1Q19 net profit up 51% both QoQ/YoY. CGS reported 1Q19 adj. op. revenueof RMB 3.6bn, up 24% QoQ/37% YoY, and net profit of RMB 1.5bn, up 51%QoQ/51% YoY, thanks to the significant recovery of A-share market YTD. Annualized ROAE improved 3ppt QoQ to 9.2%. Bottom-line accounted for41%/37% of CMBIS/consensus FY19E estimates. Yet the results shall not be asurprising beat, as the YoY rebound of net profit was smaller than the Companydisclosed in monthly parent company level financial data （+67% YoY in 3M19）。
Results positives: 1） Under new accounting policy, prop-trading gains surged7.3x YoY （QoQ data was not comparable）， mainly on China’s stock market rally（CSI 300 Index/ChiNext Index +29%/+35% in 1Q19） and CGS’s expandedinvestment balance （+17% QoQ/+31% YoY）； 2） Net brokerage commissionincreased 57% QoQ, boosted by the 76% QoQ-increase in market stock and fundtrading ADT; 3） Provision reversed RMB 54mn as credit risks mitigated, thanksto the rebound of stock market; 4） Cost-to-income ratio improved 7pptQoQ/5ppt YoY to 45%, the lowest quarterly level since 4Q16.
Results negatives: 1） Net interest income dropped 26% YoY （QoQ data notcomparable） on lower interest income from margin financing, which may beresulted from intense competition on interest rate and contracted margin balance（+14% QoQ/ -11% YoY）， as well as higher interest expenses （as debts +30% YoY）；2） Net income from investment banking and asset management remained muted（-9%/ -7% QoQ）， showing CGS’s franchise in these business lines was still weak.
Not a high-quality high growth; maintain HOLD. CGS now trades at 0.68xFY19E P/B, lower than its historical average （since listing in May 2013） of 0.84x. The Company’s share price gained another 4.5% MTD and posted the bestperformance among peers in Apr （-1.1% on avg.）， in our view, mainly due to 1） itslow valuation （vs. sector avg. 0.96x） and 2） the market’s expectation of a strongerearnings rebound on its high sensitivity to ADT towards the results release date.
However, we think the set of 1Q19 results merely met the market’s expectationand lacked quality growth. The optimism in A-share market seems to sustain, andCGS may post higher YoY growth in coming quarters due to low-base in 2Q-4Q18.
But we see the Company’s weak franchise in businesses other than brokeragemakes it less favorable in capturing the trend of institutionalization and thedevelopment of direct financing market （e.g. the Tech Board, where currentlynone of the 92 applicants were sponsored by CGS）， thus lacks mid- to long-termgrowth potential. Maintain HOLD rating on CGS and TP at HK$ 4.80, implying0.61x FY19E P/B.