GFS reported FY19 net profit of RMB 7.5bn, up 75% YoY, 4%/5% above CMBIS/ consensus estimates. FY19 operating revenue grew 46% YoY to RMB 20.5bn, mainly fueled by a 10.7x rebound of prop-trading gains from low base in FY18, while impairment losses surged 125% YoY largely from debt investments. 4Q19 results surprised us on higher investment banking fees. We maintain HOLD on GFS as it is not a principal beneficiary of policy tailwinds, in our view.
- Results positives: 1) Investment banking fees +49% QoQ in 4Q19, primarily on 153% QoQ increase in equity financing underwriting amount, with four STAR Market IPOs listed in 4Q19. GFS has completed another two sponsored IPOs on the new board in 1Q20E, and now has no active sponsorship in its STAR Market pipeline. The Company may need to catch up as we still see STAR Market as major IPO supply in FY20E. 2) Prop-trading gains +23% QoQ on better A-share stock market performance towards year-end. 3) Asset mgmt. fees +25% QoQ, likely partly due to higher performance fees. AM business’s total AUM was still contracting under tighter regulations (-22% YoY/-15% HoH at YE FY19), while higher proportion of actively managed AUM improved fee rates. GFS obtained approvals for two CAM products to transform into mutual funds in Nov 2019, which may help stabilize its AUM trend. 4) Net interest income +14% QoQ, vs. most peers seeing a sequential decline. We believe this was resulted from higher interest income as margin financing balance expanded 8% QoQ, and lower interest expenses as total debts decreased 6% QoQ. GFS was one of few brokers under our coverage lowering its leverage, of which the YE adj. financial leverage decreased 0.4x from 3.9x in FY18 to 3.5x in FY19.
- Results negatives: 1) Brokerage commission -9% QoQ, vs. -8% domestic stock market turnover trend. We estimated both market share loss (-0.3ppt) and slightly lower commission rate in 2H19. 2) Impairment losses surged 18x QoQ in 4Q19 and 125% YoY in FY19. 2H19 impairment losses halved HoH though, those from GFS’s leasing subsidiary were likely the main components.
- Maintain HOLD. GFS currently trades at 0.58x 1-year forward P/B, close to its historical trough (0.52x). Though the valuation is very low, we see limited catalysts ahead for an upward re-rating. We made no changes to our earnings forecast, and maintain HOLD rating on GFS with TP at HK$ 8.90.
