CGS reported 9M19 net profit of RMB 3.9bn, up 107% YoY, accounting for 84%/86% of CMBIS/consensus FY19 estimates. 3Q19 operating revenue increased 12% QoQ, mainly on decent prop-trading gains and resilient brokerage commission income. Improved operating efficiency and lower provision also helped bottom-line to grow 19% QoQ to RMB 1.3bn. 3Q19 annualized ROE rebounded 1.2ppt QoQ to 7.4%. The results was not bad, but we see limited upside potential ahead given 1) already big re-rating YTD and 2) CGS’s lacking structural growth potential. Maintain HOLD.
- Results positives: 1) Brokerage income was quite resilient, as A-share ADT contracted 23% QoQ to RMB 454bn in 3Q19, while CGS’s brokerage commission declined only 11% QoQ. This may be attributable to the activeness of retail investors which it has large exposure to. 2) Prop-trading gains delivered strong performance (+80% QoQ), with investment yield jumping to 4.7%, up 2.1ppt QoQ, likely due to better return from bond investment (ChinaBond Aggregate Index +1.4% QoQ in 3Q19 vs. CSI 300 Index -0.3% QoQ). 3) Impairment losses decreased 76% QoQ/79% YoY, as SPL-related risks mitigated amid a stabilizing market condition.
- Results negatives: 1) Investment banking continued to be the biggest weakness, as fee income was down 3% QoQ despite the STAR Market launch boom. IPO financing amount surged 129% QoQ in 3Q19 and STAR Market IPOs accounted for 60% of it, yet CGS had no sponsored company listed on the new board. Recently, SSE has sped up the registration process of STAR Market IPOs, and estimated ~100 listings by the end of 2019 (currently 35 listed). As CGS has only one sponsored applicant on STAR Market, we expect its investment banking fee to remain subdued in 4Q19. 2) Asset management fee was flat QoQ/ down 15% YoY, showing continuing pressure from new asset management rules. 3) Net interest income probably dipped slightly QoQ after excluding the reclassification of bond interests, as margin financing (+1% QoQ) expanded slower than market (+4% QoQ), indicating possible share loss.
- Maintain HOLD. CGS currently trades at 0.54x FY19E P/B, 7% below its historical average minus 1SD (0.58x). The valuation is low but we believe this could be justified by its weaker structural growth potential. The stock has gained 21% YTD, outpacing sector’s average of 2% and HSI Index’s 4%. Its higher correlation with stock market ADT rebound should be largely priced in. Maintain HOLD on CGS with TP at HK$ 4.5.
