中國經(jīng)紀人：脫離群體

1、By: Angel Sun (S1700519080001)Equity Research ReportFinancialsJanuary 2020 HYPERLINK / China BrokersInitiate coverage: Breaking away from the packChina brokers are hard to tell apart, but there are two we think will continue to perform particularly wellThe secret? A strong IPO pipeline and a high in

2、vestment yield lead to top-tier ROEsInitiate on four brokers: China Securities (A and H) and Guosen (A) at Buy, Shenwan Hongyuan (A andat Hold, and Orient at Hold (A) and Reduce (H)Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in the Disclosur

3、e appendix, and with the Disclaimer, which forms part of it.Why read this report?Were bullish on Chinese brokers given the regulator is relaxing rules, funding costs are coming down, and risks are easing upWe use a top-down approach to analyse four leading China brokersChina Securities Co and Guosen

4、 Securities stand out due to their strong investment banking capabilitiesKey stock callsCSC 601066 CH /6066 HKCurrent price: RMB30.58 / HKD6.73Buy / BuyTarget price: RMB35.00 / HKD12.00Upside:14.5% / 78.3% CSC is a well-rounded securities brokerage platform and enjoys leading positions across its va

5、rious divisions. It owns a best-in-class investment banking franchise. Strong profitability enables CSC to stand out among Chinas securities brokers. In the 1H19, CSC was ranked No. 1 in investment banking business and No. 1 in underwriting & sponsorship revenue for bonds and No. 2 for equities. CSC

6、 has strong risk management while its stock-pledged lending (SPL) business is at reasonable levels. The SPL balance remains as low as 6.5%- 7.1% of total assets during 2017-1H19, the lowest among peers.Guosen 002736 CHCurrent price:RMB12.61Target price:BuyRMB16.00Upside:26.9% Guosen has a robust inv

7、estment banking business. In 9M19 it had a strong IPO pipeline in the STAR market, with an underwriting fee rate of 7.7%, which could generate revenue of as much as RMB210m. Guosen has a 4.6% market share in the equity trading business, ranking among the top five China brokers. The firm also has the

8、 capability to expand in the southern part of China. We believe the firm is aware of the risks from its SPL business. It reduced its SPL balance by 23% in 2018 and 27% in 1H19. We believe the SPL balance will keeping dropping in 2020-21e and concerns over credit risk will ease.SWHY 000166 CH /6806 H

9、KCurrent price: RMB5.04 / HKD2.31Hold / HoldTarget price: RMB5.50 / HKD2.40Upside:9.1% / 3.9% SWHYs revenue grew quickly in 2018, and ahead of its IPO on the HKEX. However, much of this came from SPL interest income, which creates credit risks. Now the firm is trying to prevent this risk by reducing

10、 the SPL business. We believe it will be hard to generate significant revenue growth from other business divisions in the short term to make up for the decline in SPL interest income. Equity trading is the main strength of SWHY. However, it is losing this edge, as its equity trading rank declined fr

11、om No. 4 in 2016 to No. 7 in 2018.Orient 600958 CH /3958 HKCurrent price: RMB10.38 / HKD4.89Hold / ReduceTarget price: RMB11.00 / HKD4.40Up/downside:6.0% / -10.0% We believe the heavy reliance on proprietary trading is a threat to Orient Securities earnings visibility. Revenue from asset management

12、and investment banking has been declining given the challenge to establish teams with top- talent staff. As revenue and profits for China brokers are concentrated among the leaders, those that are laggards will struggle to gain market share. We believe Orient Securities has no clear catalysts for ex

13、panding its divisions other than proprietary trading, making it hard for the company to grow. The core business competence from proprietary trading is declining, meaning the firm is losing its competitive edge.Priced at close of 8 January 2020Source: Bloomberg, HSBC Qianhai Securities estimatesConte

14、nts HYPERLINK l _TOC_250007 Why read this report?1 HYPERLINK l _TOC_250006 Key stock calls2 HYPERLINK l _TOC_250005 Looking for an edge4 HYPERLINK l _TOC_250004 Why the IPO pipeline is key14 HYPERLINK l _TOC_250003 Company section33CSC Financials A/ H(601066 CH/ 6066 HK)34Guosen Securities(002736 CH

15、)45Shenwan Hongyuan A/ H(000166 CH/ 6806 HK)53Orient Securities(600958 CH/ 3958 HK)62 HYPERLINK l _TOC_250002 Appendix 171 HYPERLINK l _TOC_250001 Disclosure appendix84 HYPERLINK l _TOC_250000 Disclaimer87Looking for an edgeAngel Sun* (S1700519080001)Head of A-share Financials ResearchHSBC Qianhai S

