CSC Financial Co Ltd (6066 HK) CSC Financial Co Ltd

China Financials 18 July 2017

Target price: HKD9.50

Share price (17 Jul): HKD7.09 | Up/downside: +34.0%

Initiation: delivering high ROE by focusing on IB Leon Qi, CFA (852) 2532 4381  Strong IPO business, particularly with small-sized issuers [email protected]  Disciplined cost control helps to deliver sector-leading ROE Yan Li (852) 2773 8822  Initiating with Buy (1) call; below-book valuation unjustified, in our view [email protected]

Investment case: We initiate coverage on CSC Financial Co., Ltd. (CSC) Share price performance with a Buy (1) call. CSC is a mid-sized securities firm that focuses on (HKD) (%) th investment banking. Its net assets ranked 11 among all China securities 7.5 110 firms at end-2016, but its 2016 ROE was the highest among the 8 7.3 104 securities firms under our coverage. 7.0 98 6.8 91

6.5 85 Strength in investment banking. Though its net assets ranked 11th overall Dec-16 Mar-17 Jun-17 in the China Securities Sector (at end-2016), CSC was ranked 4th in CSC Financ (LHS) Relative to HSI (RHS) China’s equity underwriting league table and first in the debt underwriting nd league table in 2016. As at end-1H17, its IPO pipeline ranked 2 among all 12-month range 6.52-7.50 China securities firms in terms of number of deals. We believe CSC’s Market cap (USDbn) 6.52 competitive edge in investment banking is a result of its flexible product 3m avg daily turnover (USDm) 2.10 Shares outstanding (m) 7,176 offerings, market-driven incentive system and early-mover advantage in the Major shareholder BSCOMC (45.0%) fixed-income business. We expect CSC to continue to benefit from the expansion of investment banking business, in particular IPOs, within the Financial summary (CNY) whole China securities industry. Year to 31 Dec 17E 18E 19E Revenue (m) 18,083 21,236 23,883 Operating profit (m) 7,425 8,532 8,979 Peer-leading ROE. We forecast an average 12.4% ROE for CSC over Net profit (m) 5,528 6,355 6,686 2017-19E, the highest among the 8 China securities firms under our Core EPS (fully-diluted) 0.770 0.886 0.932 coverage. Its peer-leading ROE is a result of its focus on the IPO business EPS change (%) (9.7) 15.0 5.2 Daiwa vs Cons. EPS (%) (2.7) (5.0) (17.6) (which features high ROE) and disciplined cost management. PER (x) 8.0 6.9 6.6 Dividend yield (%) 0.0 0.0 0.0 Catalysts: Interim results in late-August may prompt investors to take a DPS 0.000 0.000 0.000 PBR (x) 0.9 0.8 0.7 closer look at CSC’s attractive risk-reward profile, in our view. A potential A- ROE (%) 12.6 12.8 11.9 share listing may also lead to more investor attention on its below book Source: FactSet, Daiwa forecasts valuation. CSC filed an application for A-share listing in June 2017, which is currently under review by the China Securities Regulatory Commission (CSRC).

Valuation: We use SOTP methodology to value CSC’s underlying operations and its contribution to the national stock market “support fund” (set up in mid-2015) separately to derive our 12-month target price of HKD9.5, which implies a 1.3x overall 2017E PBR, or 1.4x for its ex-support fund business derived using the Gordon Growth Model. CSC is currently trading at 0.9x 2017E PBR and 0.8x 2018E PBR, which is the lowest among the 8 H-share listed China securities firms under our coverage (for details of our valuation methodology, see Distinguishing cyclicality from secularity, published 7 June 2016).

Risks: Commission rates in the traditional brokerage business are being pressured due to the largely homogenous services offered and the rise of Internet brokers. We expect CSC’s brokerage strategy to lead to a faster- than-sector decline in commission rates.

See important disclosures, including any required research certifications, beginning on page 34

CSC Financial Co Ltd (6066 HK): 18 July 2017

Table of contents

SWOT analysis and peer comparison snapshot ...... 6 Traditional fee businesses ...... 7 Investment banking ...... 7 Retail brokerage ...... 10 Investment management ...... 12 Capital intermediary businesses: margin finance and stock repo ...... 14 Sector lending balance steadily recovering ...... 14 CSC’s lending balance poised to grow after its IPO but downside in pricing ...... 15 Cost discipline leading to high ROE ...... 16 Cost-to-income ratio ...... 16 High ROE ...... 17 Financial forecasts ...... 19 Valuation and risks ...... 21 Fair value = PBR of 1.3x ...... 21 Valuation methodology ...... 21 Relative valuations ...... 22 Risks ...... 23 Appendix ...... 25 Company background and industry position ...... 25 History and restructuring ...... 26 Relationship with BSCOMC, Central Huijin and CITIC Group ...... 27 Shareholding structure and major business subsidiaries ...... 28 Senior management profile ...... 28

CSC Financial Co Ltd (6066 HK): 18 July 2017

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook CSC: net profit and net profit growth We expect CSC to see an 8% net profit CAGR for 2016- (CNYm) 2019E, driven by steady growth of its investment banking 20,000 200% 18,000 150% business and lending-related revenue. Notably, we forecast 16,000 100% investment banking-related revenue to contribute 35% of 14,000 total revenue by 2019, compared with 14% in 2015. 12,000 50% 10,000 0% 8,000 (50%) 6,000 (100%) 4,000 2,000 (150%) 0 (200%) 2014 2015 2016 2017E 2018E Net profit YoY (RHS)

Source: Company, Daiwa forecasts

Valuation CSC: PBR and share price China securities firms under our coverage are trading Rolling PBR (x) Price (HKD) currently at 1.1x 2017E PBR, on our estimated 2017E 1.00 7.5 0.95 BVPS on a market-cap weighted basis. CSC is trading at a 7.0 2017E PBR of 0.9x, which is the lowest under our 0.90 coverage and is one of two firms in our coverage trading 6.5 0.85 below book. We believe it deserves to trade at a premium and that the current valuation offers an attractive entry 0.80 6.0

point, given its high ROE and its leading position in the

7-Apr-17

2-Jun-17

14-Jul-17

5-May-17

21-Apr-17

13-Jan-17 27-Jan-17 16-Jun-17 30-Jun-17

10-Feb-17 24-Feb-17 10-Mar-17 24-Mar-17

16-Dec-16 30-Dec-16 China investment banking business. 19-May-17 One-year forward rolling PBR Average PBR -1SD +1SD Price (RHS) Source: Bloomberg, Daiwa Note: prices as at 17 Jul 2017

Earnings revisions CSC: Daiwa vs. Bloomberg-consensus net profit forecasts

Due to the stock’s limited trading history, there are limited (CNYm) 7,500 6,742 consensus forecast revisions as yet. So far, only 6 sell-side 6,355 5,816 analysts have published forecasts. Our net profit forecasts 6,000 5,528 for 2017 and 2018 are 5% and 6% lower than those of the 4,500 Bloomberg consensus, respectively, due to our more conservative forecasts for average daily turnover (ADT) 3,000 and A-share stock market performance. 1,500

