CGS reported FY19 net profit of RMB 5.2bn, up 81% YoY, in-line with preliminary results. FY19 operating revenue increased 55% YoY to RMB 14.3bn, supported by strong brokerage rebound and prop-trading gains as A-share market significantly recovered, while other fee incomes remained weak. The Company is at disadvantage amid the sped-up capital market reform due to its relatively weak competitiveness in investment banking business and the recent risk-off sentiment may not favor its franchise in brokerage. Maintain HOLD.
- Results positives: 1) Prop-trading gains +25% QoQ in 4Q19, maintaining resilient and decent yields throughout the year (5.7% in FY19 vs. 2.6% in FY18). 2) Net interest income +4% QoQ in 4Q19, attributable to 9% QoQ growth in margin financing balance, with mild increase in debt (+4% QoQ) and declining finance cost trend.
- Results negatives: 1) Brokerage commission unexpectedly weak (-17% QoQ), a much steeper decline than domestic turnover of -8% QoQ, which may indicate pressure from both market share and commission rate in 2H19. 2) Investment banking fee weakness continued (-47% QoQ), as equity financing underwriting amount was nil in 4Q19, according to Wind. CGS recorded no IPO underwriting in 3M20, though its three STAR Market IPO in pipeline may lift investment banking fees in coming quarters. 3) Asset management fee -11% QoQ, showing consistent AUM contraction (-17% YoY/-11% HoH) and limited improvement in fee rates. 4) Impairment losses surged QoQ in 4Q19 though was flat YoY in FY19. Credit risk was mainly observed from reverse repos (on B/S SPLs) and debt investments in 2H19.
- Maintain HOLD. CGS currently trades at 0.45x 1-year forward P/B, close to historical trough of 0.41x. Except for weakness in investment banking, with high exposure to brokerage commission (32% in FY19 revenue), the softening A-share ADT (from >RMB 1tn in late Feb to ~RMB 0.7tn last week) amid heightened market volatility may dampen the Company’s profitability more than other brokers we cover. We maintain earnings forecast unchanged, and maintain HOLD rating with TP at HK$ 4.20.
