Weak interim performance and robust cost control
The company's 2020H1 revenue fell 23% year-on-year to 1.798 billion yuan, mainly due to the decline in multi-business sectors such as investment banking, financial products, market-making and investment affected by COVID-19 's epidemic, while net profit decreased slightly to 606 million yuan (up 136% from the previous month). This is mainly due to a significant reduction in the company's impairment provision and total cost control (down 31 per cent from the same period last year). The company's dividend ratio rose to 54 per cent, up 4 percentage points from a year earlier, with a ROE of 9.4 per cent (8.1 per cent in 19) and a BVPS of HK $1.51. The composition of income is relatively balanced, with 34% of premium and commission income, 37% of interest income and 29% of investment income.
Investment banking and institutional financing business are inferior. Investment banking income of effective companies at the beginning of wealth management transformation fell 46% year on year, mainly due to the epidemic. The overall number of new shares in Hong Kong stocks fell 24% to 64, which is weaker than that of DCM and ECM revenues of major companies in the big market. Management expects abundant reserve projects to resume growth in the second half of the year, reaching the 19-year level for the whole year. The transition of brokers to wealth management has been effective at the beginning of the past three years, with the Hang Seng Index falling 13 per cent, the income of the brokerage division falling only 5 per cent, rising 15 per cent month-on-month, and the market share rebounding slightly; wealth management assets increased 17 per cent to 22.2 billion yuan compared with the same period last year; capital management and financial product fees were outstanding, with revenues up 134 per cent and 86 per cent respectively.
The provision for impairment decreased by 92.6%. In the second half of the year, the loan and financing business resumed the company's loan and financing business income (year-on-year-10%) and investment / market-making business (- 53%,-20%) accounted for 57.4% of 1H total revenue, slightly lower than last year's 58.7%. Share prices have been lower than the market so far this year mainly because investors are worried about the risks of these two businesses.
Compared with the impairment provision of 512 million yuan in the same period last year, this year's 1H provision is only 38 million yuan. Management said that the number of bonds and large high-quality collateral securities has increased, with a LTV of 33 per cent, provision coverage has exceeded 80 per cent, and impairment charges are expected to remain low in the second half of the year.
The company's loan and financing balance surged 28% to 15 billion yuan during the period, while interest income fell slightly to 3.3% to 350 million yuan. With the decrease in impairment charges, the ministry's income is expected to increase in the second half of the year. The management also stressed that with the rebound in the financial markets, the company's investment losses had gradually recovered in July, and the company's active share buybacks from April to June this year also reflected the company's confidence in the future of the business.
Nearly 30% of the balance sheet expansion is more than 10% of the target for the department ROE
After the completion of the rights issue in March, the balance sheet expanded by nearly 30%. Management stressed that the main funds were used for margin financing, financial product investment and asset management to drive income growth, and business growth will revolve around the principle of "one low, one high, two moderate". That is, lower financing costs, a ROE target of no less than 10%, and a moderate pace of growth.
Maintain buy rating and raise target price to HK $1.45
The company has a high degree of stability among Chinese securities firms in Hong Kong, the business tends to be balanced, and the dividend is stable. The growth rate of the company's business lines is expected to accelerate in the second half of the year, and the widening of the balance sheet is expected to boost earnings. The company's 2020 revenue forecast is 4.196 billion yuan, and we fine-tune the net profit to 1.08 billion (+ 3.8%), giving a target price of 1.45 Hong Kong dollars, corresponding to 0.95 times the 20-year PB. The target price has a potential increase of 28.3% corresponding to the current price.
Risk hints: (1) violent fluctuations in the financial market and environmental deterioration; (2) market trading volume continues to shrink
