HTSC reported FY20 net profit of RMB 10.8bn, up 20% YoY, 8% lower than consensus estimates. Operating income increased 27% YoY, highlighted by investment banking (+87% YoY) and brokerage (+57% YoY). Like many large peers, HTSC booked surged impairment losses (+82% YoY), which slowed bottom-line growth. We slightly trim HTSC FY21E-22E net profit forecast by 1%-2% and cut TP to HK$ 15.80 to reflect heightened volatility. HTSC now trades at historical low (0.64x forward P/B). With a 4% yield and its strength in WM and IB, we think the Company is exposed to limited downside. Maintain BUY.
- Results positives: 1) IB fees +87% YoY, attributable to 259% YoY in domestic IPO underwriting amount given HTSC’s strong pipelines in registration-based markets, and 80% YoY growth in domestic bond underwriting amount with solid share gains. 2) Brokerage commission +57% YoY, higher than industry trend of +54% YoY, as HTSC maintained higher domestic market share across FY20 (7.7% in 1H20 & 2H20 vs. 7.5% in FY19) and better commission rate trend (-12% vs. industry -38% YoY). 3) Invst. gains from JVs & associates +54% YoY, thanks to its holding in China Southern Fund and Huatai-Pine Fund amid mutual fund issuance boom, as well as in several PE funds. 4) NII +23% YoY on strong growth of margin acct. (+49% YoY) and lower financing costs (cal. -0.32ppt YoY). HTSC also achieved fast growth of securities lending business through its online platform, of which YE FY20 balance +85% YoY and had a market share of 19%.
- Results negatives: 1) AM fees +7% YoY (vs. industry growth of 9%). Domestic AM fees saw 13% YoY growth through further enhancing active management capabilities while reducing channel business (AUM -19% YoY), while est. contribution from Assetmark was relatively flattish YoY. 2) Prop-trading gains +11% YoY, while cal. invst. yield dipped 1.1ppt YoY, mainly due to RMB 2.7bn FV losses from derivative assets. 3) Impairment losses was RMB1.3bn, up +82% YoY, primarily for margin account (RMB 1.36bn), while SPL booked a reversal of RMB 18mn as HTSC had cut its SPL balance to RMB 6.7bn from RMB 283bn at YE FY18.
Maintain BUY. HTSC now trades at 0.64x 1-year forward P/B, a historical low level. Our 3-stage DDM-derived TP of HK$ 15.80 reflects higher COE (10.6% vs. prev. 9.5%) and unchanged other assumptions. We maintain BUY rating and our new TP implies 0.87x FY21E P/B (vs. historical avg. 0.9x).
