CSC reported FY19 net profit of RMB 5.5bn, up 78% YoY, in-line with prelim results. FY19 operating revenue increased 25% YoY to RMB 13.7bn, on better prop-trading gains, brokerage and investment banking income, as well as an RMB 59mn reversal of impairment losses (vs. charging RMB 1.2bn in FY18). Through its effective leverage-up and robust fee growth, the Company continued to deliver one of the highest ROE in the industry at 10.6%, up 3.8ppt YoY. We expect CSC to be a key beneficiary of capital market reform given its strong investment banking franchise and higher IB revenue exposure. Maintain BUY.
- Results positives: 1) Investment banking fees +26% QoQ in 4Q19, thanks to 1.54x QoQ increase in equity financing underwriting amount. CSC topped the industry by no. of listed STAR Market IPO sponsorship in FY19, and maintained its leadership in corporate bond underwriting amount. We believe the Company will continue to gain shares from policy tailwinds, esp. through the potential ChiNext reform and registration-based corporate bond issuance. 2) Prop-trading gains -4% QoQ on high base. CSC used to deliver relatively stable invt. yields due to its higher proportion of fixed income invt., while the Company increased its exposure in equity invt. in FY19 and enjoyed a higher yield (5.3% vs. 4.5% in FY18), which was partly attributable to sponsors’ mandatory investment in STAR Market IPOs. 3) AM fees jumped 87% QoQ, likely due to higher performance fees. Full-year AM fees increased 11% YoY, where AUM contracted 16% due to cutting down on channel business and average fee rate picked up 2bps YoY, based on our estimates. 4) Brokerage commission -5% QoQ, better than market turnover trend of -8% QoQ, as share gains offset commission rate contraction in 2H19.
- Results negatives: Net interest income decreased 22% YoY in FY19, mainly due to 33% YoY growth in total debt balance, though average financing costs lowered. We also noticed a decline in margin financing interest yield in 2H19, which was possibly caused by intense competition.
- Maintain BUY. CSC currently trades at 0.69x 1-year forward P/B, close to its historical average minus 1SD (0.62x). The valuation is not demanding, esp. when considering its industry-leading double-digit ROE. CSC has the highest proportion of investment banking business in revenue mix (27% in FY19) and is more sensitive to underwriting volume changes. We maintain our earnings estimates and BUY rating unchanged.
