HTSC reported FY19 net profit of RMB 9.0bn, up 79% YoY, 7%/9% higher than CMBIS/consensus estimates. FY19 operating revenue increased 52% YoY to RMB 23.8bn, mainly driven by surged prop-trading gains and investment gains on associates/JVs, while lower net interest income dented the growth due to cutting-down on SPL business. HTSC announced an A-share repurchase plan for share incentives. We still like HTSC’s leading position in IPO underwriting and strength in wealth management transformation. Maintain BUY.
- Results positives: 1) Prop-trading gains and profit from associate/JVs was strong in 4Q19, together pushed up investment gains by 12% QoQ. Gains from associates/JVs recorded a total of RMB 2.7bn in FY19 vs. RMB 0.9bn in FY18, largely from PE investments. 2) Brokerage commission -9% QoQ (vs. domestic market total turnover -8% QoQ). We estimated a stable market share in 2H19 but further declining commission rate. 3) Impairment losses -73% QoQ in 4Q19/-17% YoY in FY19, seeing increase in 2H19 mainly from reverse repos. Given contracting SPL balances, the risks should be manageable going forward.
- Results negatives: 1) Investment banking fees +25% QoQ though, equity/debt financing underwriting amount -7%/-10% QoQ. HTSC now owns the most active STAR Market IPO sponsorship in pipeline, and we expect better performance from its investment banking in FY20E. 2) AM fees -13% QoQ in 4Q19/+12% YoY in FY19, likely from lower fund mgmt. fees while we estimate enhanced AM fee rate against lower AUM (-24% HoH/-10% YoY at YE FY19). 3) Net interest income +20% QoQ in 4Q19/-30% YoY in FY19, primarily due to lowered interest income on significant contraction of SPL balance (-64% HoH/-80% YoY at YE FY19).
- HTSC announced A-share repurchase for share incentive plan, which allows it to repurchase 0.5%-1.0% of its total share base through secondary market. The max. repurchase price should not exceed 150% of its A-shares’ avg. 30-day prices before the Board approves the plan or RMB 28.81 (167.5% of its last A-share closing price). Potential positive reaction of its A-share price may also help lift its near-trough H-share valuation. HTSC now trades at 0.71x 1-year forward P/B, 12% lower than historical avg. minus 1SD (0.81x). Our earnings forecast remains unchanged, and we maintain BUY rating on HTSC with TP at HK$ 14.60.
