accounting for 52%/50% of CMBIS/consensus FY19E estimates. 2Q19 operating revenue was down 20% QoQ to RMB 8.4bn, with sequential decline in almost all business lines (except AM) as A-share market cooled down. Surged impairment losses dragged bottom line to RMB 2.2bn, down 49% QoQ. Looking ahead, we think CITICS’s growth could be supported by 1) the Company’s strong competitiveness on the newly launched STAR Market, and 2) its balanced revenue mix that could protect it against weakening market condition (A-share ADT -33% in 3QTD from 1H19). Maintain BUY.
- Results positives: 1) Investment banking remained in leading position (income +3% YoY in 1H19) though 2Q19 income was down 18% QoQ on high base. CITICS topped the peers in both equity and debt underwriting amount with enhanced market share of 20%/14% in 1H19 (+5ppt/+0.6ppt from FY18) despite a 13% YoY decline of market equity underwriting amount. 2) Prop-trading gains was largely resilient, down est. ~50% QoQ from 1Q19 high (investment yield ~3.3%), less volatile than industry avg. of -79% QoQ. 3) AM fees rebounded 6% QoQ. AUM saw milder contraction (-3% HoH in 1H19 vs. -12% in 2H18) and actively managed AUM balance increased 2% HoH (proportion +5ppt HoH to 43%).
- Results negatives: 1) Brokerage likely faces pressure on market share and commission rate (2Q19 income -5% QoQ vs. market ADT +2% QoQ). The share loss (est. -0.5ppt from 6.1% in FY18) may result from more active engagement of retail investors in domestic stock market in 1H19, while CITICS owns a higher portion of institutional investors in its client mix. 2) Net interest income dropped 13% YoY in 1H19 (quarterly data incomparable), largely due to YoY decline in margin and SPL balance. Good news is interest cost fell esp. on short-term liabilities, together with QoQ scale-up of credit business, which shall help improve net interest income in 2H19E. 3) Impairment losses surged QoQ (although credit impairment losses dropped 26% YoY), likely on higher credit costs from SPLs and goodwill impairment losses from a subsidiary.
- Valuation. CITICS currently trades at 0.94 FY19E P/B, 2% below its historical average minus 1SD (0.96x). We remain our earnings forecast unchanged, and maintain BUY rating on CITICS with TP at HK$ 21.3.
