GFS reported FY20 net profit of RMB 10.0bn, up 33% YoY, in-line with prelim results. Operating revenue grew 34% YoY, primarily boosted by robust brokerage, AM and net interest income, while the regulatory ban on its IB business halved IB income. Though the ban will expire in FY21E, we think the recent tightening IPO rules will likely make GFS’s IB income recovery a mild and gradual one, esp. given its strength in small- to mid-sized corporate clients. We revise up GFS’s FY21E-22E earnings forecast by avg. 20% on higher AM and NII projection, and lift TP to HK$ 13.10. Maintain HOLD.
- Results positives: 1) AM income was up impressively 69% YoY, mostly attributable to doubled fund mgmt. fee on a 52% YoY growth of GF Fund’s total mutual fund AUM. Meanwhile, asset mgmt. fee and AUM was flat YoY on reduced “channel business”. 2) Brokerage income +57% YoY, though brokerage market share dipped 0.2ppt, commission rate was more resilient than industry trend (-4% vs. -9% YoY) and agency sales income of financial products more than doubled. 3) Net interest income +34% YoY, mainly due to 34% YoY growth of margin financing interest income and lower interest rates of bond issuance amid easing monetary policy. The Company’s leverage was up only 0.2x YoY to 3.6x ended FY20, the slowest growth among brokers we cover.
- Results negatives: 1) IB income dropped 55% YoY, as the Company was banned from IPO sponsoring & bond underwriting for 6mths & 12mths, respectively, from Jul 2020. This trend should gradually reverse in FY21E as ban on IPO sponsoring ban expired in Jan 2021 and ban on bond underwriting will expire in Jul 2021. 2) Prop-trading gains +2% YoY, lagging behind peers and index performance. We noticed that GFS’s financial investment only grew 2% YoY and % of equity investment decreased from 12% in FY19 to 8% in FY20, possibly making it miss out to gain from the A-share market rally. 3) Impairment losses +26% YoY, though already a low growth compared with large peers. Charges was mainly made for bond investment and leasing receivables.
- Lift TP to HK$ 13.10; Maintain HOLD. We revise up GFS’s FY21E-22E earnings forecast by avg. 20% on higher AM and NII projection, and lift TP to HK$ 13.10 after incorporating higher COE assumption (11.3% vs. prev. 10.1%). GFS now trades at 0.74x 1-year forward P/B (vs. post-2015 avg. of 0.86x) or two-year high. We think the expectation for GFS’s IB recovery was largely priced in current valuation. We maintain HOLD rating on the name.
