Action
We upgrade CGS-H to BUY, and maintain our target price of HK$6.31,implying 0.84x 2019e P/B and 29% upside.
What’s changed?
A good market-beta play with the highest sensitivity to ADT andmargin trading among H-share brokers. Of CGS’s FY18 revenue,brokerage income accounted for 23% （vs. Average of 18% for 6other H-share brokers that have announced FY18 results）； interestincome of margin trading accounted for 25% （vs. 16% for 6 otherbrokers）。 A-share ADT has jumped to Rmb910bn in March （vs.
FY18’s Rmb369bn）。 For every 10% increase in ADT or marginbalance, we estimate FY19 net profit would grow 8% or 5%.
Decline of earnings slower than sector, slightly beating ourexpectation. FY18 net profit fell 28% YoY to Rmb2.9bn （vs. thesector’s -41% YoY）， beating our expectation by 6% due to betterinvestment & net interest income in 4Q18 and effective riskcontrol of stock pledges. Brokerage and prop trading businessshowed similar trends with the sector, while asset management（income +8% at CGS vs. the sector’s -8% YoY） and IB business（income -5% at CGS vs. the sector’s -34% YoY） outperformed.
FY19 earnings expected to improve thanks to equity investmentgains. The loss of trading securities in 2018 reached Rmb0.83bn（~22% of total profit in 2018）， among which we expect the loss ofequity investment would be larger than the total amount. Due tothe recovery of stock markets in 2019 （SSE/SZSE Composite Index+21%/+31% since start-2019）， we expect the equity investmentwould turn profitable, greatly improving CGS’s earnings.
How do we differ from the market? The huge loss of equityinvestment in FY18 offers a low earnings base for FY19. With themarket turnover recovering in FY19, we favor CGS’s high market-betaon the back of solid offline and brokerage businesses. Potentialcatalysts: Rebounding turnover; 1Q19 results better than expected.
Financials and valuation
As we lift our stock ADT assumption to Rmb600bn, we raise 2019e/20eearnings by 18%/13% to Rmb4.3bn/4.9bn. CGS is currently trading at0.6x 19e P/B. We upgrade CGS-H to BUY, and maintain our TP ofHK$6.31 （0.84x 2019e P/B and 29% upside）。 Risks: Weak turnover;capital market reforms miss expectations.