HTSC reported 9M19 net profit of RMB 6.4bn, up 44% YoY, accounting for 88%/81% of CMBIS/consensus FY19 estimates. 3Q19 operating revenue increased 42% QoQ to RMB 6.4bn, mainly boosted by investment banking fees, prop trading gains and asset management fees, while net interest income was the major drag. Lower cost-to-income ratio (-12ppt QoQ) drove up bottom line growth to 87% QoQ, despite surged impairment losses. The results was quite solid and we would expect the Company’s leading position in STAR Market pipelines and wealth management to support its earnings growth going forward. Maintain BUY.
- Results positives: 1) Prop-trading gains doubled QoQ, with a 7% QoQ growth in investment balance and decent investment yield at 4.2% (+1.8ppt QoQ). 2) Investment banking fees saw sequential improvement (+68% QoQ), fueled by 81% QoQ growth from equity underwriting amount, including 3.5 STAR Market IPOs, and 20% from debt underwriting amount. HTSC is now ranked second place by no. of STAR Market active applications, and we expect it to benefit from the acceleration of registration pace. 3) AM fees continued to grow 3% QoQ in 3Q19 and 23% YoY in 9M19, when many peers were still experiencing decline. The strong resilience of AM business could provide a stable support to top-line growth. 4) Brokerage commission was down 13% QoQ (vs. A-share ADT -23% QoQ), in-line with peers’ trend.
- Results negatives: 1) Net interest income dropped 17% YoY in 9M19 (quarterly data not comparable), weighed by sharply contracted reverse repo balance (-59% in 9M19), as the Company sees SPL business risky and the scale-down will likely to continue in coming quarters. Margin account, on the other hand, expanded 31% in 9M19 and 7% QoQ (vs. market +4% QoQ) in 3Q19, which could partly alleviate the pressure on NII. 2) Impairment losses rose another 2.2x QoQ, which could be from rising SPL-related write-offs.
- Maintain BUY. HTSC now trades at 0.82x FY19E P/B, close to its historical average minus 1SD (0.83x). Our earnings forecast remains unchanged, and we maintain BUY rating on HTSC with TP at HK$ 14.90.