0 2017E 2018E

Consensus Daiwa

Source: Bloomberg, Daiwa forecasts

CSC Financial Co Ltd (6066 HK): 18 July 2017

Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E A-share ADT (CNY bn) n.a. 202 322 1,103 567 500 580 580 Brokerage mkt share of company (%) n.a. 3.3 3.3 3.1 3.1 3.1 3.0 2.9 Commission rate for company (%) n.a. 0.076 0.063 0.049 0.049 0.048 0.043 0.040 Margin finance bal (mkt) (CNY bn) n.a. 347 1,026 1,174 939 962 1,062 1,192 Stpck repo bal (mkt) (CNY bn) n.a. 111 365 846 799 962 1,118 1,192 Stock market annual return (%) n.a. (6.7) 52.9 9.4 (12.3) 2.0 0.0 0.0 Bond market annual return (%) n.a. (0.5) 10.3 8.2 1.8 2.0 4.0 4.0 Mkt annual equity financing (YoY, %) n.a. (6.5) 74.8 69.0 46.4 20.0 50.0 50.0 Mkt annual debt financing (YoY, %) n.a. (2.6) 38.0 37.2 23.9 10.0 10.0 10.0 Cost-to-income (%) n.a. 52.2 43.2 40.1 43.6 41.3 41.6 43.9

Profit and loss (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Gross fee and commission income n.a. 4,388 6,541 14,901 10,584 10,536 12,165 14,173 Gross interest income n.a. 1,621 2,930 5,573 4,441 4,859 5,669 6,067 Investment income n.a. 1,247 1,903 3,980 2,412 2,525 3,223 3,446 Other income n.a. 66 78 59 148 163 179 197 Total Revenue n.a. 7,322 11,452 24,512 17,585 18,083 21,236 23,883 Fee and commission expense (-) n.a. (552) (861) (2,237) (1,389) (1,288) (1,459) (1,698) Finance costs(-) n.a. (1,077) (1,960) (3,219) (2,849) (3,197) (3,861) (4,424) Business tax(-) n.a. (361) (527) (1,144) (347) (904) (1,062) (1,194) Other Operating Expenses n.a. (2,911) (3,560) (6,450) (5,939) (5,269) (6,323) (7,587) Operating profit n.a. 2,421 4,543 11,461 7,061 7,425 8,532 8,979 Profit from Assoc/JV n.a. 0 0 0 (3) (3) (3) (3) Other Inc/Exp/Extord. (+/-) n.a. 0 0 0 0 0 0 0 Pre-tax profit n.a. 2,421 4,543 11,461 7,057 7,422 8,528 8,976 Tax n.a. (643) (1,145) (2,810) (1,744) (1,834) (2,108) (2,218) Min. int./pref. div./others n.a. 9 9 (13) (54) (59) (65) (72) Net profit (reported) n.a. 1,787 3,407 8,639 5,259 5,528 6,355 6,686 Net profit (adjusted) n.a. 1,787 3,407 8,639 5,259 5,528 6,355 6,686 EPS (reported)(CNY) n.a. 0.293 0.559 1.416 0.853 0.770 0.886 0.932 EPS (adjusted)(CNY) n.a. 0.293 0.559 1.416 0.853 0.770 0.886 0.932 EPS (adjusted fully-diluted)(CNY) n.a. 0.293 0.559 1.416 0.853 0.770 0.886 0.932 DPS (CNY) n.a. 0.064 0.030 0.000 0.000 0.000 0.000 0.000 Source: FactSet, Daiwa forecasts

CSC Financial Co Ltd (6066 HK): 18 July 2017

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment n.a. 24,389 54,210 86,818 72,608 73,259 77,886 82,841 Fee and commission receivables n.a. 47 164 153 378 454 545 654 Advances to customers n.a. 14,625 31,941 35,931 31,007 45,492 51,274 58,677 Reverse repo & bank placement n.a. 3,280 2,260 6,896 7,705 9,246 11,095 13,314 Financial assets n.a. 22,619 31,282 47,868 62,851 66,040 70,697 75,648 Long-term equity investments n.a. 20 20 50 172 207 248 297 Other assets n.a. 2,959 3,528 5,471 6,973 7,656 9,005 10,609 Total assets n.a. 67,940 123,406 183,188 181,695 202,354 220,751 242,040 Accounts payable n.a. 19,653 43,487 72,045 56,736 59,379 57,247 60,109 Repo and bank placements n.a. 21,305 35,486 31,546 34,391 40,414 46,847 49,333 Financial liabilities n.a. 2,828 2,445 1,407 4,887 5,211 5,569 5,967 Bonds payable n.a. 4,686 7,699 15,072 13,653 13,653 13,653 13,653 Other liabilities n.a. 6,315 17,561 32,935 30,765 36,906 44,287 53,145 Total liabilities n.a. 54,786 106,678 153,005 140,432 155,563 167,604 182,208 Share capital n.a. 6,100 6,100 6,100 7,176 7,176 7,176 7,176 Reserves/R.E./others n.a. 6,991 10,569 24,006 33,887 39,415 45,770 52,456 Shareholders' equity n.a. 13,091 16,669 30,106 41,063 46,592 52,947 59,633 Minority interests n.a. 63 59 77 200 200 200 200 Total equity & liabilities n.a. 67,940 123,406 183,188 181,696 202,354 220,751 242,040 BVPS (CNY) n.a. 2.146 2.733 4.935 6.661 6.492 7.378 8.309

Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Gross fee and commission (YoY) n.a. n.a. 49.1 127.8 (29.0) (0.5) 15.5 16.5 Operating profit (YoY) n.a. n.a. 87.7 152.3 (38.4) 5.2 14.9 5.2 Net profit (YoY) n.a. n.a. 90.7 153.6 (39.1) 5.1 15.0 5.2 EPS (YoY) (FD) n.a. n.a. 90.7 153.6 (39.8) (9.7) 15.0 5.2 ROAE n.a. 27.3 22.9 36.9 14.8 12.6 12.8 11.9 ROAA n.a. 5.3 3.6 5.6 2.9 2.9 3.0 2.9 Net dividend payout n.a. 21.8 5.3 0.0 0.0 0.0 0.0 0.0 Brokerage commission/Op inc n.a. 50.5 43.5 50.6 32.1 25.7 22.2 20.4 Inv banking commission/Op inc n.a. 16.7 20.3 16.1 31.8 37.2 38.8 43.0 Assest mgmt inc / Op inc n.a. 3.4 3.5 3.7 7.5 7.2 8.4 8.8 Interest inc / Op inc n.a. 9.0 10.0 11.1 10.8 11.2 10.4 8.4 Inv inc / Op inc n.a. 17.6 21.4 18.1 16.4 17.0 18.6 17.7 Leverage n.a. 516.5 737.7 606.9 440.3 432.5 415.4 404.5 Cost-to-income n.a. 66.9 60.3 53.2 59.8 58.9 59.8 62.4 Net capital ratio n.a. 72.7 92.2 97.8 90.3 76.7 48.7 22.0 Source: FactSet, Daiwa forecasts

Company profile

CSC is a medium-sized investment bank in China, with a market share of 3.8% in terms of brokerage trading volume in 2016. Its core business scope covers brokerage, underwriting and sponsorship, proprietary trading and asset management.