16、ecurities Limited HYPERLINK mailto:angel.y.sun angel.y.sun+86 21 6081 3815* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulationsTrying to tell Chinese brokers apart hasnt been easy, as its a highly regulated sector, with most tra

17、ding largely in line with the A-share index. But we find those that have a strong investment banking unit, especially those with a strong IPO pipeline, generate high ROEs and that pushes up their valuations. Of course, the sector is full of risks, too, and we recommend avoiding those with higher cre

18、dit risk due to their higher exposure to stock-pledged lending business.Why we are bullish on China brokersWe are bullish on Chinese brokers for a number of reasons. Regulators are moving into a pro- growth cycle and allowing brokers to move into new areas such as asset management and derivatives. A

19、n improved liquidity backdrop is lowering funding costs. We also see the risky practice of stock pledged lending (SPL) by which brokers lend money to major shareholders using their stock as collateral as reaching a peak and falling from here. In addition, we believe brokers will benefit from a moder

20、ately bullish market over the next six months (see A-share Investment Atlas, 9 December 2019). A final supporting factor for brokers is the governments continuing efforts to cool down the property sector, which we believe will cause investors to increasingly favour equities and turn away from the ma

21、inland property market.Choose brokers with a high ROE and a balanced business mixWe initiate coverage of four brokers and prefer China Securities Co Ltd (CSC) and Guosen Securities Co Ltd (Guosen). We look for the following two characteristics in Chinese brokers:A strong investment banking unit with

22、 a revenue contribution of 20% or more, particularly if this is complemented by a strong IPO pipeline. CSC fits this profile and Guosens investment banking exposure is rising fast.Better ROA/ROE/net profit margin. CSC and Guosen also score highly on these metrics.Exhibit 1. China Brokers scorecard20

23、18CSCGuosenSWHYOrientCICCGFSCMSGTJAHTSCCITICSHaitongCGSInvestment banking (RMB bn)2.911.050.821.051.791.121.251.531.722.741.820.49Investment banking (% rev)26.6810.506.7510.2213.897.3711.046.7410.707.377.644.92Investment banking revenue rank191210487652323Equity trading market share rank115719104826

24、193Asset management (% rev)4.141.506.6022.263.897.136.585.208.302.682.266.162016-1H19 average ROE (%)10.178.688.585.189.538.848.118.087.767.437.146.91Net profit margin (%)28.31Source: Company data, SAC, Wind, HSBC Qianhai Securities34.1327.2311.9526.1828.1639.0829.5331.2425.2321.9329.09Where we are

25、different from consensusFocusing on the investment banking businessWhen thinking about China brokers, it is natural to think first of the securities business, which deals in the buying and selling of stocks and bonds for customers, as this is the traditional business. However, we find that the inves

26、tment banking business is one of the most important ROE drivers for China brokers, and even more important than the equity trading business.The correlation between investment banking revenue and overall ROE was high during 2016- 1H19, ranging from 0.8 (Orient) to 0.99 (SWHY) among the brokers under

27、our coverage. We conclude that brokers with a higher business percentage of investment banking business will generate higher ROE. CSC falls squarely into this profile, with investment banking business contributing 27% to gross revenue and an ROE of 9.67% in 1H19. CSCs ROE in 1H19 was the second high

28、est among the sector. Another example is CICC whose investment banking business contributed an average of 19.1% to gross revenue during 2016-1H19, with an average ROE of 9.53% in 2016-1H19. Though the investment banking business mix is declining, the relatively high IB mix vs. other peers enables CI

29、CC to generate a high ROE.Exhibit 2. Summary of China brokers business mix (1H19) and correlations between investment banking revenue vs. ROE0.800.860.980.990.96120%100%80%60%40%20%0%CSCGuosenSWHYOrientCICCBrokerage/quasi-brokerageInvestment bankingProprietary tradingAsset management Corr (RHS)Sourc

30、e: Company data, Wind, HSBC Qianhai SecuritiesNote: Corr refers to the correlation between investment banking revenue and ROE during 2016-1H20191.21.00.80.60.40.20.0Why we are more bullish on CSC and Guosen, but bearish on Orient?Our net profit forecasts are higher than consensus for CSC and Guosen

31、as we believe:Companies listing on the Growth Enterprise Market no longer need two years of profits, enabling the two firms to increase their IPO pipelines, given their strong underwriting capabilities;The speedier IPO timeline on the STAR market enables the two firms to redeem the potential underwr

32、iting fees more quickly;Given the two firms have invested in the companies they sponsored for IPOs on the STAR market, then they will achieve a higher investment yield from proprietary trading since most of the companies have had a good share price performance.We have lower-than-consensus view for O

