After a rebound in June, the share price of Haitong International weakened again inJuly because of low market trading volume and potential concerns about the marginfinancing business.
The Company is likely to deliver solid results in 1H19, based on the parent company’spositive profit alert.
Trading velocity of the Hong Kong market reached the low end of the range, whichmay suggest further downside risk is limited.
We trim our 2019E/2020E EPS by 1.4%/3.1% to reflect a lower market trading volumeassumption; the negative impact will be partly offset by lower finance costs.
Our new target price is HK$3.66 （0.78x 2019E PER）。 Reiterate ADD. Solid 1H19results should help improve the share price performance.
Low trading volume and margin financing business led to weakshare price performance
The average daily turnover （ADT） of the Hong Kong market in July （up to yesterday） wasHK$69.5bn, much lower than the ADT YTD of HK$94.3bn. We believe the slow progressin trade negotiations between China and the US and the “social issues” in Hong Kong arethe key reasons for the low ADT. The high share price volatility of some small caps inrecent months may also lead to concerns about the health of brokers’ balance sheets.
ADT should be near the bottom
The trading velocity of the Hong Kong market has already droppedto the low end of the 10-year range. If the historical pattern still works, ADT may recoverin the near term if there is major news, such as meaningful progress in trade negotiationsbetween China and the US.
Manageable risk of the margin financing business
Although investors may have concerns about the balance sheet health of some brokers,given the extreme share price volatility of some small caps in recent months, we believethe potential risk encountered by Haitong International should be manageable afterreviewing the CCASS record in the past few months.
Parent’s positive profit alert suggests solid results for HTI
Haitong Securities （6837.HK; ADD） releases its net profit （non-consolidated） figures on amonthly basis. If we deduct the consolidated net profit （announces half-yearly） by thenon-consolidated figures, this “residual” profit reflects mainly the performance of HaitongInternational and some other businesses. Based on the 1H19 positive profit alertreleased by Haitong Securities, we see a strong recovery in “residual” profit in 1H19,which should bode well for the 1H19 earnings of Haitong International 。
Minor adjustment in earnings and target price
We lower our 2019E/2020E EPS by 1.4%/3.1% to reflect （i） a lower 2019E ADTassumption from HK$115bn to HK$90bn and （ii） the fact that the negative impact of lowerADT will be partly offset by lower finance costs, as the Company just issued US$700m inbonds （expiring in 2024） at an interest rate of 3.375% p.a. Our Gordon Growth Modelbasedtarget price is also lowered from HK$3.85 to HK$3.66 （mid-term ROE at 9.1%（previously 9.3%））， equivalent to 0.78x 2019E PBR. The current PBR of 0.51x is at thelow end of the historical range