CICC reported FY19 net profit of RMB 4.2bn, up 21% YoY, in-line with CMBIS/consensus estimates. FY19 operating revenue increased 22% YoY to RMB 15.8bn, where strong prop-trading gains and investment banking fees were partly offset by a surge in net interest loss as CICC continued to leverage up. CICC proposed no dividend to secure more capital for future development, and aims to grow its scale in coming years. Maintain BUY.
- FY19/4Q19 results review: 1) Investment banking fees the brightest spot (+169% QoQ in 4Q19/+34% YoY in FY19), attributable to its leadership in STAR Market IPOs and mega deals in 4Q19. 2) Prop-trading gains grew 43% YoY with relatively stable quarterly performance and expanded investment asset (+31% YoY). Invt. yield was modestly up 0.3ppt YoY to 4.7%, as CICC has less exposure to directional equity invt., making it less vulnerable to heightened market volatility. 3) Net interest losses surged 95% QoQ in 4Q19/2.9x YoY in FY19, due to 47% YoY increase in debt balance. 4) Adj. financial leverage reached 6.1x by 4Q19 (-0.1x QoQ/+0.7x YoY) post H-share private placement in Oct 2019. CICC is still facing tight capital position which may put pressure on its B/S expansion in FY20E, while being included into the consolidated capital supervision pilot program could partly alleviate this before it replenishes capital through A-share IPO.
- Results briefing key takeaways: 1) Aiming to grow bigger and will prioritize revenue growth and market share gains over ROE in next 2-3 years. CICC will continue to enhance its investment in capital, talents and IT to achieve this goal. 2) Leveraging strong franchise in investment banking amid capital market reform and synergizing with other business lines to boost growth. Mgmt. feel confident to maintain its leadership in IB business through its strength in long-term relationship with new economy issuers and expanding penetration into broader customer base. 3) CICC expects its tech JV with Tencent to commence operation in Jun 2020, and sees growing investment advisor team and tech enabling important to its WM transformation.
- Maintain BUY and as one of our sector top picks. CICC now trades at 0.95x 1-year forward P/B, 10% below its historical avg. minus 1SD (1.06x), providing a good entry point for long-term investment. We maintain earnings forecast unchanged and BUY rating on CICC with TP at HK$ 16.40, and remain positive on its unique position in investment banking business and institutionalization.
