Earnings in the second half of the year exceeded expectations. Benefiting from a surge in trading and investment business, the company's fiscal year 20 performance exceeded market expectations, with total revenue +15% to HK$4.88 billion, and shareholders' net profit +75% to HK$1.56 billion (market forecast of HK$1.18 billion, we expect HK$1.38 billion, we expect HK$1.34 billion), 2H net profit surged 273% to HK$957 million. Strong profit growth was mainly driven by two factors: 1) Financial products, investment and market earnings surged 42% to $2.47 billion and corporate and brokerage revenue of +2.243%, respectively tube lift 321 % reached 150 million; 2) Total costs fell 6% year over year to HK$3.06 billion, with impairment provisions falling 60% year over year to HK$360 million and financing costs falling 6% to $0.3 billion. Although the company's revenue fell 23% year-on-year due to the impact of the COVID-19 pandemic in the first half of the year, there was a clear rebound in trading investment business revenue in the second half of the year. The company's revenue structure remained balanced, with fees and commissions accounting for 32%, interest income accounting for 54%, and transaction investment accounting for 14%. ROE has increased to 11.8%, and the payout rate is 52%.
Financial products and investment market-making business revenue was strong. The company's asset quality improved, and the company's financial products and market-making investment business revenue reached 2.47 billion, up 42% year-on-year, and 2H increased 139% to 1.73 billion. Of these, investment surged 86% to HK$1.24 billion. Management said that in the second half of last year, equity investment revenue was 694 million yuan; financial products contributed 464 million yuan in revenue, an increase of 11% over the previous year, mainly due to earnings from its asset management seed fund of 439 million yuan, and the bond market brought 7.7 billion yuan 100 million dollars in revenue. For the high-risk loan business before 2017, the company strengthened credit risk management from 2018 and adjusted the financing ratio and collateral ratio for small to medium capitalization stocks. Impairment expenses of HK$909 million and HK$360 million were calculated in 19 and 20 respectively. We believe that the quality of the company's assets has now steadily improved, and impairment provisions for subsequent years will gradually decrease. Furthermore, the company's loan financing balance increased steadily by 33% to HK$15.6 billion, and the corresponding revenue of -11% year-on-year reached $1.01 billion. Mainly due to the company's shift to bonds, blue-chip stocks and the optimization of collateral quality, we believe this positive change is healthier and more sustainable.
Wealth management and asset management revenue performance was impressive
Brokerage revenue was HK$650 million, +22.3% year on year. Since the transformation from corporate brokerage to wealth management in '17, the scale of wealth management assets has been very effective. The scale of wealth management assets has increased 48% to HK$28.8 billion, introduced bond and OTC market products, and set up an information system and launched a rotating securities business.
The custodian scale of asset management clients has reached 9.3 billion yuan. Performance fees have increased significantly in revenue of HK$154 million. Asset management revenue accounts for 3% of the company's revenue, and there is plenty of room for improvement in the future.
Corporate finance performance is disappointing, 21 years of business may be expected
The performance of corporate financing revenue was quite disappointing when Hong Kong stock IPOs and China Securities returned in earnest last year. Revenue was HK$590 million, down 27% from the previous year. However, the 2H Chinese dollar bond and stock underwriting business recovered strongly. Management said that the project reserves were abundant this year, and the business is expected to perform positively. Furthermore, the company established an equity financing department in July '20, and has already invested in 6-7 new economic projects. This year, 2-3 projects are scheduled to go public, which will make a joint contribution to wealth management products and investment banking business.
Maintain the buying rating and raise the target price to HK$1.80
The company developed steadily and its business income was balanced among Chinese brokerage firms in Hong Kong. The company changed its business focus from a traditional brokerage type to a comprehensive wealth service provider, with stable dividends throughout the year. We adjusted the company's revenue forecast for 2021 to HK$5.498 billion, adjusted net profit to $1,684 million (+13.4%), giving a target price of HK$1.80, corresponding to 0.95 times PB in '21. The target price corresponds to a potential increase of 25.9% in current price.
Risk warning: (1) sharp fluctuations in financial markets; (2) macroeconomic recovery is not as good as expected