CITICS reported 1H20 net profit of RMB 8.9bn, up 38% YoY, in-line withpreliminary announcement. 2Q20 operating income was above our estimates, up19% QoQ, with strength across business lines led by prop-trading, althoughbuilding provision again slowed bottom-line growth. We continue to like CITICS’sleadership amid industry consolidation, and expect favorable market and reformenvironment to support its earnings growth in 2H20E. Maintain BUY.
Results positives: 1） Prop-trading gains +6% QoQ in 2Q20 despite highbase, achieving 64% YoY growth in 1H20 to RMB 11.8bn. CITICS continuedto expand its financial investment balance （+17% QoQ in 2Q20/+26% HoH）in 1H20 while maintaining decent yield at 5.4%. We believe this wasattributable to CITICS leading position in equity derivatives as well as betterperformance of CITICS investment and Goldstone. 2） Investment bankingfees +49% QoQ, where strong domestic follow-on offering and overseaunderwriting offset slower domestic IPO underwriting （2 IPOs in 2Q20 vs. 5 in1Q20）。 Given the Company’s rich IPO pipeline （ranked 1st by no. ofsponsorship on STAR Market and ChiNext）， we expect IB business willcontinue to improve in 2H20E. 3） Brokerage commission performed betterthan industry （-13% vs. -22% QoQ）， where we estimated a YoY marketshare gain （+0.7ppt） in 1H20, more than offsetting declining commission rate.
4） AM fees +3% QoQ in 2Q20/+23% YoY in 1H20 （vs. industry +9% YoY in1H20）， thanks to both enhanced actively managed AUM （+23% HoH,accounting for 61% of total AUM） and stellar growth of China AMC （AUM +21%HoH） amid robust mutual fund issuance. 5） Net interest income +59% QoQ,as borrowings and bonds balance reduced 7% QoQ while margin balanceextended 10% QoQ. We saw financing cost experiencing sequential declinedue to easier monetary policy.
Results negatives: Impairment losses of another RMB 704mn wasbooked in 2Q20, totaling RMB 2.3bn in 1H20, up 205% YoY. The increasewas mostly for reverse repos （on-B/S SPLs） and margin financing, whichincreased CITICS’s buffer to total balance to 9.1% and 1.5%, respectively,among highest within major brokers.
Maintain BUY. CITICS now trades at 1.14x 1-year forward P/B, slightly belowits historical average of 1.19x. Our unchanged TP of HK$ 24.60 implies 1.5xFY20E P/B, to reflect its leading position in enjoying capital market reform andexpected ROE recovery. Maintain BUY and as one of our sector top picks.