1H19 results in line with our expectations
China Galaxy Securities’ （CGS） revenue rose 71% YoY to Rmb7.37bnand earnings surged 98% YoY to Rmb2.6bn in 1H19, implying 2Q19profit at Rmb1.06bn, up 258% YoY and down 31% QoQ. The resultsare in line with our expectations. In 1H19, net asset value expanded5.6% YoY to Rmb68.14bn, implying ROAE rose 3.7ppt YoY to 7.7%;leverage ratio was up 0.4ppt from the beginning of 2019 to 3.3x;administrative expense ratio fell 8.7ppt YoY to 45.6%.
Trends to watch
Investment income improved significantly and debt investment sizeincreased substantially. The firm’s investment income totaledRmb2.12bn in 1H19 （vs. an investment loss of Rmb230mn in 1H18），accounting for 29% of CGS’s revenue and was the largest source ofthe firm’s incremental revenue.
Retail brokerage segment was on a solid footing, while institutionalbrokerage and sales of products issued by other firms contracted.
Brokerage business revenue rose 24% YoY to Rmb2.44bn, accountingfor 33% of CGS’s revenue, still the largest contributor.
Net interest income fell 7% YoY to Rmb1.63bn.
Investment banking and asset management business linescontracted, in line with performance of their respective industries.
Financials and valuation
We maintain our 2019 and 2020 earnings forecasts at Rmb4.3bn andRmb4.9bn. CGS-H now trades at 0.5x 2019e and 0.5x 2020e P/B.
Maintain OUTPERFORM rating but lower our target price by 18% toHK$4.61 considering the lower sector valuation, implying 0.6x 2019eP/B and 26% upside.
Risks
Substantial decline in turnover; volatility in bond and equity markets;slower-than-expected capital market reforms.