CSC Financial Co Ltd (6066 HK): 18 July 2017

SWOT analysis and peer comparison snapshot

We conduct a SWOT analysis on CSC below. We believe CSC has a competitive edge in investment banking, with equity underwriting ranked 4th and debt underwriting ranked 1st overall in terms of underwriting amount in 2016. The company’s relatively small scale is a weakness, however after raising HKD7.1bn from its Hong Kong IPO in December 2016, CSC’s A-share IPO application is currently under review and is likely to raise around CNY3bn.

CSC: SWOT analysis

Source: Company, Daiwa

China Securities Sector: market share by amount underwritten China Securities Sector: market share by amount underwritten for ECM (%) for DCM (%)

GTJA Huatai CSC 7.00% CITICS 6.40% 10.92% 9.30%

GTJA CITICS 6.01% 6.80% CSC CMS 5.30% Others 5.92% Others 56.22% HTS 57.50% GFS 5.32% 4.60% HTS GFS 4.50% 4.49% Huatai CMS 3.50% CGS 2.68% CGS 2.04% 1.50%

Source: WIND, Daiwa Source: WIND, Daiwa Note: data for 2016; including IPO, follow-on offerings and convertible bonds Note: data for 2016

CSC Financial Co Ltd (6066 HK): 18 July 2017

Traditional fee businesses

Investment banking China’s investment banking business has historically been highly competitive with relatively low market concentration. Since 2016, large brokers have been gaining market share at the expense of smaller brokers. According to WIND, in terms of underwriting amount for the ECM business as lead underwriter, the top-8 securities firms combined had a 48.5% market share in 2016. In terms of DCM business, the top-10 securities firms accounted for 49.8% market share in 2016.

China Securities Sector: market share by amount underwritten China Securities Sector: market share by amount underwritten for ECM (%) for DCM (%)

Huatai CSC Guotai Junan CITICS 6.4% 9.3% 6.9% 10.9% CITICS Others Guotai Junan 6.8% 40.0% 6.0% CMS Others CSC 5.3% 50.2% 5.9% GFS Guosen HTS 4.6% 5.4% 4.5% CGS HTS Huatai 2.0% China 5.3% 3.4% China Ping An Everbright CICC Merchants Southwest Zhong De CICC GFS Securities Securities 3.2% 2.7% 2.7% 4.0% 4.1% 4.5% 2.7% 3.1% Source: WIND, Daiwa Source: WIND, Daiwa Note: data for 2016; including IPO, follow-on offerings and convertible bonds Note: data for 2016

CSC’s investment CSC’s investment banking business has seen a continuous improvement in its size and banking business has ranking over the past 10 years. According to the company, its investment banking business seen steady ranking advanced from 12th in 2006 to second in 2015, while according to WIND, the improvement in size and company was no.1 in 2016 in terms of the aggregate amount of equity and debt securities ranking over the past 10 underwritten as lead underwriter. years According to the Securities Association of China (SAC), CSC’s revenue from investment banking ranked 3rd and 2nd among all China securities firms in 2014 and 2015, respectively. According to WIND, CSC’s revenue from the investment banking business as lead underwriter was ranked 3rd among all China securities firms in 2016.

China Securities Sector: revenue from investment banking China Securities Sector: market share of revenue from underwriting as lead underwriter (%)

(CNYm) 2015 2014 YoY GFS CITICS 3,775.89 2,824.25 33.7% CITICS 6.5% CSC 2,983.12 1,633.13 82.7% 8.6% CSC Guotai Junan 2,838.27 1,306.34 117.3% 5.9% China Merchants 2,296.26 1,079.43 112.7% Guosen 2,145.43 1,504.26 42.6% Others CICC GFS 1,971.32 1,688.92 16.7% 48.4% 4.8% CICC 1,697.56 939.06 80.8% Essence HTS 1,577.93 1,304.82 20.9% 4.7% Shenwan Hongyuan 1,548.84 1,042.49 48.6% Huatai Huatai 1,476.31 1,170.96 26.1% Guotai Junan 3.8% 3.8% Guosen Southwest HTS Sinolink 3.7% 3.4% 3.1% 3.2%

Source: SAC, Daiwa Source: WIND, Daiwa Note: data for 2016

We believe growth in its investment banking business will be a key differentiating factor for CSC, allowing it to create synergies among its different business lines. For example, equity financing transactions would bring in corporate clients for its custody, margin financing and securities lending, and collateralised stock repurchase businesses, to which the company could cross-sell asset management products.

CSC Financial Co Ltd (6066 HK): 18 July 2017

CSC’s strength in We attribute CSC’s strength in investment banking to its flexible product offering, decent investment banking incentive mechanism, early-mover advantage in the fixed-income business, specialised mainly comes from its sector teams, deep-rooted cooperation with CITIC Bank, and its full-service and cross- flexible product offering border platform. See table below for details. and decent incentive mechanism, in our view CSC: differentiating its investment banking business Aspect Details Importance The equity underwriting and debt underwriting departments are allowed and able to 1 Flexible product offering underwrite each other’s products (ie, ECM on debt offering, DCM on equity offering) as long * * * as they ascertain their clients’ demand for such products at the origination stage Teams share a certain percentage of revenue from deals they originate or execute. This is 2 Incentive mechanism also applicable when they bring in revenue on other products, such as the case mentioned in * * * above point Early mover in fixed-income The fixed-income business has been deemed a key area of business focus for CSC since 3 * * business 2012, which was early among major securities firms in China CSC has established specialised sector teams in sectors such as high-end manufacturing, Specialised sector teams to 4 TMT, banking, new energy, energy saving, and environment protection, healthcare, and new * * provide professional services materials Deep-rooted cooperation with Long-term relations between the investment banking teams and branch-level management of 5 * Citic Bank CITIC Bank Full-service and cross-border CSC has a full-service investment banking licence domestically. Its Hong Kong investment 6 * investment banking platform banking business commenced operations in 2013

Source: Company, Daiwa

Equity offerings In 2016, CSC was ranked 1st in terms of the number of A-share equity underwriting as lead underwriter. According to WIND, in 2016, CSC underwrote IPOs worth CNY18.7bn, or a market share of 11.4%, ranking it 1st among all China securities firms. Its rights issues, public issuances and private placements in 2016 totalled CNY59.6bn, ranking it 5th among all China securities firms.

