CITICS reported FY19 net profit of RMB 12.3bn, up 30% YoY, in-line with prelim results. FY19 operating income grew 24% YoY to RMB 37.4bn, boosted by strong investment banking fees and prop-trading gains. 4Q19 net profit softened 48% QoQ, dragged by subsidiary’s goodwill impairment loss. FY19 ROE rebounded 1.2ppt YoY to 7.8%. CITICS increased its payout ratio to 50%, up 5ppt YoY. Going forward, we believe the Company will continue to enjoy policy tailwind and enhance its market leadership and profitability. Maintain BUY.
- Results positives: 1) Investment banking fees +26% QoQ in 4Q19, mainly driven by 48% increase in IPO underwriting amount supported by strong STAR Market pipelines. CITICS maintained 1st place in both equity and debt underwriting in domestic market in FY19. 2) AM fees +12% QoQ and continue to rebound sequentially, thanks to higher proportion of actively managed AUM (52% YE FY19, up 9ppt HoH) and expanded total AUM (+8% HoH in 2H19). We expect leaders in AM to see faster recovery of AUM and fees trend than the industry as favorable policies skewed towards them (e.g. pilot program of transforming large CAM products to mutual funds). 3) Prop-trading gains -5% QoQ on high base, and invt. yield still decent at 4.6%.
- Results negatives: 1) Brokerage commission -10% QoQ vs. market total turnover -8% QoQ, likely pressured by further declining commission rate, while we see a rebound in domestic market share in 2H19. 2) Net interest income -37% QoQ, as interest expense outpaced interest income. CITICS continued to leverage up, with YE adj. leverage at 4.1x, up 0.4x QoQ/0.5x YoY. Total debt increased 5% QoQ, while 5% growth in margin balance was offset by a 11% decline in reverse repos ended 4Q19. 3) Impairment losses surged 5.7x QoQ, mainly from an RMB 528mn goodwill impairment losses for CLSA.
- Maintain BUY. CITICS has completed the acquisition of Guangzhou Securities (renamed CITICS South China), and the subsidiary already contributed a RMB 13mn net profit to CITICS’s Feb parent company earnings. We expect the post-acquisition integration, together with CITICS’s all-round market leadership esp. in investment banking will enhance its competitiveness as a key beneficiary of market reform and lift its profitability. CITICS’s valuation is attractive at 0.82x 1-yr fwd P/B, well below its historical avg. minus 1SD (0.95x). We made no change to our forecasts. Maintain BUY and as our sector top pick.
