CITICS reported FY20 net profit of RMB 14.9bn, up 22% YoY, in-line with prelim results. Top-line (+28% YoY) was highlighted by stellar fee growth, while prop- trading gains was weak, and heavy impairment charges (RMB 7.1bn) further dragged down bottom-line growth. We think the results was quite impressive regarding strength in WM, AM and IB, which we believe are core competitiveness of brokers in the longer run. Mgmt. mentioned the set-up of AM subsidiary could help it apply for mutual fund license, and we think the Company could therefore better capture the trend of retail investors’ increasing allocation to risk assets. We fine-tune our FY21E-22E earnings estimates by -2% to +6% and lower TP to HK$ 22.40 to reflect heightened market volatility. Maintain BUY.
Results positives: 1) Brokerage income +52% YoY (vs. industry +54% YoY) on domestic brokerage share gain (6.5% in FY20 vs. 5.8% in FY19) and soared revenue from agency sales of products (+145% YoY), showing initial success from WM business transformation. 2) IB income +54% YoY, where domestic/oversea revenue was robustly up 52%/62% YoY. CITICS maintained 1st place in domestic equity and debt underwriting, and achieved high growth overseas. 3) AM income +40% YoY, of which asset mgmt. fees/fund mgmt. fees grew 52%/36% YoY, as CITICS enhanced its active management capability (75% actively managed AUM at YE FY20 vs. 52% at YE FY19) and enjoyed the mutual fund boom through China AMC (AUM +42% YoY to RMB 1.5tn)。 4) Net interest income +27% YoY, thanks to 65% YoY growth of margin account and lower funding costs amid easing monetary policy, though this was partly offset by expanded debt balance (+19% YoY)。
Results negatives: 1) Prop-trading gains was up modestly 13% YoY, including RMB 6.4bn FV losses. Calculated investment yield was 4.3% in FY20 (5.4%/2.8% in 1H20/2H20), down 0.6ppt YoY, despite 23% YoY growth in financial assets. 2) Impairment losses surged 173% YoY to RMB 7.1bn, of which RMB 4.9bn/RMB 0.7bn was for SPL/margin financing, further lifting CITICS’s provision coverage to 17%/1.3%, both at highest level among large peers. 3) Payout ratio was 34% in FY20 (vs. 53% in FY20)。 We think the Company needs to keep cash on hand before the completion of proposed A+H rights issue to replenish capital and support its mid-term expansion.
Fine-tune TP to HK$ 22.40, maintain BUY. We fine tune CITICS earnings in FY21E-22E by 2% on average, and apply higher COE assumption (10.6% vs. prev. 9.5%) to reflect heightened market volatility. The Company’s valuation is undemanding at 0.9x 1-year forward P/B (vs. historical avg. 1.1x)。 We continue to like CITICS’s solid leadership amid market consolidation.