CSC reported 1H19 net profit of RMB 2.3bn, up 38% YoY, in-line with prelim announcement and accounting for 56%/51% of CMBIS/consensus FY19E estimates. 2Q19 operating revenue declined 10% QoQ to RMB 2.8bn, where robust growth from investment banking was offset by lower net interest income and investment gains. Bottom line was eroded by surged impairment losses, reaching RMB 841mn, down 44% QoQ. CSC now ranks first place by number of STAR Market sponsored IPOs (both listed and in reviewing process). As the Company generated 27% of its operating revenue from investment banking fees in 1H19, we believe investment banking will continue to support its 2H19E earnings. Maintain BUY.
- Results positives: 1) Investment banking fees recorded strong growth (+47% QoQ in 2Q19 and +14% in 1H19).CSC maintained its leading position in equity and debt underwriting, being the second in industry by underwriting amount. 2) Brokerage commissions increased 7% QoQ (vs. A-share ADT +2% QoQ) as it maintained stable market share (2.81% in 1H19 vs. 2.83% in FY18) amid recovering market. Estimated commission rate slid 6% to 3.6bps in 1H19 but was still above industry average of 3.0bps. 3) Prop-trading gains saw moderate QoQ decline than industry trend, as CSC increased its exposure on bonds in investment portfolio. 4) AM fees grew 4% YoY in 1H19 (2Q19 strong growth likely due to seasonality) and AUM was back on expanding track for the second half year (+1% HoH).
- Results negatives: 1) Net interest income plunged 47% YoY in 1H19, as margin balance contracted 27% YoY and 8% QoQ in 2Q19. 2) CSC reported impairment losses of RMB 324mn in 2Q19, reversing a net write-back of RMB 424mn in 1Q19, likely on deteriorating asset quality from SPLs and margin financing as A-share market weakened.
- Valuation. CSC currently trades at 0.74 FY19E P/B, 8% below its historical average (0.80x) and close to sector’s average (0.73x). The valuation is attractive as CSC delivered a 1H19 annualized ROE of 9.7%, the highest among brokers we cover. We made no changes to our earnings forecast, and maintain BUY rating on CSC with TP at HK$ 8.0.
