Benefiting from its geographically concentrated SMEstrategy with higher profitability; maintain BUY
GFS is expected to be a major beneficiary from the growingdemand for SME IPOs in Guangdong given its strong local presenceand higher underwriting fee rate thanks to its SME-focused strategy
In light of cooling stock markets and softer demand for marginfinancing and security lending (MFSL), we revised down earnings by4%/8% for FY16/17E while introducing FY18E earnings forecastswith NPAT growth of -40%/20%/19% YoY in FY16/17/18E
Trading at 1.41x FY17E P/B and 12.87x FY17E P/E, GFS' valuationis still undemanding compared to historical average P/B of 1.49xand P/E of 12.53x and sector average of 1.18x FY17E P/B and 13.01xFY17E P/E. Maintain BUY given its better position in investmentbanking business and the highest profitability within our coverage.
TP is cut to HK$20.82 from previously HK$21.19
High quality SME niche player leads to stronger growthin its investment banking business
Tight links with clients in Guangdong and its SME-focused strategy helpGFS capture the growing demand of SME IPOs in the region and attain astronger bargaining power on underwriting fee rate (9% vs sector averageof 7% in 2016 YTD as of 6 June)。 We expect GFS
market share of equityfinancing to increase to 4.6% in FY16E and gradually improve to5.0%/5.2% in FY17/18E. We now expect fee income from investmentbanking business to grow 98%/28%/15% YoY in FY16/17/18E,representing 29%/33%/35% of total fee and commission income.
As the subdued stock markets and declining balance for MFSL shouldunavoidably weigh on brokerage fees and interest incomes, we reviseddown NPAT by 4%/8% in FY16/17E, on the assumptions of average dailyturnover of stock markets at RMB645/RMB753/RMB775 bn and year-endbalance of MFSL at RMB924/RMB1,003/RMB1,097 bn in FY16/17/18E,respectively. We estimate GFS
ROE to reach 10%/12%/12% inFY16/17/18E, the highest within our coverage thanks to lower-than-peersCIR of 64%/61%/58% in FY16/17/18E.
Catalysts and valuation: rolling over to FY17E
A mild recovery for A-share stock markets with an increase in averagedaily turnover as well as margin financing and securities lending balancein 2H16E, launch of Shenzhen-Hong Kong Stock Connect andacceleration in the adoption of registration-based IPO system shouldserve as positive catalysts to boost share prices.
Revised down our TP to HK$20.82 from previously HK$21.19 as we cutour earnings forecasts for FY16/17E. Our revised SOTP-based TPimplies 14.9x FY17E P/E and 1.60x FY17E P/B with upside of 16% fromclosing price as of 10 June 2016. Maintain BUY rating.