CITICS reported 1H20 net profit of RMB 8.9bn, up 38% YoY, in-line with preliminary announcement. 2Q20 operating income was above our estimates, up 19% QoQ, with strength across business lines led by prop-trading, although building provision again slowed bottom-line growth. We continue to like CITICS’s leadership amid industry consolidation, and expect favorable market and reform environment to support its earnings growth in 2H20E. Maintain BUY.
- Results positives: 1) Prop-trading gains +6% QoQ in 2Q20 despite high base, achieving 64% YoY growth in 1H20 to RMB 11.8bn. CITICS continued to expand its financial investment balance (+17% QoQ in 2Q20/+26% HoH) in 1H20 while maintaining decent yield at 5.4%. We believe this was attributable to CITICS leading position in equity derivatives as well as better performance of CITICS investment and Goldstone. 2) Investment banking fees +49% QoQ, where strong domestic follow-on offering and oversea underwriting offset slower domestic IPO underwriting (2 IPOs in 2Q20 vs. 5 in 1Q20). Given the Company’s rich IPO pipeline (ranked 1st by no. of sponsorship on STAR Market and ChiNext), we expect IB business will continue to improve in 2H20E. 3) Brokerage commission performed better than industry (-13% vs. -22% QoQ), where we estimated a YoY market share gain (+0.7ppt) in 1H20, more than offsetting declining commission rate. 4) AM fees +3% QoQ in 2Q20/+23% YoY in 1H20 (vs. industry +9% YoY in 1H20), thanks to both enhanced actively managed AUM (+23% HoH, accounting for 61% of total AUM) and stellar growth of China AMC (AUM +21% HoH) amid robust mutual fund issuance. 5) Net interest income +59% QoQ, as borrowings and bonds balance reduced 7% QoQ while margin balance extended 10% QoQ. We saw financing cost experiencing sequential decline due to easier monetary policy.
- Results negatives: Impairment losses of another RMB 704mn was booked in 2Q20, totaling RMB 2.3bn in 1H20, up 205% YoY. The increase was mostly for reverse repos (on-B/S SPLs) and margin financing, which increased CITICS’s buffer to total balance to 9.1% and 1.5%, respectively, among highest within major brokers.
- Maintain BUY. CITICS now trades at 1.14x 1-year forward P/B, slightly below its historical average of 1.19x. Our unchanged TP of HK$ 24.60 implies 1.5x FY20E P/B, to reflect its leading position in enjoying capital market reform and expected ROE recovery. Maintain BUY and as one of our sector top picks.
