HTSC reported 1Q20 net profit of RMB 2.9bn, up 4% YoY, accounting for 31% of our FY20E estimates. Operating revenue increased 11% YoY to RMB 6.7bn, where fee income growth outshone that of investment gains and NII. HTSC also recorded smallest provision among covered brokers, helping support a positive bottom-line growth. Going forwards, we expect the Company to deliver strong performance in asset mgmt. business and see sequential rebound in investment banking fees as IPO approval pace resumed to normal. Maintain BUY.
- Results positives: 1) Brokerage commission +35% YoY (vs. industry trend +33% YoY). Already-lower-than-peers’ commission rate and its leadership in WM transformation should help HTSC to guard its market share. 2) Investment banking fees +54% YoY on low base, largely from strong growth of debt underwriting (amount +57% YoY vs. industry +43%), while equity underwriting was subdued (amount -50% YoY with nil IPO). With now second largest STAR Market pipeline, we believe HTSC could catch up in IPO sponsorship in coming quarters. 3) AM fees +19% YoY (and +24% QoQ despite high base), which could be attributable to its outstanding active mgmt. capability. 4) Impairment losses was RMB 17mn (vs. RMB 3mn/122mn in 1Q19/4Q19), the lowest among covered brokers and was mainly from investments. After slashing its on-B/S SPL balance by 80% in FY19, HTSC should face less pressure from related credit risks than peers going forward.
- Results negatives: 1) Investment yield was calculated at 3.4% for 1Q20, much lower than 5.3% for FY19. Though prop-trading gains was up +13% YoY, we believe this was primarily on expanded investment balance (+69% YoY). Furthermore, investment gains from JVs/associates dropped 31% YoY, possibly dragged by gains from PE funds. 2) Net interest income -11% YoY, where higher interest income was offset by higher interest expenses. Margin account balance grew 22% YoY (vs. industry +15% YoY), while growth of total debts outpaced it (+33% YoY).
- Maintain BUY. HTSC’s share price has outperformed peers’ in Apr (+12% vs. peers’ avg. +2%) which was partly spurred by its A-share repurchase plan for ESOP. HTSC now trades at 0.82x 1-year forward P/B, 14% lower than its historical average of 0.95x. By considering ~3% FY20E dividend yield, total return in next 12mths could reach ~16%, thus we maintain BUY on the name.