CSC: IPO amount underwritten CSC: underwriting fees from IPOs (CNYbn) (CNYm) 18.7 20 700 624.7 18 600 16 14 500 12 400 10 269.7 8 300 6 4.2 200 147.6 4 2.9 100 2 0 2.0 0 0 2013 2014 2015 2016 2013 2014 2015 2016 Source: Company, WIND, Daiwa Source: Company, WIND, Daiwa Note: IPOs were suspended in 2013 in China Note: IPOs were suspended in 2013 in China

CSC: amount of secondary offerings* underwritten CSC: underwriting fees of secondary offerings* (CNYbn) (CNYm) 70 700 61.7 57.5 583.0 60 600

50 500 37.8 399.8 40 400 327.3 303.2 30 300 20.0 20 200

10 100

0 0 2013 2014 2015 2016 2013 2014 2015 2016 Source: Company, Daiwa Source: Company, Daiwa Note: secondary offerings mainly consist of rights issues, public issuances, and private Note: secondary offerings mainly consist of rights issues, public issuances, and private placements (including ancillary financing for restructuring) placements (including ancillary financing for restructuring)

CSC Financial Co Ltd (6066 HK): 18 July 2017

Robust deal pipeline and According to the China Securities Regulatory Commission (CSRC), as of 13 Jul 2017, strong sponsor CSC had 37 IPOs and 27 follow-on equity offerings pending review by regulatory representatives team authorities, ranking it 2nd and 1st in the industry, respectively. Similarly, as of 13 Jul 2017, should help CSC CSC was ranked 2nd in terms of the number of IPOs on the main board and 1st in terms of maintain its advantage in the number of sponsor representatives. investment banking CSC had 176 sponsor representatives as of 17 Jul 2017, ranking it no.1 among all China securities firms.

China Securities Sector: IPO pipeline Shanghai Stock Exchange Shenzhen Stock Exchange Shenzhen Stock Exchange (Mainboard) (SME board) (ChiNext board) Total No. of stocks No. of stocks obtained No. of stocks No. of stocks obtained No. of stocks No. of stocks obtained No. of stocks No. of stocks obtained Rank Name in pipeline listing approval in pipeline listing approval in pipeline listing approval in pipeline listing approval 1 CITICS 26 3 7 0 6 1 39 4 2 GFS 19 3 4 1 10 0 33 4 3 CSC 21 3 6 0 10 1 37 4 4 Guosen 10 1 3 0 9 1 22 2 5 CMS 10 1 13 0 8 2 31 3 6 Essense Securities 7 0 3 1 5 2 15 3 7 HTS 20 3 1 0 13 3 34 6 8 CICC 0 0 0 0 0 0 0 0 9 GTJA 7 1 0 0 2 0 9 1 10 Industrial Securities 5 0 1 0 5 0 11 0 11 Minsheng Securities 4 0 1 0 7 2 12 2 12 Sinolink 16 0 2 0 8 1 26 1 13 Huatai 9 0 0 0 8 2 17 2 14 Oriental Citi 5 1 3 0 1 1 9 2 15 Hualin 0 0 0 0 0 0 0 0 16 CGS 3 0 4 0 0 0 7 0 Source: CSRC, Daiwa Note: as of 13 Jul 2017; ranking as per no. of stocks in pipeline on mainboard

China Securities Sector: number of sponsor representatives China Securities Sector: secondary financing pipeline Number of sponsor % of total sponsor No. of deals in No. of deals Rank representatives representatives Rank pipeline obtained approval 1 CSC 176 5.3% 1 CSC 27 6 2 Guosen 168 5.0% 2 CITICS 26 10 3 GFS 165 4.9% 3 Guosen 19 3 4 CITICS 152 4.5% 4 GFS 17 7 5 Sinolink Securities 130 3.9% 5 Dongxing Securities 17 4 6 HTS 124 3.7% 6 GTJA 16 8 7 CMS 111 3.3% 7 Huatai 15 5 8 Huatai 109 3.3% 8 CMS 14 5 9 Shenwan Hongyuan 99 3.0% 9 HTS 13 6 10 GTJA 98 2.9% 10 CICC 13 3

Total 1,332 39.8%

Source: SAC, Daiwa Source: CSRC, Daiwa Note: as of 17 Jul 2017 Note: as of 13 Jul 2017

Debt offerings CSC is a lead CSC has full-service licences for underwriting fixed income products, including corporate underwriter in debt bonds, enterprise bonds, treasury bonds, financial bonds, government-backed agency securities offerings bonds, debt financing instruments of non-financial enterprises as well as asset-backed securities. The company believes its pricing, marketing and innovation capabilities are key to the success of its debt financing business and that it has a strong brand in debt securities offerings as a lead underwriter. According to WIND, in 2016, it was ranked 1st in terms of the aggregate amount of debt securities offerings.

CSC Financial Co Ltd (6066 HK): 18 July 2017

CSC: debt financing amount underwritten CSC: breakdown of debt underwriting amount (2016)

(CNYbn) 885.2 900 800 Others 700 591.9 19.8% 600 500 400 277.0 Financial bonds 300 202.3 13.2% 200 Corporate 100 bonds 0 Convertible 64.6% 2013 2014 2015 2016 bonds Corporate bonds Enterprise bonds 0.1% Enterprise Convertible bonds Financial bonds bonds 2.3% Others Total Source: Company, Daiwa Source: Company, Daiwa Note: Others include medium-term notes, short-term commercial papers, private placement Note: Others include medium-term notes, short-term commercial papers, private placement notes, government-backed agency bonds and exchangeable bonds notes, government-backed agency bonds and exchangeable bonds

CSC is also a leader in terms of asset securitisation product design. In 2015, it offered around CNY74bn of asset securitisation products, up 99.5% YoY and ranking it 3rd in the industry. From the resumption of the non-performing loan (NPL) securitisation business in June 2016 until 31 July 2016, the total offering size of the market amounted to CNY4.1bn, of which CSC had a market share of 29% by underwriting Agricultural Bank of China’s NPL-ABS, ranking it second overall during the period. In September 2016, it issued a credit risk mitigation warrant (CRMW), the first securities firm to issue a CRMW in the industry.

CSC also provides M&A and restructuring, National Equities Exchange and Quotations (NEEQ) quotation recommendations and other financial advisory services. According to Dealogic, CSC completed 5, 21 and 38 M&A and restructuring projects involving an aggregate transaction value of around USD0.9bn, USD19.7bn and USD35.2bn in 2013, 2014 and 2015, respectively. In 2016, the company acted as financial adviser in 18 significant asset restructuring projects, ranking it 5th overall in the industry. The acquisition transaction amount of the asset restructuring projects was CNY42.2bn, representing a 15.1% YoY growth.

Retail brokerage Stock market ADT has stabilised in 2017 CSC has a large CSC has a large brokerage client base. As of 30 June 2016, it had around 5.3m wealth brokerage client base management clients in China, including individual and corporate clients, of which about 61.0% were active clients, and around 33.4% of its clients had maintained accounts for over 10 years.

