CSC reported 1H20 net profit of RMB 4.6bn, up 97% YoY, in-line with preliminary announcement. 2Q20 operating revenue increased 25% QoQ to RMB 2.6bn, mainly spurred by superior prop-trading gains and investment banking fees. With a solid IPO pipeline and potential mega deal being rolled out in coming quarters and strong investment capability, we are positive on CSC’s earnings outlook in 2H20E. Maintain BUY and as one of our sector top picks.
- Results positives: 1) Prop-trading gains achieved 36% QoQ growth in 2Q20, as financial investment expanded (+15% QoQ) and investment yield further picked up to 7.0%. CSC increased its position mostly in bonds and equity in 1H20 (+28% HoH). 2) Investment banking fees +68% QoQ in 2Q20/+22% YoY in 1H20. CSC enhanced its franchise in IB business in 1H20. It topped the industry by underwriting amount of IPOs in 1H20, which grew 8.6x YoY and gained the Company with ~30% market share, and maintained 2nd place in debt underwriting. Regarding the recently launched NEEQ Selective Layer and ChiNext reform, CSC already booked 7 and 3 sponsorships on either board, and now owns the 4th/2nd largest pipeline on STAR Market (incl. Ant Group) and ChiNext by no. of IPO. We feel increasingly positive on the Company’s IB outlook in 2H20E. 3) AM fees grew 183% QoQ in 2Q20/34% YoY in 1H20, attributable to increased actively managed AUM (+7% HoH, proportion in total AUM up 9ppt HoH to 51%), though total AUM still saw 12% HoH shrinkage as CSC was consistently reducing “channel business”. 4) Brokerage commissions -15% QoQ (vs. -22% industry) thanks to share gains (+0.4ppt YoY in 1H20 by our est.).
- Results negatives: Net interest income -2% QoQ in 2Q20/-19% YoY in 1H20. This was likely caused by pared down SPL balance (-25% HoH) which had higher yields, though margin balance grew robustly 16% QoQ/23% HoH by 2Q20, which more than offsetting benefits from sequentially decreased borrowings and bonds (-5% QoQ) and lower financing costs.
- Maintain BUY. CSC now trades at 1.23x 1-year forward P/B (vs. 1.28x of CICC and 1.14x of CITICS). We think the Company’s valuation is well supported by its industry leading ROE (17.6% in 1H20) and its position as a key beneficiary of China’s capital market reform. Maintain BUY and as one of our sector top picks.
