1Q16 NPAT declined 57% YoY and 63% QoQ to RMB1.8 bn. Weexpect full-year earnings to dip 32% YoY according to our base caseassumption
Incomes from brokerage, margin financing and tradingbusinesses shrank rapidly in 1Q16 along with A-share market crashin January but we expect the market to be relatively stable for therest of the year
Remains our top BUY stock within sector coverage in light ofattractive valuation and leading market position focusing on retailinvestors and SMEs as well as prudent investment strategy, despiteexpected slowdown in earnings growth
1Q16 NPAT down 57% YoY dragged by brokerage andtrading businesses, in line with expectations
HTS reported 1Q16 NPAT at RMB1.8 bn, down 57% YoY, mainly due todecline in brokerage fee and commission income (-35% YoY), netinterest income (-34% YoY) and investment income (-68% YoY). Weattribute the earnings decline in 1Q16 mainly to the sharp correction in Asharemarket in January 2016 with Shanghai Composite Index -15% in1Q16 vs +16% in 1Q15. Looking ahead, we expect A-share stock marketto be rather range bound and relatively stable throughout the year.
　　Positives: 1) fee income from investment banking business rapidly grew32% QoQ and 168% YoY in 1Q16 with a larger contribution of 33.5% tototal fee income (vs 13.2% in FY15), mainly due to increase in follow-onoffering and bond underwriting businesses, in line with our expectation; 2)fee income from asset management jumped 68% YoY in 1Q16; and 3)leverage/gearing ratio flattened at 4.2x/73.8%, respectively, in 1Q16.
　　Negatives: 1) fee and commission income from brokerage businessdecreased 35% YoY while investment income fell 68% YoY in 1Q due toA-share stock market collapsed in January 2016; 2) ROE dropped quicklyto 6.5% in 1Q16 from 18.1% in 4Q15 on an annualized basis; and 3) CIRedged up 24.5pp YoY to 55.3% in 1Q due to slowing revenue growth.
　　Catalysts and valuation
　　A sustainable bull market for A shares, an earlier-than-expected launch ofShenzhen-Hong Kong stock connect and a surge in average dailyturnover as well as margin financing and securities lending should serveas positive catalysts to boost share price.
　　The stock is now trading at 1.20x FY16E P/B and 12.77x FY16E P/E. Webelieve HTS’ valuation remains undemanding compared to its historicalaverage of 1.31x P/B and 13.36x P/E, and sector average of 1.33xFY16E P/B and 14.05x FY16E P/E. Reiterate BUY with TP of HK$17.09.