The company categorises its brokerage clients into regular clients with an account balance value of CNY0.5m or less, mid-to-high net worth clients with an account balance value above CNY0.5m but less than CNY5m, and private banking clients with an account balance value above CNY5m. According to WIND, CSC’s market share of total stocks and funds stood at 3.2% and 2.9% in 2015 and 2016, respectively.

CSC Financial Co Ltd (6066 HK): 18 July 2017

China Securities Sector: brokerage market share (%) 10

0 CITICS HTS GTJA GFS Huatai CGS CMS CSC 2010 2011 2012 2013 2014 2015 2016

Source: WIND, Daiwa

Declining brokerage commission rates The traditional brokerage business has seen declining commission rates over the past few years due to fierce price competition and online brokerage services. Given the A-share market is retail driven, the fact that most investors mostly look at price (commission rates) and most brokers are not able to offer differentiated services has exacerbated the situation. Also, the spike in ADT in 2015 made brokers more willing to cut commission rates in 2016 as they were able to be compensated by the large trading volume.

Furthermore, due to the rise in the Internet brokerage model, more and more brokers have been willing to cut commission rates to compete for market share. The mainstream commission rate for newly-opened retail brokerage accounts in tier-1 cities has fallen to 3bp for mass-market retail clients and 2.5bp for high-net-worth accounts in 2016.

The average brokerage As a result, the average gross brokerage commission in the sector declined from 6.7bp in gross commission in the 2014 to 5.4bp in 2015 and to 3.7bp in 2016. And we see limited downside given the break- sector declined from even point (assuming CNY600m ADT) for brokers is around 2.3-3.5bp (depending on the 6.7bp in 2014 to 4.8bp in business scale of the specific broker and its cost structure). 2016, on our estimates China Securities Sector: average brokerage commission rate (bp)

18 16.3 16 13.2 14 12 9.7 10 8.0 7.8 7.7 8 6.7 5.4 6 4.0 4 2 0 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Companies, Securities Association of China, Daiwa Note: refers to average stock and fund brokerage commission rate

Against the backdrop of commission rate pressure, we see 3 strategies for brokers: 1) embrace the Internet model – offering low commission rates through the Internet or mobile platforms in order to attract a critical mass of customers and trading volume. Then try to monetise through other businesses, such as margin lending, asset management and investment banking, 2) adopt a comprehensive service model – target high-end clients who require personal and comprehensive services and client-relationship maintenance. Foster client stickiness by offering high-quality and all-rounded services so that commission rates

CSC Financial Co Ltd (6066 HK): 18 July 2017

remain at a premium to the industry level, or 3) adopt a “middle ground” model, between 1) and 2). Under this model, the companies would not campaign on low commission rates to attract customers proactively, but would rather agree to offer low commission rates to retain existing customers.

We believe that among the 3 strategies, the third is the least ideal as the broker would likely face both market-share losses and a faster-than-sector rate of decline in commission rates. For brokers that have already adopted the first strategy a few years ago, such as Huatai and Sinolink, their current average commission rate is already much lower than the sector, which suggests limited further downside to commission rates. And for those that follow the second strategy, the comprehensive services offered may stop commission rates from declining due to a differentiated client base.

China Securities sector: 3 major retail brokerage business strategies Strategy Details Representative securities firms Offer low commission rates through the Internet or mobile platforms in order to gather a critical mass number of customers and trading volume. Then try to 1 Internet / low-cost Huatai, Sinolink monetise through other businesses, such as margin lending, asset management, and investment banking. Aim at high-end clients that require personal and comprehensive services and client-relationship maintenance. Foster client stickiness by offering high-quality 2 Comprehensive service CITIC, CICC and all-rounded services so that the commission rates can remain at a premium to the industry level The middle ground between strategy (1) and (2). Companies do not campaign 3 “Middle ground” on low commission rates to attract customers proactively, but agree to offer low Haitong, GF, Galaxy, CSC commission rates to retain existing customers.

Source: Daiwa estimates

CSC likely to suffer The average stock and fund brokerage commission for CSC declined from 6.3bp in 2014 higher-than-peers to 4.9bp in 2015, and remained at 4.9bp in 1H16. We estimate CSC’s gross commission commission rate rate break-even point is around 2.5bp. pressure Investment management CSC’s investment management business includes: 1) asset management services through collective asset management schemes (CAM), targeted asset investment schemes (TAM) and specialised asset management schemes (SAM), 2) fund management services by providing mutual fund products and segregated account management products through China Securities Funds (CSC subsidiary), and 3) private equity investment management through China Securities Capital (CSC subsidiary). CSC’s asset management arm is a late comer to the market and started operations in 2009 while its mutual fund and private equity businesses were set up in 2013 and 2009 respectively.

CSC’s aggregate AUM for its investment management business reached CNY811.4bn in 2016, according to our calculations. Revenue from the investment management business segment contributed 9.4% of total revenue in 1H16, up from 5.7% in 2015.

CSC: AUM of investment management business (CNYbn) 2013 2014 2015 2016 Asset management 148.1 299.7 551.7 811.4 CAM schemes 2.9 10.3 19.5 22.5 TAM schemes 144.1 287.8 527.9 780.8 SAM schemes 1.1 1.6 4.3 8.1 Fund management (China Securities Funds) n/a 4.0 86.1 212.4 Mutual fund n/a 1.3 5.7 9.5 Segregated account management n/a 2.7 80.4 202.9 Private equity management (China Securities Capital) 0.4 1.7 3.4 n/a Total 148.5 303.6 602.5 928.2

Source: Company, Daiwa Note: China Securities Funds was established in September 2013. As CSC holds 55% of China Securities Funds’ equity interest, we include 55% of China Securities Funds’ AUM in to the total AUM.

CSC Financial Co Ltd (6066 HK): 18 July 2017

CSC is transforming its CSC is in the process of transforming its targeted asset management scheme (TAM) targeted asset business from a channel-based business to an actively managed business. At end-1Q17, management scheme according to the Asset Management Association of China (AMAC), CSC’s AUM of actively (TAM) business from a managed products was CNY156.1bn, ranking 9th in the industry. channel-based business to an actively managed CSC: AUM of actively managed and non-actively managed products business 2013 2014 2015 2016 AUM % AUM % AUM % AUM % Actively managed products 25 16.9% 35.4 11.8% 120.1 21.8% 153.2 18.9% Non-actively managed products 123.1 83.1% 264.3 88.2% 431.6 78.2% 658.2 81.1% Total 148.1 100% 299.7 100% 551.7 100% 811.4 100%

Source: Company, Daiwa

China Securities Capital, which is 100%-owned by CSC, had an AUM of CNY3,967m as of end-1H16, of which CNY650m was its own funds. By end-2016, it had managed 12 funds, including 6 integrated funds, 2 industrial funds and 4 designated funds. The newly established funds amounted to CNY890m, up by 26.6%. As of end-2016, China Securities Capital completed over 70 investment projects, including 6 main board listings, 18 NEEQ quotations and 9 exit projects, with average investment yield of 360%.