33、rient Securities in terms of net profit as:We believe the firm has limited business catalysts in the short term to generate revenue growth.The investment yield for its proprietary trading business, their core business competence area, has deteriorated in both 2018 and 9M19.Exhibit 3. HSBC Qianhai Se

34、curities estimates vs. consensus HSBC Qianhai estimates Consensus estimates Variance CompanyRMBm2019e2020e2021e2019e2020e2021e2019e2020e2021eSWHY-A/HRevenue18,50420,40321,87018,29920,20621,6381.1%1.0%1.1%Net profit5,8126,5177,3155,7636,4747,3000.9%0.7%0.2%CSC-A/HRevenue14,09616,65519,57813,12014,897

35、16,8767.4%11.8%16.0%Net profit5,0566,2407,3874,7395,5806,4386.7%11.8%14.7%GuosenRevenue14,49216,08318,00113,91115,43916,7114.2%4.2%7.7%Net profit5,6756,5297,4945,4966,2776,9943.3%4.0%7.1%Orient-A/HRevenue14,82015,73716,45815,41416,69818,113-3.9%-5.8%-9.1%Net profit2,2892,7453,3702,3192,7963,468-1.3%

36、-1.8%-2.8%Source: Company data, Wind, HSBC Qianhai Securities estimatesWhy we recommend CSC and Guosen?Our core argument for buying these companies is based on (1) high ROEs that should translate into higher valuations eventually, (2) the potential for Guosen to increase its market share in the secu

37、rities business, and (3) a relatively low risk given a low SPL balance for CSC while Guosens SPL balance has declined rapidly and is likely to continue to drop.Many people believe CSC is not particularly competitive in the securities business, where most of the top ten brokers are strong, enabling t

38、hem to achieve high equity trading commission fees during a bullish market. However, this is a short-term view. We believe a diversified business mix, like plenty of exposure to investment banking, will help offset the risk of a market downturn and is more important in the long run. In addition, rec

39、ent regulations that relaxes restrictions on IPOs will enable brokers with strong investment banking capabilities to benefit.Specifically, recent changes that should encourage IPOs include (1) the start of the STAR board market that seeks to attract listings, especially from the technology sector; a

40、nd (2) relaxation of the two-year profitability rule for listing on the Growth Enterprise Market (GEM). Both of the changes will benefit these two brokers by boosting their IPO pipelines as they are already strong players in this space.Moreover, we notice brokers with robust investment banking capab

41、ilities will generate a higher ROE, which is the major valuation driver.Exhibit 4. China brokers average ROE (%) throughout 2016-9M192016-9M19Sector average12.010.08.06.04.02.00.0Exhibit 5. China brokers average ROE (%) for 9M1912.010.08.06.04.02.00.09M199M19 SectorSource: Company data, Wind, HSBC Q

42、ianhai SecuritiesSource: Company data, Wind, HSBC Qianhai SecuritiesExhibit 6. Investment banking income as a % of total revenue among top tier brokers30.0025.0020.0015.0010.005.000.00CSCGuosen SWHY Orient1H19CICCGFSCMSGTJAHTSC CITICS Haitong 2018CGSSource: Company data, Wind, HSBC Qianhai Securitie

43、sCSCs average ROE was No. 1 for the sector during 2016-9M19, while Guosen ranked No. 1 and No. 2 in 1H19 and 9M19 respectively from No. 4 in 2018, both thanks to their growing investment banking pipeline. In terms of the revenue mix, brokers with a high percentage of investment banking business such

44、 as CSC and CICC have a higher-than-peers average ROE.Furthermore, the China broker sector is undergoing transformation as simply adding operational and financial leverage will no longer be effective. Brokers that engage in a large amount of margin financing, whereby securities firms lend to clients

45、 to invest in the markets, as well as those with heavy exposure to SPL where funds are used for any purposes other than stock transactions, will become less and less competitive if they have not also built up a comprehensive investment business.We see that CSCs SPL exposure is relatively low among t

46、op-tier brokers with its SPL balance stable at 6.5%-7% of total assets during 2017-1H19. Though Guosen, another favourite company among our coverage, has a high exposure to SPL, the balance has declined faster than many of its peers and we believe its balance will continue to drop given the risks in

47、herent in this business. Brokers have limited control over the use of the funding given to clients, the risk of clients using the capital for risky events could be high, while they can struggle to claw back the cash when the market falls.Exhibit 7. China brokers SPL exposureCompany SPL balance as %

