【Company Research】Haitong Securities (6837 HK) – FY20 outstanding fee growth offset by weak prop-trading and impairment charges

HTS reported FY20 net profit of RMB 10.9bn, up 14% YoY, in-line with prelim results. Operating revenue increased 16% YoY to RMB 32.5bn, mainly boosted by brokerage, IB and AM, while prop-trading was a drag. Heavy impairment charges (RMB 4.6bn) further eroded its profitability. CSRC imposed restrictions on HTS’s investment advisory and AM business for 6-12mths; we calculate that related income accounted for ~5% of HTS’s FY20 op. revenue, therefore financial impact should be limited. The Company’s near-trough valuation provides limited downside potential. Recovery of oversea business and less impairment charges could be upside earnings catalysts. Maintain BUY.

 

  1. Results positives: 1) Investment banking income +43% YoY, largely driven by surged domestic IPO underwriting amount (+1700% YoY) as several sponsored mega IPOs was launched on STAR Market. Oversea IB income remained stable YoY and we expect better growth in FY21 on market recovery. 2) AM income +41% YoY, on rapidly enhanced active management capability (70% actively managed AUM ended FY20, up 16ppt YoY). Fund sub. HFT Fund also contributed greatly to the 40% YoY growth of fund mgmt. income, as its AUM expanded 49% YoY during the mutual fund boom. 3) Brokerage income +46% YoY, where domestic brokerage saw slight share loss (-0.1ppt YoY) and oversea commission income grew 37% YoY. 4) Net interest income +18% YoY, thanks to higher interest income from margin financing and leasing business (+17%/+13% YoY) due to 38%/12% balance expansion, as well as significant funding cost decline (est. 0.5ppt YoY) and deleveraging (leverage -0.5x YoY to 3.8x) that lowered interest expenses (-7% YoY).

 

  1. Results negatives: 1) Prop-trading gains -3% YoY, the lowest among brokers we cover, despite a 10% YoY growth in financial investment balance, suggesting weaker investment capability than peers. 2) Impairment losses +65% YoY, eroding PPoP by 23%, though charges in 2H20 was 42% lower HoH. The write-off was mainly for margin financing, SPLs (largely for Haitong Int’l [665 HK, NR]’s lending to Luckin), receivables (largely for leasing business) and bond investments. We expect lower credit losses in FY21E as the impact of one-off event fades and macro economy gradually recovers.

 

  1. Cut TP to HK$ 8.40. Maintain BUY. We lift HTS’s FY21E-22E earnings forecast by 14-16% to reflect higher IB, AM and NII, while cut TP to HK$ 8.40 on higher COE assumption (11.6% vs. prev. 9.8%). HTS currently trades at 0.49x 1-year forward P/B, almost at historical low. We think the negative impact from CSRC’s ban should be largely reflected in current depressed valuation. Maintain BUY.
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