Investment points: The company has drastically reduced its exposure to high-risk investments and returned to its roots of business. The revenue structure is dominated by commission fees and interest income. The performance is steady, and it is vigorously promoting low-risk customers to seek new growth points in performance. ROE is leading and dividend payments are stable. The target price was HK$0.89 (down 2%), maintaining the “better than market” rating.
[Event] Guotai Junan International achieved revenue of HK$1.55 billion, +27.9% year on year in the first half of 2023; net profit to parent was HK$120 million, or -25.9% year on year. EPS 1.25 HK cents; annualized ROE 1.6%, -0.5 pct year on year. The dividend for the first half of the year was HK1 cent per share, and the dividend was stable. As of the end of June 2023, the company's actual leverage ratio (excluding financial assets held by clients) was 2.66x (FY22:2.38x). The company's revenue growth in the first half of the year mainly benefited from a sharp increase in interest income from banks and interest income from financial products, and investment management income that turned a loss into a profit year over year.
Poor fees and commission income, interest income, and net income from transactions and investments have driven the company's overall performance to rise. 1) In the first half of 2023, the Hong Kong equity and bond market continued to be sluggish. The Hang Seng Index was -4%, the average daily stock turnover was -16%, the amount of IPO financing in the Hong Kong market was -10%, and the amount of G3 currency bonds issued was -27%. Affected by this, the company's commission and fee revenue was -24.2% year-on-year to HK$340,000, accounting for 22.1% of revenue, and -15.2pct year-on-year. Among them, brokerage commissions/investment banks/asset management revenue was HK$2.3/0.8/04 million, or -14.5%/-36.2%/-68.9% year-on-year, respectively. 2) In the first half of 2023, the company's interest income was +28.7% year-on-year to HK$1.19 billion, accounting for 76.9% of revenue. Among them, the drop in bond holdings used for market-making purposes and the decline in customer financing demand led to a year-on-year decline in related interest income; while the increase in global interest rates and the increase in the scale of clients' financial products led to a year-on-year increase of +574.7%/+75.5% to HK$5.2 million/HK$350 million, accounting for 33.8%/22.6% of the company's revenue, respectively, and +27.4pct/+6.1 pct., which is the main driving force driving the company's revenue growth. 3) The company's net income from transactions and investments in the first half of 2023 was HK$12 million, which turned a year-on-year loss into a profit (loss of HK$168 million in the first half of 2022).
The asset structure continues to be optimized, the scale of client-demand business has further increased, and risk exposure for self-employment continues to drop. By the end of June 2023, the company's total assets were +9% to HK$102.8 billion compared to the beginning of the year. Of these, the company continued to vigorously develop its financial products business. The balance of financial products held by clients was +9% to HK$50.29 billion compared to the beginning of the year, accounting for 48.9% of total assets; self-operated risk exposure continued to fall, with a continued decline of -29% to HK$8.2 billion from the beginning of the year, accounting for 8.0% of total assets.
Financing costs doubled year on year, but the increase was far less than the increase in market interest rates, and cost control was effective. The company's financing cost in 2023 was HK$7.1 billion, +115.7%. Although the company's capital cost increased significantly, the increase was far less than the increase in market interest rates during the same period (1-MHIBOR/LiBOR +12.58x/+6.94x), and the cost control was good.
[Investment advice] The company has drastically reduced its exposure to high-risk investments and returned to its roots of business (providing wealth management for retail customers, transactions and products for institutional customers, and financing for investment banking customers). The revenue structure is dominated by commission fees and interest income, and is diversified and more resilient. The company has stable dividend payments and excellent asset quality; vigorously promoting low-risk customer demand and institutional business has become a new growth point in performance. We estimate the company's 2023-2025E EPS to be HK$0.03/0.03/0.03 (the original forecast was HK$0.06/0.08/0.10) and the BVPS is HK$1.57/1.61/1.66 (the original forecast was HK$1.60/1.64/1.69). We used GGM to value the company. Assuming ROE: 6%, COE: 9.0%, and dividend growth rate of 2%, we arrived at a target valuation multiple of 0.57x 2023E P/B, corresponding to a target price of HK$0.89, maintaining a “better than market” rating.
Risk warning: Continued market downturn has led to a decline in business scale, and increased capital market volatility has led to investment returns falling short of expectations.