CGS reported FY20 net profit of RMB 7.2bn, up 39% YoY, in-line with prelim results. Operating revenue increased 23% YoY to RMB 17.6bn, mainly boosted by brokerage, net interest income and investment banking, while prop-trading and asset management remained subdued. We think CGS’s weak franchise in IB and AM makes it least favorable in enjoying capital market reforms among covered brokers and softening ADT could further pressure its top-line growth. We cut TP to HK$ 5.50 and maintain HOLD, though its near-trough valuation (0.49x forward P/B) and >5% yield is attractive for short-term investment.
- Results positives: 1) Investment banking fees surged 98% YoY, thanks to >360% growth of equity underwriting amount (including 5 IPOs vs. 1 in 2019) and 68% growth of debt underwriting amount in domestic market. The strong growth was mainly on low base and IB still accounted for only 5% of CGS’s FY20 operating income. 2) Net interest income +20% YoY, primarily boosted by 61% YoY growth of margin account (vs. 47% YoY of market margin financing balance) and higher interest income from bond investment, offsetting a 18% YoY decline in reverse repo balance. Meanwhile, CGS’s financing costs greatly lowered due to easing monetary environment and more short-term funding (balance +85% YoY). 3) Brokerage +52% YoY on robust A-share stock market activity, of which we estimate domestic commission was up 42% YoY, slightly lower than industry income growth of +47%, suggesting possible market share loss; but this was offset by strong agency sales of financial products (+132% YoY) and future trading commissions (+45% YoY).
- Results negatives: 1) Asset management fees -7% YoY (vs. industry +9% YoY), as AUM continued to contract 28% YoY to reduce the scale of “channel business”, though the Company’s active management capability was gradually improved, as actively managed AUM accounted for 45% of its total AUM in 4Q20 vs. 35% in 4Q19, according to AMAC. 2) Prop-trading gains -1% YoY and cal. investment yield dropped 1.3ppt YoY despite the bullish A-share market. The Company explained that this was due to less recognition of “strategic investment gains” in FY20. 3) Impairment losses +21% YoY, mostly booked in 2H20 for SPLs and bond investment.
- Cut TP to HK$5.50; Maintain HOLD. We maintain FY21E-22E earnings forecast for CGS largely unchanged but cut TP to HK$ 5.50 on higher COE assumption (11.3% vs. prev. 10.1%). CGS now trades at 0.49x 1-year forward P/B or at its historical average -1SD. The near-trough valuation and >5% yield provide a reason for short-term investment, in our view, but we are cautious on its long-term growth prospectus.
