The strong 1H17 result underpinned GTJAI’s strengthenedbusiness competitiveness and supports our positive thesis
Early adoption of IFRS 9 removes overhang; credit quality isfirm and should be further helped by business optimization
Maintain Buy rating with TP up to HKD3.50 （from HKD3.20）
　　Record interim profit and DPS +50%. Today we hosted a group breakfast for GuotaiJunan Int’l （GTJAI）， after it reported its interim profit rose 25% y-o-y and 56% h-o-h toHKD672m, a new record. This was led by a strong increase in corporate finance income（+181% y-o-y）， growth from structured financial products （+68% y-o-y） and brokeragefees （+37% y-o-y）， which together offset an increase in operating expenses. ROE hasrebounded to 16% on an annualised basis and GTJAI lifted its interim DPS by 50% y-o-yto HKD4.5 cents. The latter, in our view, is a reflection of management’s confidence inGTJAI’s future profit outlook and capital management capability.
　　With the early implementation of IFRS 9, which require the company to make provisionsbased on “expected losses” rather than “incurred losses”， GTJAI has added HKD264m inprovisions to its impairment allowance. Note this reduced retained earnings （and equity）by a corresponding amount but doesn’t affect the income statement. We believe this alsoremoves an overhang. Credit quality remains firm, with a net write-back on loans duringthe period, and GTJAI continues to optimise its asset mix which resulted in a reduction inthe margin financing loan book and an increase in the structured financial products.
　　Overall, we believe our positive investment thesis is being well supported. Thecompany’s expanded market share in 1H17 is a reflection of its strengthened businesscompetitiveness and market presence – which we expect to continue. Moreover, weare encouraged to see management’s efforts to improve the business structure, internalrisk pricing, finance cost and capital management – all in our view will position GTJAIfor more sustainable, long-term success.
　　Buy with HKD3.50 target price. We have revised our financial forecasts to align with thelatest market assumptions on HKEX and also take into account the latest operatingtrends. Following the adjustments, we lower our profit forecast by 5% in 2017e, followedby 3% and 6% respective upward revisions in 2018e and 2019e. We raise our target priceto HKD3.50 （from HKD3.20） as we roll forward the valuation basis from end-2017e toend-2018e （see page 4 for details）。 We maintain our Buy rating on the stock. We regardGTJAI as a solid long-term play on the rising Chinese participation in the Hong Kongstock market, and believe the lacklustre share price performance （up 2.5% y-t-d versusthe Hang Seng Index up 24.5%） does not reflect its prospects and results.
　　With this note, York Pun assumes primary coverage of Guotai Junan Int’l.