1H16 earnings declined 62% y-o-y from last year’s high base. Haitong Int’l (HTI)reported net profit of HKD810m in 1H16, down 62% y-o-y but more than double h-o-h.This was mainly attributable to volatility in trading income, especially investment gainsfrom equity and fund investments. In 1H16, the company still recorded net investmentlosses from investment holdings and institutional equities segments, but a muchsmaller amount compared to 2H15. Growth of loans and financing activities remainedstrong with interest income from these up 47% y-o-y, driven by financing demand fromboth retail investors and corporate clients.
Although earnings fell in 1H16, we believe the launch of the Shenzhen-Hong KongStock Connect (SZHKSC) will fuel business growth, as:
We expect mainland investors’ participation (as a percentage of turnover in HongKong) to rise after the launch of the SZHKSC, which will lift cash turnover in HongKong, helping HTI to gain brokerage market share and grow margin loan business
HSBC’s strategists believe the SZHKSC will likely boost Hong Kong small-cap’sperformance (for details, please refer to China Strategy report: SZHKSC – a wellanticipatedevent, 17 August 2016), which will support the company’s growth incorporate finance as well as leveraged and acquisition finance as it hasestablished a leading position in equity fundraising for relatively small companies.
Also, HTI has market risk exposure in its fund-of-fund investment, which mainlyinvests in Hong Kong and overseas markets. Increasing trading interests andimproved market conditions could enhance its trading performance.
Our forecasts and valuation. We reduce our earnings estimates for 2016e to reflectweaker-than-expected turnover momentum y-t-d but revise up our 2017-18e profitestimates. Based on higher ROE and lower COE assumptions, our target price,which is derived from a PB-based valuation approach, increases to HKD5.70 (fromHKD4.20). Our target price implies 13% upside from the current share price, but wemaintain Hold on the company due to the uncertainties in its trading strategy andcapital-raising demand.
Key risks. Key upside risks include favourable changes to macro and marketconditions and a faster-than-expected leveraging process. Key downside risks includevolatility in financial investments and inappropriate strategies in overseas expansion.