HTSC reported 1H19 net profit of RMB 4.1bn, up 28% YoY, accounting for 50%/50% of CMBIS/consensus FY19E estimates. 2Q19 operating revenue decreased 26% QoQ to RMB 4.5bn, dragged by weak net interest income and prop trading gains. Higher opex. (+8 QoQ) and credit costs further dragged bottom line to RMB 1.3bn, down 54% QoQ. 1H19 annualized ROE was up 0.3ppt to 7.4% as the Company’s GDR issuance expanded its equity base.
- Results positives: 1) 2Q19 brokerage commission remained largely stable (-1% QoQ vs. A-share ADT +2% QoQ). We estimated a slight market share uptick of HTSC’s brokerage business in 1H19, thanks to its leading position in wealth management business transformation and successful penetration of its mobile APP “ZhangLe Fortune Path”. 2) AM fees was a big bright spot (+8% QoQ in 2Q19 and 26% YoY in 1H19), as its AUM bucked the trend of a declining industry (+18% HoH of HTSC vs. -14% HoH of industry). 3) Investment banking fees saw sequential improvement (+44 QoQ), though 1H19 IB income was down 25% as IPO fund raised plunged (-95% YoY for HTSC vs. -34% YoY for industry). But HTSC maintained a stable market share in debt financing underwriting, where the market size grew 69% YoY. HTSC now ranks third/fourth by underwriting amount and no. of sponsored IPOs on STAR Market (with 3.5 IPO already listed), and we expect this to well support its investment banking income in 2H19E.
- Results negatives: 1) Prop trading gains declined ~40% QoQ by our estimates, milder than industry trend, but 1H19 investment yield was only 4.0%, lagging behind most large brokers we cover. 2) Net interest income dropped 33% YoY in 1H19, likely weighed by lower interest rate of margin financing and a sharp contraction on SPL balance (-61% YoY). 3) Impairment losses climbed up 40x QoQ, as SPLs recorded higher write-off due to heightened market volatility.
- Valuation. HTSC now trades at 0.74 FY19E P/B, 12% below its historical average minus 1SD (0.84x). Our earnings forecast remains unchanged, and we maintain BUY rating on HTSC with TP at HK$ 18.2.
