CITICS reported 9M20 net profit of RMB 12.7bn, up 20% YoY, accounting for 84% of our FY20E estimates. 3Q20 operating income was overall strong (fee +44% QoQ and NII +105% QoQ) except for a RMB 3bn invt. FV losses dragging down prop-trading gains (-33% QoQ). Impairment losses surged to RMB 3.1bn, eroding 38% of PPoP, and resulted in 23% QoQ decline of net profit from post-2015 high last quarter. We see factors dragging earnings are basically one-off and growth trend is still on track. We maintain constructive on CITICS growth prospectus, for its balanced revenue mix and leadership in investment banking and institutionalization enabling it to ride on policy benefits. Maintain BUY.
- Results positives: 1) Investment banking fees +71% QoQ in 3Q20, mainly due to strong growth of domestic equity underwriting amount (IPO +7.6x QoQ/follow-on offerings +41% QoQ) as ChiNext Reform implemented and issuance pace sped up. Bond underwriting amount decreased 13% QoQ. CITICS now owns the largest IPO pipeline by no. of sponsorship on both ChiNext and STAR Market, and we expect robust IB to continue. 2) Brokerage commissions +51% QoQ, thanks to A-share velocity surge in Jul, while the growth was lower than market turnover growth (+78% QoQ), likely due to commission contraction, lower activity from institutional clients and slower oversea trading turnover growth. 3) AM fees +26% QoQ, and has increased consistently for seven straight quarters. We believe this is largely attributable to the heated mutual fund market. CITICS’s subsidiary China AMC registered RMB 410mn net profit in 3Q20, up 2% QoQ. 4) Net interest income +105% QoQ, as margin balance expanded 10% QoQ and possible expansion in securities lending business (market daily avg. balance +154% QoQ) that helped widen interest spread.
- Results negatives: 1) Prop-trading gains -33% QoQ on big FV losses, possibly caused by sluggish bond market (ChinaBond Aggregate Index -2% in 3Q20) and volatile stock market towards quarter-end that affect the Company’s hedging position for stock options, while investment booked an impressive RMB 7.1bn realized gains. 2) A RMB 3.1bn impairment losses was recorded, which may be from SPL and debt investments.
- Maintain BUY. CITICS now trades at 1.1x 1-year forward P/B, below its historical average of 1.2x. We maintain our earnings forecast and TP unchanged. Our TP of HK$ 24.60 reflects 1.4x FY21E P/B. Maintain BUY and as one of our sector top picks.