48、of total assets 20181H191H1920171H1820181H19YoY %YoY %HoH %SWHY10.8%15.5%12.6%8.5%2%-7%-4%CSC6.5%7.4%7.1%6.5%1%-1%-1%Guosen20.3%18.5%14.8%12.1%-5%-6%-3%Orient13.4%12.4%10.6%9.2%-3%-3%-1%GTJA17.8%12.6%8.8%6.3%-9%-6%-2%HTSC12.7%10.1%7.7%3.2%-5%-7%-4%GFS7.4%6.7%5.8%3.8%-2%-3%-2%CITICS12.5%9.0%5.9%6.0%-

49、7%-3%0%CMS10.7%10.6%7.5%5.1%-3%-6%-2%CGS14.3%15.5%14.9%10.2%1%-5%-5%Haitong13.9%12.8%9.7%8.1%-4%-5%-2%Source: Company data, HSBC Qianhai SecuritiesTherefore CSC and Guosen gives investors a well-rounded investment banking business and a low or fast-declining risk exposure to SPL. By contrast, we bel

50、ieve large brokers with a heavier SPL exposure have higher credit risks which will drag down net profit.Initiate coverage on seven China broker stocksWe apply a dividend discount model (DDM) as our valuation methodology, with a 2.5% risk-free rate and a 6.5% equity risk premium, the actual beta for

51、each stock (from Wind), and 2% sustainable growth. We apply a trading discount by taking the 2016-19 A- and H-share historical PB as a reference, ranging from -56.0% (Shenwan Hongyuan) to -68.0% (CSC). We use HSBC FX teams end-2020 RMB-HKD forecast of 1.09.Exhibit 8. China brokers summary of key val

52、uation assumptionsCompanyCOERFRBeta (x) Terminal RMB:HKDgrowthFX rateImplied 2020e PBImplied 2020e PETrading discountTarget priceRatingCSC-A12.9%2.50%1.602.0%1.094.8241.8-68.0%35.0BuyCSC-H13.0%2.50%1.612.0%1.091.6514.312.0BuyGuosen-A10.0%2.50%1.152.0%1.092.1522.1n/a16.0BuySWHY-A8.6%2.50%0.952.0%1.09

53、1.5818.8-56.0%5.5HoldSWHY-H9.2%2.50%1.032.0%1.090.698.22.4HoldOrient-A9.7%2.50%1.102.0%1.091.6353.9-62.0%11.0HoldOrient-H9.8%2.50%1.132.0%1.090.6521.54.4ReduceSource: Company data, Wind, HSBC Qianhai Securities estimatesExhibit 9. Summary of DDM valuation detailsRMBmCSCGuosenSWHYOrientCOE - A12.9%10

54、.0%8.6%9.7%COE - H13.0%n/a9.2%9.8%PV of dividends (1st stage)7,3697,1216,3023,948PV of dividends (2nd stage)91,37550,75144,53538,187PV of dividends (terminal)168,58073,52472,71748,702Total PV168,580131,396123,55548,702Number of shares (m)7,6468,20022,5368,232TP for A-share (RMB/shr)35.0016.005.5011.

55、00FX assumption (CNY:HKD)1.09n/a1.091.09A-H trading discount-68.0%n/a-56.0%-62.0%TP for H-share (HKD/shr)12.00n/a2.404.40Source: Company data, HSBC Qianhai Securities estimatesMethodology for A-H trading discountFor a long time, China brokers have traded at a discount in the Hong Kong equity market

56、which we believe is unfair. In this report though we do introduce an A-H trading discount factor to reflect the reality that there is a difference between A-share and H-share for the same name.The mathematical methodology for calculating the A-H trading discount we use is calculating the average tra

57、ding PB for both A-share and H-shares during the same period and then finding the discount between the average PB.A-H trading discount = average H-share PB / average A-share PB -1As companies were listed separately on the A-share and H-share market, and in order to compare the average PB in an apple

58、-to-apple manner, we have to put them into the same time frame. For instance, CSC was listed on the H-share market in 2016, but was not listed on the A- share market until 2018. We therefore selected the two-year historical PB for both the A-shares and the H-shares through 2018-19 to calculate the a

59、verage PB so as to deduct the discount.For SWHY, we could only use one years average since SWHY H-shares were only listed in 2019. Orient Securities, which has a four-year trading PB record, enables us to calculate the trading discount by applying its historical PB throughout 2016-19.Exhibit 10. Sum

60、mary of A-H trading discount details2016201720182019Average PBA-H trading discountCSC - An/an/a1.583.782.68CSC - H1.191.030.820.920.87-68.0%SWHY-A2.432.141.621.591.59SWHY-Hn/an/an/a0.700.70-56.0%ORIENT-A2.612.361.411.391.94ORIENT-HSource: Wind, HSBC Qianhai Securities1.020.710.630.620.74-62.0%Top pi