HTS reported FY19 net profit of RMB 9.5bn, up 83% YoY, arriving at the middle of its profit alert range. FY19 operating revenue increased 49% YoY to RMB 28.0bn, attributable to growth in almost every business line except NII with prop-trading gains and AM fees as the key highlights. 4Q19 net profit was up 15% QoQ on sequentially strong AM fees and invt. gains, though partly offset by surged impairment losses. HTS defers dividend distribution as it is proceeding with the A-share private placement. Maintain BUY.
- Results positives: 1) Prop-trading gains +39% QoQ in 4Q19, which we think was largely contributed by oversea and investment subsidiaries. FY19 invt. yield rebounded 3.1ppt to YoY 5.3%. 2) Asset mgmt. fee +63% QoQ partly due to seasonality though, the full-year growth was impressive at 24% YoY, vs. a flat industry trend. We believe the enhanced profitability was due to contraction in “channel business”, evidenced by a 31% YoY decline in TAM AUM at YE FY19, and 29% increase in actively managed AUM (accounting for 54% of total AUM at YE FY19, up 17ppt YoY). 3) Brokerage commission +12% QoQ, where domestic commission trend was slightly better than market turnover trend (-5% vs. -8%) and oversea commission held up the growth. 4) Investment banking fees -3% QoQ, also mixed with weaker domestic (-24% QoQ) and stronger oversea, most likely from Haitong Int’l (665 HK, NR)’s bond underwriting. Domestically, HTS is catching up in STAR Market sponsorship, with seven IPOs in progress, which could help support its equity financing underwriting performance in FY20E.
- Results negatives: 1) Impairment losses surged 55% QoQ, which possibly came from its leasing subsidiary (impairment losses +25% HoH in 2H19 to RMB 717mn) and other debt investments. The coronavirus outbreak and slowing macro growth may continue to put pressure on leasing segment’s asset quality in FY20E. 2) Net interest income -29% QoQ, likely due to lower interest income from SPL business as reverse repo balance contracted another 3% (on B/S SPL balance -24% YoY at YE FY19) and debt balance slightly went up.
- Maintain BUY. HTS currently trades at 0.55x 1-year forward P/B, 25% below its historical average minus 1SD (0.73x). The low valuation offers limited downside potential. We remain our earnings forecast unchanged, and maintain BUY rating with TP at HK$ 9.40.
