FY18 results beat on stronger-than-expected prop-trading performance.CGS reported FY18 adj. op. revenue/net profit of RMB 9.2bn/RMB 2.9bn, down18%/27% YoY. Bottom-line was 17%/10% higher than our/consensusestimates, which was driven by better-than-expected prop trading gains （-6%YoY）， while other businesses performed largely in-line with our estimates.FY18 ROAE declined 2.1ppt YoY to 4.4%, still the weakest among China brokerswe cover.
Brokerage net income and net interest income weak as expected, down27%/24% YoY, similar to industry trend amid lackluster market condition.Brokerage business may maintain a relatively stable market share, whileexperienced further decline in commission rate. Interest income was supportedby the Company’s rapidly expanding stock-pledged repo business （balance +3%YoY ended FY18） in addition to a stable income from margin financing andsecurities lending, while was offset by higher interest costs esp. in 1H18.
Investment banking and asset management delivered stable performance,better than industry trend, while they only contributed 6%/8% to the Company’sop. revenue, and we won’t expect substantial improvement in near-term. Proptrading gains was also a highlight, as the investment yield improvedsubstantially from 0.7% in 1H18 to 2.6% for FY18, which may be attributable tomore allocation into fixed income assets.
More sensitive to ADT recovery while lacking mid-to-long term growthpotential. CGS’s earnings was more sensitive to A-share market ADT changes asbrokerage income accounted for ~40% of its op. revenue （vs. industry avg. of26%）。 As A-share market activity improved substantially YTD （+53% vs. FY18ADT） with an uptrend of margin balance （+21% YTD）， CGS may enjoy strongerrebound, which was evidenced by its 2M19 parent company level financial data（revenue/net profit +45%/+64% YoY）。 Yet the Company’s relatively weakfranchise in other business lines and slower pace in business transformation willdrag its profitability in mid-to-long run, in our view, as it lacks capability tocapture new business chances such as the Tech and Innovation Board, and mayface fierce competition in traditional brokerage businesses.
Maintain HOLD. CGS now trades at 0.62x FY19E P/B, lower than its historicalaverage （since listing） of 0.84x, even after a 38% YTD rebound in share price. Webelieve the valuation reflects its below-peers’ profitability, as we estimateFY19E/FY20E ROAE of 5.4%/6.2% vs. 8.1%/9.0% on average for other peers wecover. Maintain HOLD rating and TP at HK$ 4.80.