2019 results in line with our forecast
CITIC Securities （CITICS） reported 2019 results: revenue rose 16% YoY to Rmb43.1bn and attributable net profit grew 30% YoY to Rmb12.2bn with ROE up 1.6ppt YoY to 7.8%, in line with the firm’s preannouncement. 4Q19 net profit fell 18% YoY and 58% QoQ to Rmb1.7bn due to impairment loss of credit business and goodwill impairment of overseas subsidiaries. Business and G&A expense ratio fell 0.4ppt YoY to 40.7%. Leverage ratio rose 0.5x YoY and 0.4x QoQ to 4.14x. The payout ratio rose 8ppt YoY to 53%.
Trends to watch
Substantial increase in investment income contributes incremental earnings. 2019 investment income rose 90% YoY to Rmb16.7bn, and the balance of held-for-trading financial assets increased 44% YoY to Rmb355.3bn with annualized investment returns up 2.9ppt to 6.2%.
Brokerage business underperformed sector. 2019 brokerage income stayed flat YoY at Rmb7.4bn （vs. market average daily turnover （ADT） up 36% YoY）， and we estimate the commission rate fell 12% YoY to 0.031%.
Investment banking business continues strengthening. 2019 investment banking income rose 23% YoY to Rmb4.5bn.
Asset management business remaining solid. 2019 asset management income fell 2.2% YoY to Rmb5.7bn.
Financials and valuation
We maintain our 2020-2021 earnings forecast at Rmb15bn and Rmb16.8bn. CITICS A-shares and H-shares are trading at 1.6x and 0.8x 2020e P/B. We maintain a NEUTRAL rating on CITICS A-shares and H-shares. Given increased capital market uncertainties amid the global spread of COVID-19 and impact on valuations, we trim target prices for the A-shares 4% to Rmb26.7 （1.9x 2020e P/B with 19% upside） and for the H-shares 21% to HK$15.5 （1.0x 2020e P/B with 19% upside）。
Risks
ADT plunging; sharp market fluctuations; disappointing capital market reform.