CGS reported 1Q20 net profit of RMB 1.8bn, up 15% YoY, accounting for 31% of our FY20E estimates. Operating revenue increased 27% YoY to RMB 4.6bn, primarily boosted by brokerage commissions and prop-trading gains, though higher impairment losses partly eroded profitability. Given that A-share ADT was moderating (-26% in Apr from 1Q20 to ~RMB 600mn) and market uncertainty is likely to remain, growth momentum of CGS may weaken in coming quarters, and the thriving direct financing market could only marginally help with its top-line growth due to its weak franchise in investment banking. Maintain HOLD.
- Results positives: 1) Brokerage commissions growth outpacing industry (+47% YoY vs. +33% YoY), contributing 55% of CGS’s 1Q20 op. revenue growth, showing the Company’s strong retail franchise in brokerage business. 2) Prop-trading gains +14% YoY (vs. industry -48% YoY), mainly attributable to its expanded investment balance (+36% YoY/+22% QoQ), while investment yield dropped 0.8ppt YoY/0.5 QoQ to 4.9% based on our estimates. 3) Investment banking fees +28% YoY, as debt financing underwriting amount increased 49% YoY along with the market (+43% YoY), but equity financing underwriting remained subdued (nil IPO in 1Q20). 4) Net interest income +30% YoY, on higher interest incomes from debt investment as well as robustly growing margin balance (+14% YoY).
- Results negatives: 1) Impairment losses was recorded at RMB 145mn (vs. a reversal of RMB 54mn in 1Q19), most of which (~RMB 120mn) was caused by commodity business of its subsidiary. 2) Asset management fee -6% YoY, suggesting possible AUM contraction still in progress.
- Maintain HOLD. CGS currently trades at 0.45x 1-year forward P/B, close to historical trough of 0.41x. Considering current softening market trading activity and its disadvantage in capital market reforms, we see limited upside potential ahead for both its earnings and valuation. Maintain HOLD.
