Main points of investment
Our view: in the first half of 2020, the global economy, financial markets and business environment were generally affected by the epidemic. With diversified development strategies and effective cost management, the company showed great resilience in its medium-term results. At the same time, timely expansion to promote financial products, customer loans and other business development. We maintain the company's "prudent overweight" rating and maintain the target price of HK $1.26, which is 8.5% higher than the current price.
From 2020 to 2022, the PB corresponding to Guotai Junan's international target price is 0.9,0.9 and 0.8 times respectively. It is suggested that investors should pay active attention to it.
The overall performance of the company has declined compared with the same period last year, and the profit side is more resilient. In the first half of 2020, the company achieved operating income of HK $1.8 billion (the second highest half in history), a decrease of 22.7% over the same period last year, mainly due to a sharp decline in corporate financing business affected by the epidemic. The net profit reached 610 million Hong Kong dollars, down 5.5% from the same period last year and 136% higher than the previous month. The decline in net profit was much lower than revenue, mainly due to effective operating and financing cost control, and a substantial reduction in impairment provisions.
Effective cost control enables the company to gain stronger anti-risk ability in the volatile capital market. The company's total cost fell 31 per cent year-on-year to HK $1.096 billion in the first half of 2020. Of this total, employee cost expenditure fell 10 per cent year-on-year, accounting for 30.1 per cent of the company's total expenditure; financing costs fell 1 per cent to HK $433 million year-on-year, thanks to loose monetary policy introduced in March and the company's leading risk control and rating.
The wealth management platform is developing against the market, and the growth rate of brokerage commission in the secondary market is in line with that of the market. Revenue from the company's brokerage division fell slightly by 5 per cent in the first half of 2020 compared with the same period last year, mainly due to a decline in the number of clients participating in placing activities on the Hong Kong stock market. However, the transaction commission in the secondary market increased by 21% compared with the same period last year, which is basically in line with the market transaction. Despite a sharp 13% correction in the Hang Seng Index in the first half of this year, the size of customer escrow assets on the company's wealth management platform has steadily increased by 15%.
The investment banking business income affected by the epidemic has decreased significantly, but the accumulated high-quality projects are expected to be gradually listed in the second half of the year, with considerable revenue for the whole year. The company achieved HK $243 million in investment banking revenue in the first half of 2020, down 46.4 per cent from a year earlier. The epidemic seriously affected the process and willingness of corporate customers to issue bonds for financing, and the income from bond underwriting fees dropped by 37% compared with the same period last year. However, the company's market share in Chinese dollar bonds continues to remain in the forefront.
Revenue from the stock capital market fell 78% year-on-year, mainly due to a decline in the number of IPO projects in the market as a whole in the first half of the year. Since July, the company has participated in the underwriting of important projects such as Smoore International Holdings Limited and Financial Street property. It is expected that the accumulated projects will be gradually listed in the second half of the year, and the annual stock underwriting income is still considerable.
Risk tips: 1) the development of wealth management business is not as expected; 2) the growth of investment banking business is not as expected; 3) the market downturn affects investment returns; 4) the company's operating risk.
