What surprised us
　　HTSC reported 2Q NPAT of Rmb1.6 bn, down 66% yoy, or 24%/20% ofour/Bloomberg consensus FY16E, and in line with unconsolidated monthlydata. Key positives: 1） Investment income up 126% qoq from a very lowbase in 1Q16 on better market conditions. Trading book （trading + AFS）shrank by 21% compared to YE15, with a higher proportion of bonds andless allocation to funds. 2） NII up 37% qoq, likely due to cheaper fundingcosts as bonds & LT borrowing as a proportion of total debt fell to 25%from 32% in 1Q16 and 30% in YE15. 3） Asset management income grew8% qoq, mainly due to fund management income （Rmb77mn in 1H16, up146% from 1H15）。 According to AMAC, HTSC ranks no. 2 among allbrokers by total AUM as of 1H16. But revenue contribution remained low（2% of revenue in 1H16） due to the low margin. Key negatives: 1）Brokerage commission down 7% qoq, slightly worse than the sectoraverage, likely due to more aggressive commission rate cuts to maintainmarket share （8.5% in 1H）。 We estimate the commission rate declined to2.3bps in 2Q16, -9%/-18% qoq/yoy. 2） 2Q Investment Banking incomedown 32% qoq vs a flat trend for the sector as a result of weaker M&A dealflows despite resilient underwriting revenue.
　　What to do with the stock
　　We expect HTSC to maintain leadership in mass-end retail brokerage givenits cost advantage, although further monetization is needed to liftprofitability （e.g. in asset mgmt. and high-end services）。 Similar to peers,2Q results demonstrated a steady recovery from what we see as thetrough in 1Q16. We lower 2016E EPS on lower commission rates andinvestment yields and fine tune 2017-18E +1%. We maintain our A/H 12-m2016E P/B vs. ROE-based TPs of Rmb15.90/HK$ 18.30 and Neutral ratings.
　　Upside risks: Better-than-expected ADT/margin finance balance, proptrading volatility; downside risks: market share losses in brokerage/underwriting, prop trading volatility.