CITICS reported 1Q20 net profit of RMB 4.0bn, down 4% YoY, accounting for 29% of our FY20E estimates. 1Q20 operating income increased 16% YoY to RMB 11.6bn, fueled by higher prop-trading gains and brokerage commissions, while a RMB 1.6bn provision charge was the main drag to bottom-line. We think the set of results is still solid given its robust top-line growth, and the Company has always been maintaining a prudent provision policy. We still like CITICS for its all-round leadership, esp. in investment banking and institutionalization, and we see it as a key beneficiary in on-going capital market reform. Maintain BUY.
- Results positives: 1) Brokerage commission +37% YoY in 1Q20 (vs. industry +33% YoY), which could partly attributable to consolidation of CITICS South China (former GZS) that brought about retail trading activity to the Company and growth in oversea trading. 2) Prop-trading gains +16% YoY from higher fair value gains of financial investments. CITICS increased its investment balance 48% YoY/17% QoQ, and achieved a decent investment yield calculated at 5.6%. 3) AM fees +25% YoY (vs. industry +16% YoY), possibly from both its enhanced active mgmt. capability of asset mgmt. as well as strong growth of fund mgmt. fees from China AMC (1Q20 monthly avg. balance +46% YoY/+4% QoQ and net profit +25% YoY).
- Results negatives: 1) Investment banking fees -10% YoY, which surprised us as CITICS’s IPO/follow-on offering/debt financing underwriting amount actually grew 78%/15%/51% YoY in 1Q20. The lower fees may suggest some fee rate pressure or mismatch in revenue recognition, while we do not see any substantial unfavorable change to its investment banking competitiveness. 2) Net interest income -40% YoY, where interest expense growth continued to outpace interest income, as total debt balance expanded 33% YoY/4% QoQ. 1Q20 adj. leverage went up 0.8x YoY/0.1x QoQ to 4.2x, despite its equity issuance to Yue Xiu Holding. 3) Impairment losses stayed high at RMB 1.6bn, mostly due to higher charges from SPLs and margin financing on parent company level, and it also recorded RMB 0.3bn impairment losses for subsidiary’s commodity trading business.
- Maintain BUY. CITICS’s current valuation is undemanding at 0.94x 1-yr fwd P/B, close to its historical avg. minus 1SD (0.95x). We maintain TP unchanged at HK$ 18.90, implying 1.19x FY20E P/B, equivalent to its historical average. Maintain BUY and as one of our sector top picks.
