CSC reported 1Q20 net profit of RMB 2.0bn, up 31% YoY (vs. industry -11% YoY), accounting for 32% of our FY20E estimates. Operating revenue grew markedly 39% YoY to RMB 3.1bn, mainly underpinned by strong brokerage incomes and prop-trading gains. Net charge-offs of credit business partly offset better operating efficiency (cost-to-income ratio -10ppt YoY), yet CSC continued to achieve decent ROE of 13.5%. The superior 1Q20 results laid solid foundation for CSC’s FY20E earnings. Though sequentially strong invt. gains may not be sustainable given heightened market uncertainty, we remain positive on its investment banking fee growth as capital market reforms would speed up. Maintain BUY and as one of our sector top picks.
- Results positives: 1) Prop-trading gains growth greatly outpacing industry trend (+67% YoY vs. -48% YoY in 1Q20) amid coronavirus-battered stock market, with an impressive invt. yield of 5.7% based on our estimates. The Company possibly chose to realize some of its equity investment gains before Mar. 2) Brokerage commissions +49% YoY (vs. industry +33% YoY). We saw industry commission rate trend stabilizing (+1bps to 2.8bps QoQ) when market ADT soared and CSC may have continued to gain shares (the Company was one of the few covered brokers that recorded brokerage market share gains in 2H19), which also attributed to its better-than-industry growth. 3) Investment banking fees +13% YoY, supported by 103%/56% YoY growth of equity/debt underwriting amount, highlighted by mega IPO and robust corporate bond underwriting (both ranked 1st by market share in 1Q20). With 2nd most active IPOs in approval process, we expect CSC’s investment banking fees to drive revenue its growth after approval pace resumed normal.
- Results negatives: 1) Net interest income -13% YoY, likely due to flat margin balance growth (vs. industry +15% YoY) as well as lower yields caused by intense competition, which outweighed benefits from sequentially declining financing cost. 2) AM fees -1% YoY (vs. industry +16% YoY), probably still suffering from AUM contraction. 3) Impairment losses recorded net charge-off of RMB 108mn, vs. reversals in 1Q19/4Q19, as recent market volatility weighed on asset quality of margin financing and SPLs.
- Maintain BUY. CSC currently trades at 0.76x 1-year forward P/B (vs. historical avg. of 0.75x). Despite recent outperformance over peers due to the merger rumor with CITICS (6030 HK, BUY), we still see the Company as a principal beneficiary of direct financing demand growth that could support its industry leading ROE. Maintain BUY and as one of our sector top picks.
