Investment points: the company has moved from a brokerage business channel securities firm to an integrated financial service provider centered on big wealth management business. ROE is in the lead and dividends are steadily rising. Under the large fluctuations in the market, the company actively manages high-risk exposure and returns to the origin of the business. The income structure is mainly commission fee and interest income, which is diversified and more resilient. Great wealth management continues to upgrade, asset quality is excellent, and vigorously promote the business of low-risk customer demand institutions to seek new growth points of performance. The target price is HK $1.28 (down 23%), maintaining the "better than the market" rating.
[event] Guotai Junan International achieved operating income of HK $1.09 billion in the first half of 2022,-56% year-on-year and-17% month-on-month; its mother net profit was HK $160 million, year-on-year-83%, month-on-month + 3%, better than its Hong Kong counterparts; corresponding to EPS 1.68 Hong Kong cents; annualized ROE2.1%, year-on-year-10.1pct. An interim dividend of HK1 cents per share and a special dividend of HK3 cents per share, with a dividend rate of 60%, have been steadily rising over the years. The company's real leverage ratio (excluding financial assets held by valets) fell slightly to 3.3x, and there is still room for expansion.
In the first half of the year, due to the impact of the epidemic, default on internal housing bonds, and interest rate hikes by the Federal Reserve, the Hong Kong stock market was in the doldrums. The company's business declined significantly from a high base compared with the same period last year, but on the whole it remained profitable and its performance was better than that of its Hong Kong counterparts.
Affected by the high base and the downturn in the capital market, commission and fee income fell 54% year-on-year, and financing interest income was-33% year-on-year. In the first half of 2022, the company's brokerage revenue was HK $260 million, which was-43% year-on-year from a high base and accounted for + 5pct to 24% of total revenue from the same period last year. In the same period, the average daily trading volume of the Hong Kong stock market was 136.8 billion Hong Kong dollars,-28% compared with the same period last year.
The main reason why the decline in brokerage revenue is more than the decline in average daily trading volume is that 70% of the company's commission income comes from high net worth customers, who are more sensitive to market changes. The size of corporate financing loans was-34% to HK $10.5 billion at the beginning of the year, and the corresponding interest income was-33% to HK $290 million, accounting for-9pct to 27% of total revenue. Investment banking business, due to a sharp decline in corporate customers' willingness to issue, stock and bond underwriting income has been affected. The overall financing scale of Hong Kong stocks shrank significantly in the first half of 2022, with IPO-90 per cent and refinancing-65 per cent year on year. The company's investment banking business achieved revenue of 130 million Hong Kong dollars,-64% year-on-year, accounting for 12% of total revenue-3pct. In the asset management business, due to the downturn in the capital markets, the company's revenue was-84 per cent to HK $1.3 billion, accounting for 1 per cent of total revenue-2pct to 1 per cent.
Proprietary income has performed poorly, and the scale of investment has been slashed to reduce risk. In the first half of 2022, the company posted a net loss of HK $290 million on trading and investment, turning from profit to loss compared with the same period last year. Return on investment-1.4%, despite losses, outperformed the overall market level (Hang Seng Index-7% in the first half of 2022, Chinese dollar bond price index-41%). The company's proprietary losses mainly came from the spread loss of the company's bond market-making business (a loss of about HK $300 million) and seed fund investments (a loss of about HK $400 million).
The company began to reduce its exposure to high-risk investments and increased risk hedging measures in mid-2021 due to factors such as a default on real estate dollar debt and the Fed's interest rate hike and contraction schedule, management said.
So far, the risk exposure of the company's own assets has been greatly reduced, the position of bonds used for market-making purposes has been basically cleared, the investment size of seed funds has been reduced by more than 60 per cent (the balance is less than HK $2 billion), and the scale of bond investment has been reduced by more than 50 per cent. the exposure to equities is basically zero. The size of the company's own trading and investment financial assets fell 18 per cent, or HK $4.1 billion, to HK $19.2 billion, or 5-17 per cent of total assets, compared with the beginning of the year. Due to the adjustment of asset size, the fixed income interest income corresponding to the company's own transactions and investment financial assets also decreased significantly compared with the same period last year.
Great efforts will be made to develop the business of cross-border customer demand institutions, and the asset structure will be continuously optimized. As of the end of June 2022, the company's total assets were + 5 per cent (or HK $5.2 billion) to HK $111.5 billion compared with the beginning of the year. The increase in assets is mainly due to the increase in the scale of financial products held by valets driven by the demand of institutions and derivatives customers (mainly cross-border income swaps, that is, cooperation with mainland parent company Guotai Junan to help overseas institutional customers move northward to make new positions, Dingzeng, etc.). As of the end of June 2022, the balance of financial products held by the company's valet was + 37 per cent (or HK $11.8 billion) to HK $43.4 billion from the beginning of the year, accounting for 39 per cent of total assets compared with + 9pct at the beginning of the year. The corresponding interest income from financial products was + 15.7% year-on-year to HK $200 million, accounting for 18% of total income. The company's management said that the financial products business accounts for about 30% of the total revenue, this business is the company's long-term development of the key business, revenue contribution is expected to further improve.
The financing cost is reduced and the asset quality is excellent. In the first half of 2022, corporate funding costs fell 43 per cent year-on-year to HK $210 million, mainly due to a sharp reduction in exposure and effective control of the cost of capital. Looking to the future, under the environment of raising interest rates, the financing cost side of the company is facing some pressure. The quality of the company's assets has improved significantly, and there is no new bad debt during the period of market volatility. Thanks to the repayment of customers' overdue loans, the company's impairment provision has been transferred to reversal for the first time.
[investment advice] the company has moved from a brokerage-based brokerage to an integrated financial service provider centered on wealth management. ROE is in the lead, paying dividends steadily and rising steadily, providing shareholders with good returns. In the face of large fluctuations in the market, the company actively manages its high-risk exposure and returns to its business origin (providing wealth management for retail clients, trading and products for institutional clients, and financing for investment banking clients). The income structure is dominated by commission fees and interest income, which is diversified and more resilient. The company's great wealth management continues to upgrade, asset quality is excellent, and vigorously promote the business of low-risk customer demand institutions to seek new growth points of performance. Taking into account the adverse impact of the overall macro environment and the downturn in the capital market, we downgrade the company's profit forecast and estimate that the company's EPS for 2022-2024E is HK $0.08, 0.08, 0.09 (originally forecast, HK $0.13) and BVPS is 1.63, 1.68 and 1.73 (original forecast is 1.66, 1.70, 1.76). We use GGM to value the company, assuming that ROE:
7.5 per cent (down 1.5 per cent) and COE:9.0%, dividend growth rate of 2 per cent, resulting in a target valuation multiple of HK $1.28 (down 23 per cent) corresponding to the target price of HK $1.28 (down 23 per cent), maintaining an "better than market" rating.
Risk hint: the continued downturn in the market leads to a decline in the scale of business, and increased volatility in the capital market leads to lower-than-expected investment returns.