CSC Financial Co Ltd (6066 HK): 18 July 2017

Capital intermediary businesses: margin finance and stock repo Sector lending balance steadily recovering The industry-wide The past few years have seen a rise of “capital intermediary businesses” of Chinese lending balance of the securities firms, particularly margin loan and stock repo (collateralised stock repurchase). capital intermediary Besides the stock market frenzy in 1H15, we think there are a few other reasons driving businesses is likely on the lending balance of these capital intermediary businesses, especially stock repo. the uptrend On one hand, for borrowers, it is much easier, quicker, and less complicated to borrow from securities firms rather than from banks. On the other hand, securities firms are making efforts to boost these businesses as they offer stable sources of income that are less correlated with the stock market.

According to WIND, the balance of margin financing and securities lending in the sector stood at around CNY939.2bn at end-2016. The market value of stocks for the collateralised stock repurchase business reached CNY1,284bn at end-2016.

China Securities Sector: balance of margin finance and securities lending (CNYbn) 2,500

2,000

1,500

1,000

500

Jul-13 Jul-14 Jul-15 Jul-16 Jul-17

Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Source: WIND, Daiwa

China Securities Sector: outstanding margin loan and securities China Securities Sector: margin loan and securities lending lending balance market share

(CNYbn) Huatai GFS 56.6 5.9% 60 55.1 54.1 52.9 CITICS 5.8% 55 51.2 51.0 6.0% 50 44.7 CGS 45 37.9 37.2 Others 5.6% 40 30.4 29.9 46.6% 35 Guotai Junan 30 5.5% 25 CMS 20 5.4%

HTS HTS

GFS

CSC

CGS

CMS Huatai

CITICS 4.8% Guosen Guosen Shenwan 4.0% GuotaiJunan China CSC Hongyuan

ChinaEverbright Everbright 3.2% 4.0% Shenwan Hongyuan 3.2% Source: Wind, Daiwa Source: Wind, Daiwa Note: as of end-2016 Note: as of end- 2016

CSC Financial Co Ltd (6066 HK): 18 July 2017

CSC’s lending balance poised to grow after its IPO but downside in pricing We expect CSC to see CSC started offering margin loans and securities lending services in November 2010, and larger market-share in July 2013 commenced its collateralised stock repurchase business. According to the gains in stock repo than company, CSC’s balance of domestic margin financing and securities lending totalled margin lending over CNY29.9bn at end-2016, representing a market share of 3.2% and ranked no.11 among all 2017-19E the China securities firms.

CSC’s balance of collateralised stock repurchases amounted to CNY35.6bn at end-2016 based on its disclosure. Its market value of stocks under the collateralised stock repurchase business ranked 9th in the industry.

CSC: balance and interest rates of margin finance and collateralised stock repurchase 2013 2014 2015 2016 Balance of margin finance(CNYbn) 14.9 32.1 35.4 29.9 Annualized interest rate of margin loans 8.5% 8.5% 8.5% n/a Annualized interest rate of securities lending 7.5% 7.5% 7.2% n/a Balance of collateralized stock repurchase (CNYbn) 1.9 8.6 21.4 35.6 Annualized interest rate of collateralised stock repurchase 8.4% 8.0% 7.3% n/a Total (CNYbn) 16.8 40.7 56.8 65.5

Source: Company, Daiwa Note: CSC didn’t disclose its interest rates on margin loans or stock repo for 2016.

We expect both businesses to gain market share after CSC’s equity fundraising of HKD7.1bn from its Hong Kong IPO in December 2016 and its A-share IPO, which is currently under review by the China Securities Regulatory Commission (CSRC, we expect around CNY3bn to be raised). Given the company’s strength in investment banking, we expect it to see larger market-share gains in stock repo than margin lending over 2017-19.

However, CSC could see pricing weakness in the meantime. Note that CSC’s current lending yield on both margin lending and stock repo are higher than the sector average. As a result of its capital constraints, it is in a disadvantageous position to compete on volume, hence its pricing is higher.

We understand that CSC currently charges a slightly higher interest rate for margin lending than most of its competitors. Its stock repo yield is 8.0% currently, which is much higher than 6.5% for the industry. After its equity raising, such a pricing advantage is likely to diminish as its margin share and lending balances go up.

CSC Financial Co Ltd (6066 HK): 18 July 2017

Cost discipline leading to high ROE Cost-to-income ratio Despite its smaller size relative to other major H-share listed securities firms, CSC was able to deliver the lowest cost-to-income ratios (CIR) among peers over 2013-16 (see chart below for details). Even excluding finance costs, its CIR was still one of the lowest among major peers.

China Securities Sector: cost-to-income ratio China Securities Sector: cost-to-income ratio (excl. financing cost)

75% 60% 70% 55% 65% 50% 45% 60% 40% 55% 35% 50% 30% 45% 25% 40% 20% CITICS HTS GTJA Huatai GFS CGS CMS CSC CITICS HTS GTJA Huatai GFS CGS CMS CSC

2014 2015 2016 2014 2015 2016

Source: Companies, Daiwa Source: Companies, Daiwa

Proportionally lower Disciplined personnel expenses. Besides finance costs, we attribute such a low CIR to staff expenses and other CSC’s disciplined management of personnel expenses. From 2013 to 2016, its staff costs operating expenses as a percentage of operating revenue remained at the low-end of its major peers’.

Having said that, we believe the long-term competitiveness of a securities firm depends on its senior management and key business staff. Prolonged under-incentivising may adversely affect the morale and stability of the workforce. As of 30 June 2016, around 89.2% of the company’s mid-level management had been promoted internally. As CSC aims to become a large best-in-class full-service investment bank, we believe rapid growth of its staff costs is necessary and is likely to continue in the future, albeit at a more moderate pace.

For the other components that led to its lower-than-peer “other operating expenses” ratio, such as marketing and research, we see these as the company’s investment in its brand value in a highly competitive and rapidly-evolving market. Under-investing in these areas could expose its brand value, product competitiveness and ultimately client recognition to adverse risks.

China Securities Sector: staff costs as % of operating revenue China Securities Sector: "other operating expenses" as % of operating revenue 35% 30%

30% 20% 25%

20% 10% 15%

10% 0% 2013 2014 2015 2016 2013 2014 2015 2016 CITICS HTS Huatai CITICS HTS Huatai GFS CGS China Securities GFS CGS China Securities Source: Companies, Daiwa Source: Companies, Daiwa

CSC Financial Co Ltd (6066 HK): 18 July 2017

Branch network expansion may lead to higher operating expenses. We understand that CSC plans to open about 60 new branches over the next 5 years, which is likely to lead to higher rental expenses. Its “other operating expenses” as a percentage of operating revenue is at the low end among peers.

