GFS reported 9M19 net profit of RMB 5.6bn, up 37% YoY, accounting for 77%/82% of CMBIS/consensus FY19 estimates. 3Q19 revenue recorded a moderate QoQ growth of 7%, where the strong growth of prop-trading gains was offset by relatively weak performance across other business lines. Thanks to a large decrease in impairment losses (-97% QoQ), net profit achieved a 21% QoQ growth to RMB 1.5bn. The investment gains driven growth was not of high quality. 4Q19E results will likely see remarkable YoY growth on low base, but we will maintain our HOLD rating as GFS is not a key beneficiary of STAR Market and regulatory constraints may still weigh on its valuation.
- Results positives: 1) Prop trading gains was the largest contributor to 3Q19 revenue, which grew 121% QoQ. Investment yield improved 1.4ppt QoQ to 2.5%, but was still below those of comparable peers (>4% in 3Q19). 2) 3Q19 investment banking fees rebounded 72% QoQ (but 9M19 -4% YoY even on low base), as IPO underwriting amount increased 6.9x QoQ. With seven STAR Market applicants on hand, GFS’s investment banking business may see improvement in 4Q19, but we won’t expect this to be significant enough to materially change its competitiveness in this business line. 3) Brokerage commission dropped 15% QoQ, though better than A-share ADT trend (-23% QoQ), but was a slightly deeper decline than peers. 4) Impairment losses was 97% lower QoQ, possibly due to less risks from financial investments.
- Results negatives: 1) Asset management fee decline 23% QoQ, as AUM may be still contracting under new asset management rules. 2) Net interest income decreased 11% QoQ, as the Company proactively reduced its SPL exposure, evidenced by a 36% QoQ decline in reverse repo balance in 3Q19. Financial leverage was lower at 3.5x from 3.7x ended 1H19.
- Maintain HOLD. GFS currently trades at 0.63x FY19E P/B, close to historical trough (0.55x). The absolute low valuation may provide higher short-term potential if market sentiment improves. We made no changes to our earnings forecast, and maintain HOLD rating on GFS with TP at HK$ 9.80.
