The valuation of brokerage stocks already has a significant margin of safety, and good certainty in the medium to long term comes from the dividends of reform and innovation. As equity incentives continue to advance and corporate governance reforms continue to deepen, Guotai Junan's performance is expected to maintain an upward trend. We expect the company's net profit to increase by 23% in 2021. The valuation is expected to recover to the historical center and raise the company's A/H stock rating to “increase holdings.”
The increase in performance was in line with expectations, and Guimu's net profit increased 28.8% year-on-year. In 2020, Guotai Junan achieved revenue of 35.200 billion yuan, an increase of 17.5% over the previous year; Guimu's net profit was 11.122 billion yuan, an increase of 28.8% over the previous year; the basic EPS for the period was 1.20 yuan, an increase of 33.3% over the previous year; and the weighted average ROE was 8.54%, an increase of 1.79 percentage points over the previous year. The management fee rate was 38.0%, down 0.71 percentage points from the previous year. The BVPS attributable to common shareholders at the end of the period was $14.18.
The performance of the three sectors of wealth management, investment banking, and international business increased significantly. Benefiting from active market trading, comprehensive registration system reform and international business expansion, Guotai Junan's personal finance sector achieved operating profit of 5.14 billion yuan in 2020, an increase of 109% over the previous year; the investment banking sector achieved operating profit of 1.98 billion yuan, an increase of 95% over the previous year; and the international business sector achieved operating profit of 1.61 billion yuan, an increase of 89% over the previous year. Among other business segments, the operating profit of the investment management sector was 1.72 billion, down 20% from the previous year; the operating profit of the institutional services sector was 4.66 billion, down 11% from the previous year.
Investment business: Business division reforms stimulate potential, and the new economy boosts business growth. In the second quarter of 2020, Guotai Junan officially implemented the investment banking division reform to improve the governance mechanism to stimulate the potential of employees. In the second half of 2020, the company achieved securities underwriting fee revenue of 2.56 billion yuan, an increase of 119% over the first half of the year. In terms of the distribution of the investment banking industry, the company is actively deploying new economic fields such as semiconductors and software services, and has participated in many new economy IPOs such as SMIC, Cambrian, and Foxit Software. The annual IPO sponsorship underwriting volume was 21.7 billion, an increase of 211.8% over the previous year, and the market share increased to 4.59% from 2.75% last year.
Wealth management: Improve the coverage of leading customers and deepen the transformation of wealth management. By the end of 2020, the number of wealthy clients and high-net-worth clients of Cathay Pacific Junan increased 25% and 28% respectively compared to the end of 2019. We expect the number of customers with assets exceeding 5 million to exceed 330,000. Guotai Junan is actively deepening the transformation of wealth management and promoting the development of fund investment business. Since the launch of its fund investment platform “Junxiang Investment” in September 2020, it has served 20,000 customers and managed more than 2 billion yuan in assets.
International business: The scale is growing rapidly, and the regional layout is getting better. In 2020, Guotai Junan's overseas subsidiaries achieved operating income of $3.39 billion and net profit of $1.36 billion, up 21% and 74%, respectively, and managed client assets of HK$206.7 billion, up 35% year on year; of these, managed wealth management client assets were HK$28.8 billion, an increase of 49% over the previous year. At the international layout level, Cathay Pacific Junan International has completed the strategic integration of VIS, a Vietnamese subsidiary, and continues to deepen its layout in Southeast Asia's emerging markets.
Impairment charges were increased in the fourth quarter, and there was a decline in the share pledge implementation ratio. In 2020, Guotai Junan incurred a total of 1.31 billion yuan in impairment losses, of which 980 million were deducted in the fourth quarter. At the structural level, securities financing and equity pledge businesses calculated credit impairment losses of $660 million and $660 million respectively, accounting for 94% of the total impairment scale.
By the end of 2020, the balance of securities financing was $63.2 billion, an increase of 39% over the previous year; the guarantee ratio was maintained at 279%, the same as the same period last year. The share pledge scale was 30.3 billion, down 21% from the previous year; the performance guarantee ratio was 248%, down 31 percentage points from the previous year, lower than the average of leading brokerage firms.
Equity incentives have been implemented, and the corporate governance structure continues to be optimized. The securities industry is a human-intensive and intellectual-intensive industry. It is necessary not only to motivate people, but also to prevent moral risks. Long-term incentives are particularly necessary. In August 2020, Guotai Junan launched an 89 million share incentive plan for 451 employees (market price of 1.45 billion yuan). The entire plan selected net profit, weighted average return on net assets, fintech innovation investment, and comprehensive risk control ratings as performance evaluation indicators, establishing a long-term incentive and restraint mechanism for management, employees and shareholders to share interests and risk sharing, and further improve the corporate governance structure.
Risk factors: The turnover of A-shares has declined sharply, and equity pledge risks have been exposed.
Investment advice: Considering its 2020 annual report operating data and various market share situations, we raised Guotai Junan's 2021/2022 EPS forecast to 1.54/1.72 yuan and adjusted the BVPS forecast to 15.25/16.96 yuan (the original EPS forecast was 1.26/1.35 yuan, and the BVPS forecast was 15.60/17.03 yuan). The current price corresponds to the 2021 A/H dynamic PB of 1.07/0.60 times, respectively, which has a margin of safety. We expect the company's net profit to increase by 23% in 2021, raise the company's A/H stock rating to “increase holdings”, and give a target price of $19.82/HK$13.01, corresponding to 1.29/0.72 times PB.