CSC: operating cost breakdown (CNYm) 2013 2014 2015 2016 Commission expense 552.5 860.9 2,237.5 1,388.9 Finance costs 1,077.5 1,960.5 3,218.6 2,848.8 Personnel expenses 1,723.5 2,523.2 4,743.0 4,282.1 Depreciation 123.7 144.7 169.5 205.5 Business tax 360.7 526.9 1,144.4 347.3 Other operating expenses 888.1 1,050.9 1,383.1 1,453.1 Impairment losses 175.8 (158.8) 154.9 1.7 Total operating expenses 4,901.8 6,908.2 13,051.0 10,524.0 cost-to-income 66.9% 60.3% 53.2% 59.8% cost-to-income (excl. finance costs) 52.2% 43.2% 40.1% 43.6%

Source: Company, Daiwa

High ROE Since 2012, CSC has posted sector-leading ROEs among its major peers. Excluding 2015, when the equity market saw extremely high turnover and the stock market index rose by almost 20%, for 2014, 2015, and 2016, CSC saw an average of 27% ROE, compared with a 12% average for its H-share listed peers.

China Securities Sector: ROEs (%) 45 40 35 30 25 20 15 10 5 0 CITICS HTS GTJA GFS Huatai CGS CMS CSC 2014 2015 2016

Source: Companies, Daiwa

According to WIND, CSC’s net capital was ranked 7th at end-2016 among the H-share- listed China securities firms and its net profit was ranked 6th in 2016.

China Securities Sector: major business metrics of H-share China securities firms Operating Net profit Total asset Net asset Net capital ROE(%) (CNYbn) income 6030 HK CITICS 38.00 10.98 597.44 145.79 93.50 7.36 6837 HK HTS 28.01 8.93 560.87 121.96 78.66 7.39 6886 HK Huatai 16.92 6.52 401.45 85.66 45.12 7.59 1776 HK GFS 20.71 8.41 359.80 81.35 66.82 10.29 6099 HK CMS 11.70 5.42 243.06 59.92 45.52 9.99 3958 HK Oriental Securities 6.88 2.43 212.41 40.94 33.89 6.13 6178 HK Everbright Securities 9.16 3.08 177.64 48.64 39.75 6.87 6881 HK CGS 13.24 5.19 245.88 58.35 53.11 8.97 3908 HK CICC 7.32 1.84 101.95 18.50 n/a 10.43 6066 HK CSC 13.26 5.31 181.70 41.26 36.20 14.78

Source: WIND, Companies, Daiwa Note: for 2016

High ROE because of We attribute the variances in ROEs between CSC and its peers to: 1) the difference in larger revenue business mix, and 2) differences in operational efficiency (ie, CIR). Please see previous contribution from section for our discussion on CSC’s CIR. investment banking business

CSC Financial Co Ltd (6066 HK): 18 July 2017

CSC’s revenue mix is much more skewed towards investment banking than its peers. We forecast its investment banking business will contribute around 30% of its revenue for 2017 (peer average: 14%) while asset management fees are around 11% (peer average: 13%).

China Securities Sector: business mix (2016) 100% 90% 16% 13% 7% 80% 16% 20% 8% 15% 23% 10% 8% 11% 70% 11% 11% 18% 13% 6% 14% 60% 7% 15% 14% 30% 50% 15% 24% 14% 14% 40% 13% 29% 33% 30% 15% 23% 14% 23%

20% 34% 37% 26% 26% 10% 25% 21% 24% 19% 0% CITICS HTS GTJA Huatai GFS CGS CMS CSC Lending Traditional brokerage Investment banking Asset management Trading Others

Source: Daiwa estimates

CSC: % operating profit / segment total assets on different business lines 0 100 200 300 400 500 600 700

Investment banking (%)

Wealth management (Retail)

Trading and institutional client service

investment management

Others

2014 2015 2016

Source: Company, Daiwa Note: % operating profit / segment total assets is calculated on average segment total assets; we estimate segment total assets in 2013 equals to 90% of these assets in 2014

CSC: segment margins CSC: segment revenue contribution 80% 100% 70% 80% 60% 50% 60% 40% 40% 30%

20% 20% 10% 0% 0% 2013 2014 2015 2016 2013 2014 2015 2016 Investment banking Wealth management Investment banking Wealth management Trading and institutional client services Investment management Trading and institutional client services Investment management Others Source: Company, Daiwa Source: Company, Daiwa

Compared with the brokerage and lending businesses (which in aggregate comprises 40- 45% of total revenue), the investment banking and asset management businesses are less capital-intensive and enable the securities firms to generate revenue using less of their own capital under China’s current capital regulations.

Going forward, CSC’s ROE is likely to be lower compared with that before its H-share IPO given its newly raised equity and the adverse stock market environment in China in 2017. However, we still forecast its ROE to be at the high-end among the major H-share listed peers.

CSC Financial Co Ltd (6066 HK): 18 July 2017

Financial forecasts

Sector-level assumptions We assume a neutral We summarise our sector-level assumptions for key metrics for the China Securities Sector capital market in China in the following table. for 2018-19E

China Securities Sector: assumptions for key metrics 2014 2015 2016 2017E 2018E 2019E Average daily turnover of A-share market(ADT, CNYbn) 322 1,103 567 500 580 580 Margin finance balance (market, CNYbn) 1,026 1,174 939 962 1,062 1,192 Stock repo balance (market, CNYbn) 365 846 799 962 1,118 1,192 Stock market annual return (%) 52.9% 9.4% -12.3% 2.0% 0.0% 0.0% Bond market annual return (%) 10.3% 8.2% 1.8% 2.0% 4.0% 4.0% Market annual equity financing (CNYbn) 549 928 1,359 1,631 2,446 3,669 Market annual debt financing (CNYbn) 7,887 10,822 13,410 14,751 16,226 17,849

Source: Daiwa estimates

For market ADT, with turnover velocity now back to its past-5-year average level after the turmoil of 2015, at around 270% on total market cap or 340% on free float on an annual basis, we do not see further downside for market ADT and expect a mild rebound as we expect: 1) the past-5-year average velocity to rise moderately in 2017-19E given that margin trading, which has a much higher velocity than traditional trading, has started to make a significant contribution to total trading only since late-2014, and 2) overall market cap to gradually increase given ongoing IPOs and equity financing in the market.

For margin finance balances in the whole A-share market, we assume a 1.8% penetration rate (defined as the margin lending balance as a percentage of total market cap) at end-2017, 1.9% at end-2018 and 2.0% at end-2019. We believe 2.0% is the long- term sustainable penetration rate for margin loans.

For stock repo balances in the whole A-share market, we assume a 1.8% penetration rate (defined as the stock repo balance as a percentage of total market cap) at end-2017, and 2.0% at both end-2018 and end-2019.

For stock market’s annual returns, we mark to market these returns for 2017, and assume flat returns in 2018 and 2019 to avoid basing our forecasts and views on stock- market movements.

