CITICS reported 9M19 net profit of RMB 10.5bn, up 44% YoY, accounting for 92%/82% of CMBIS/consensus FY19 estimates. The results was strong in almost every business line. 3Q19 operating revenue grew 25% QoQ, with investment banking fees and prop trading gains as the main drivers. Lower cost-to-income ratio (-8ppt QoQ) and decreased impairment losses (-69% QoQ) sent net profit growth higher to 86% QoQ at RMB 4.1bn. The outstanding 3Q19 results was a proof of CITICS’s strength in investment banking and institutionalization, which we believe will continue to keep its competitive edge as a key beneficiary of China capital market reform. CITICS’s current valuation is undemanding at 0.98x FY19E P/B. Reiterate BUY.
- Results positives: 1) Investment banking fees surged 44% QoQ with market leading position maintained. IPO underwriting amount grew 20% QoQ, with five STAR Market IPO listings as a major contributor (~82%). CITICS ranked 4th place by no. of STAR Market active applications, enabling high visibility of IB fees in coming quarters. 2) Prop-trading gains jumped 98% QoQ to RMB 4.5bn, half of which was gained by subsidiaries by our estimates, including PE investment and the mandatory investment of STAR Market sponsorship. The Company also maintained its leading position in OTC derivative market in 8M19 (ranked 1st by outstanding notional value). 3) AM fees increased 5% QoQ (vs. industry trend of -10% QoQ), partly attributable to better fund management fees performance. 4) Brokerage commission rebounded 3% QoQ, bucking peers’ trend (-15% to -11% QoQ for brokers we cover), possibly from improved trading activity of institutional clients driven by STAR Market launch and weighting increase of A-shares into global indices as well as sequential growth of oversea brokerage business.
- Results negatives: Net interest income retreated 52% QoQ, as interest expense growth outpaced interest income, likely due to increased bond financing. Reverse repo balance slightly shrank 4% QoQ, while margin accounts balance grew 4%, in-line with market trend.
- Acquisition of GZS approved by regulator. Reiterate BUY and maintain as our sector top pick. CSRC M&A committee approved CITICS’s acquisition of Guangzhou Securities yesterday. We think the deal will benefit CITICS strategically though the new share issuance may dilute FY20E EPS insignificantly by 6% and consolidation may take time. CITICS currently trades at 0.98 FY19E P/B, still close to its historical average minus 1SD (0.96x). Maintain BUY rating and as our sector top pick.
