Core business income growth superimposed with effective cost control, driving strong profit growth in 2020 Guotai Junan International (1788 HK) announced a positive profit forecast on January 7. Earnings are expected to grow by more than 50% last year compared with the same period last year, mainly driven by solid income and reduced financing costs. Although the company was affected by the COVID-19 epidemic in the first half of the year, the decline in revenue in many business sectors led to a 23% drop in revenue compared with the same period last year, but in the second half of the year, with the rebound in the financial market, the investment / market-making business improved, and the corporate financing business recovered steadily. The transformation of wealth management has achieved results by seizing the opportunity of market increment. Looking forward to 2021, we expect the company's business development to maintain a sound and balanced, wealth management business to become a new driving force for the rapid growth of the company's performance, a reduction in impairment provisions and a more robust and high quality asset quality. As a result, we have raised the company's profit outlook for the year 2021 to HK $3.899 billion respectively. Our target price for the company has been raised to HK $1.55. Reiterate the buy rating.
The transformation of wealth management has achieved results, and corporate financing has recovered steadily.
As the epidemic abated due to vaccination, the local economies of mainland China and Hong Kong recovered further, while market liquidity was abundant and interest rates were low, superimposed by the passage of the Foreign Company Accountability Act in the United States at the end of last year to accelerate the return of US-listed stocks. Hong Kong's wealth management market is expected to increase significantly.
The company has an insight into the market trend, and has achieved results in increasing its wealth management business. the number of new customers is growing rapidly, and the asset size of wealth management has exceeded 30 billion yuan by the end of 2020. the synergy between wealth management and corporate financing, asset management and other businesses has been strengthened; bond underwriting business improved in the second half of last year, and the scale of Chinese dollar debt underwriting continued to increase. However, the improvement of equity underwriting business income is relatively small, participating in only 4 IPO sponsor projects throughout the year. It is expected that the company will participate in more IPO sponsorship projects in the first half of this year, and the income from equity underwriting will continue to improve, promoting the steady growth of the overall performance of corporate financing.
The impairment provision continued to decrease, and the quality of loan and financing business development improved. Since 2017, the company adopted IFRS 9 accounting standards and began to set aside impairment charges and gradually increase the provision. The impairment provision for the first half of 2019 was mainly aimed at high-risk loan business before 2017, while the impairment provision for the first half of last year decreased by 93% to 38 million yuan compared with the same period last year. The provision is expected to remain at a low level for the whole of last year. Management also indicated that the impairment provision for subsequent years would be gradually reduced and the quality of the balance sheet would continue to be optimized. In addition, the quality of the development of the company's loan and financing business has improved. The balance of loans and financing surged 28% to 15 billion yuan in the first half of last year, while interest income fell slightly to 3.3% to 350 million yuan. With the reduction of impairment charges, the ministry's income is expected to continue to grow.
There is no financing plan in the short term, and the ROE target is more than 10%.
The company is now well-capitalized and has no financing plans in the short term, and business growth will still revolve around the principle of "one low, one high, two moderate", that is, lower financing costs, a ROE target of no less than 10 per cent, and a moderate pace of growth.
Maintain buy rating and raise target price to HK $1.55
With sound development, balanced business income and stable dividend payout among Chinese securities firms in Hong Kong, the company released Yingxi to verify once again that the company's sound business prospects are good. We adjust the company's 2021 revenue forecast to 3.899 billion yuan, adjust net profit to 1.561 billion (+ 16.3%), and give a target price of HK $1.55, corresponding to 0.95 times the 21-year PB. The target price corresponds to a 34.8% potential increase in the current price.
Risk tips: (1) financial markets fluctuate violently; (2) macroeconomic recovery is not as expected.