Weak performance in 2016 widely expected; HTI is on track tobecome a fully fledged investment bank
More comprehensive product offerings position it well tobenefit from increasing Chinese investor demand for overseasinvestments across business lines
Maintain Buy rating with revised TP of HKD6.0 (was HKD6.2)
Strengthened market positions across business lines: Haitong Int’l (HTI) reported a33% y-o-y earnings decline in 2016 on shrinking market turnover, a weak tradingperformance and an increase in impairment charges (on both financial investment andfinancing assets due to market volatility and increased credit risks), although thefinancing, investment management and corporate finance businesses continued to deliversolid growth. However, we note its market positions have improved in various areas. Itranked no.1 and no.2, respectively, in terms of IPOs and total equity underwriting amountin Hong Kong last year. In addition, it started to issue warrants and CBBCs last year andbecame a top 5 player in terms of turnover of these products in 4Q16. The company hasdiversified its product offerings in institutional services (such as securities borrowing andlending) as well as retail wealth management business (such as fund-of-fund products).
Well positioned to become the ‘go to’ broker for Chinese investors: Chineseinvestor demand for overseas investments has been increasing – besides continuouscapital inflow from the southbound Shenzhen-Hong Kong Stock Connect since its launch,the growth of QDII funds’ AUM and Chinese applicants for Hong Kong assetmanagement licenses also underline this trend. HTI, in our view, distinguishes itself fromcompetitors through its comprehensive product offerings and solid relationship withChinese investors and should be in a position to take a larger wallet share of the Chineseinvestors. In addition to a bigger brokerage market share, this could lead to strong growthin AUM, balance of margin financing as well as leveraged and acquisition financing,market-making volume and the scale of institutional products.
Forecasts and valuation: We lower our profit forecasts by 8% in 2017e and 20% in2018e, mainly to reflect higher operating expense estimates, and introduce our 2019forecasts. Based on a lower ROE assumption, our target price, which is derived from aPB-based valuation approach, is revised to HKD6.0 (from HKD6.2). As this implies 31%upside, we maintain our Buy rating; we expect HTI to benefit from increasing demandfrom Chinese investors for overseas investments across business lines. Key downsiderisks include a sharp deterioration in macro and market conditions, volatility in financialinvestments and inappropriate overseas expansion strategies.