BoCom International upgraded 01200-HK to buy from neutral and raised its target price to HK $5.40, equivalent to a price-to-earnings ratio of 12.0 times FY13E, in line with the historical average (the previous target price is equivalent to FY13E10.0 times earnings), or 8.6 times FY13E's earnings after deducting cash.

BoCom said FY11's net profit fell 75 per cent year-on-year to HK $134 million, 6 per cent lower than the bank's expectations and 28 per cent lower than the market average reported by Bloomberg. Second-hand trading volume fell 50 per cent month-on-month, but as commissions in the primary market hit a record high, earnings fell only 25 per cent in the second half of the year from a month earlier, dragging down a loss of HK $68 million in the second half. However, higher commission rebates and rental expenses during the period narrowed FY11's operating profit margin to 5.4 per cent (FY10: 17.6 per cent bot 1H11 12.9 per cent Exchange 2H11:-4.6 per cent). Management stressed that it would strive for more market share in 2011, so the bank expects rental expenses to remain high. In view of the recent employee incidents, the company has set up a staff Remuneration Committee, which is believed to be conducive to maintaining the stability of staff costs in the future. The bank expects the company to fully recover its profits in the second half of 2012. Recent further cuts in mortgage interest rates by major banks, coupled with the regularization of additional stamp duty, will help stimulate trading volume.