For bond market annual returns, we mark to market for 2017, and assume a 4% market return in 2018 and 2019, which is the general level of the blended government bond and corporate bond yield in China.

For the market’s annual equity financing amount, we expect the high growth in 2017 to continue into 2018 and 2019 given the large IPO pipeline and potential acceleration of secondary equity offerings.

For the market’s annual bond financing amount, we assume a 10% annual increase for 2017-19 given the high base in 2016.

Company-level financial forecasts We assume market- Our company-level forecasts for CSC are summarised in the following tables. share gains for investment banking and For investment banking revenue, we forecast market-share gains for both CSC’s equity expect flat market share and debt underwriting businesses, despite some fee rate weaknesses. We forecast its for its brokerage investment banking revenue to rise at a 21% CAGR over 2017-19E despite the high base business in 2016.

CSC Financial Co Ltd (6066 HK): 18 July 2017

For the brokerage business, we expect flat market share and a similar commission rate as the sector average in 2017-19E. Our brokerage revenue forecast implies a 16.1% decline over 2017-19 due mainly to the commission rate weakness.

For asset management fees, we forecast a 15.9% CAGR for CSC over 2016-19E as it gradually increases the proportion of active-managed AUM and the whole sector sees decent growth.

For investment income, we expect a mild rebound in 2017 and 2018. CSC saw a low base in 2016. So far in 2017, the Shanghai Composite Index is up 3.7% YTD as at 7 July 2017.

Net interest income will rise at an 11% CAGR in 2017-19 on our forecasts, due to mild market expansion in margin lending. We forecast CSC to have market share in margin lending of 4.6% in 2017, 4.7% in 2018, and 4.8% in 2019, which corresponds to around CNY44bn, CNY50bn, and CNY57bn in margin loan balances. Meanwhile, we forecast its market share in stock repo to be 5% by the end of 2017, 5.5% at end-2018, and 6.0% at end-2019, which corresponds to around CNY37bn, CNY43bn, and CNY50bn in stock repo balances.

Expenses. We look for CSC’s cost-to-income ratio (excluding finance costs) to range between 41% and 44% over 2017-19. We understand most components of its expenses are positively correlated to revenue from its major business lines.

Net profit. We forecast +5%, +15%, and +5% YoY net profit growth for CSC over 2017- 19E, respectively.

CSC Financial Co Ltd (6066 HK): 18 July 2017

Valuation and risks Fair value = PBR of 1.3x Our 1.3x target PBR is derived through SOTP methodology (under a Gordon Growth Model), including a target PBR of 1.4x on a 2017E book value for its ex-support fund underlying business. Our target PBR implies a 12-month target price of HKD9.5. The current sector average PBR, on a market-cap-weighted basis, is 1.1x for the H-share China securities firms, based on Daiwa forecasts for stocks under our coverage.

Valuation methodology Similar to other major Chinese securities firms, CSC injected its own capital of CNY4.2bn into the national stock market “support fund”, a fund set up by the China Securities and Finance Corporation in mid-2015 to prop up the stock market. The “support fund” is classified as available for sale (AFS) on CSC’s balance sheet.

We use SOTP methodology to value the China securities firms, wherein the “support fund” is separately valued. We understand that the volatility and transparency related to the fund has been a concern for global investors eyeing China brokerage stocks. We believe using an SOTP methodology can help investors distinguish between volatility from such a pure cyclical item on companies’ balance sheets and the fundamental businesses. For the rest of the businesses, we still use a Gordon Growth Model, based on our sustainable ROA estimates and leverage, and hence sustainable ROEs.

Gordon Growth model for the underlying business We use SOTP For the ex-support-fund underlying business, we use a 9.75% cost of equity, a terminal methodology to value growth rate of 8% (these assumptions are homogeneous across H-share listed China CSC’s underlying securities firms in our coverage) and a sustainable ROE of 10.4%, reflecting an ROA of business and the 3.0% and a leverage of 3.5x. “support-fund” contribution separately ROE. Our ROE of 10.4% is based on an ROA of 3.0% and leverage of 3.5x. The ROA level reflects the cyclical nature of the securities business in China. The leverage is at the low- end, reflecting capital under-utilisation when the equity market in China is depressed.

Cost of equity (COE). We derive our COE assumptions from the capital asset pricing model (risk-free rate + beta*risk premium). Our COE assumptions are based on a uniform risk-free rate of 3% and a risk premium of 5%. We use a beta of 1.35 for CSC, given its relatively small size among all the H-share-listed Chinese securities firms.

Terminal growth. We forecast long-term annual business growth of 8% for CSC, which is applied across the H-share securities firms under our coverage.

CSC: sensitivity analysis on terminal growth and COE Terminal growth Target Price 7.50% 7.75% 8.00% 8.25% 8.50% 9.35% 10.76 11.36 12.19 13.38 15.28 9.55% 9.76 10.15 10.67 11.39 12.45 COE 9.75% 8.93 9.18 9.50 9.93 10.53 9.95% 8.24 8.39 8.57 8.82 9.14 10.15% 7.65 7.72 7.82 7.93 8.09

Source: Company, Daiwa forecasts

CSC Financial Co Ltd (6066 HK): 18 July 2017

The support fund We marked to market the The “support fund” is classified as AFS securities on the books of all securities firms under support fund to our coverage. Moreover, the China Securities and Finance Corporation (CSFC) provides a determine its intrinsic valuation report on a quarterly basis to all brokers that contribute funds. The fair-value value changes of the “support fund” are reflected on the balance sheets (net assets) of the securities firms, but do not affect their P&Ls (they go through Other Comprehensive Income).

For the “support fund”, we estimate the cost to CSC for the two batches of contributions to the CSFC based on the original value, then marked to market according to CSFC’s investment performance to reach a per-share value of the contribution to the “support fund”.

Relative valuations In the table below, we compare the key valuation metrics for major listed Chinese securities firms on the H-share and A-share stock markets. Also, we provide the valuations of major securities firms in Asia and investment banks globally as a reference. Valuation comparison Company Ticker Rating Market cap Current PBR PER ROE (%) ROA (%) Leverage (x) (USDbn) price FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19

CHINA - H SHARE

CITICS 6030 HK Outperform 29 16.18 1.1 1.0 1.0 13.0 11.0 10.3 8.9 9.9 9.8 2.1 2.2 2.0 4.3 4.6 4.8 HTS 6837 HK Hold 23 12.74 1.1 1.0 0.9 12.5 10.2 9.6 8.9 10.2 10.2 1.8 2.1 2.0 5.0 4.9 5.1 GTJA 2611 HK Buy 26 16.64 1.0 1.0 0.9 11.5 9.9 8.5 9.6 10.1 11.0 2.5 2.7 2.9 3.9 3.7 3.8 GFS 1776 HK Hold 18 15.98 1.3 1.2 1.1 12.3 10.5 9.0 10.6 11.5 12.5 2.4 2.7 3.0 4.4 4.3 4.2 Huatai 6886 HK Buy 18 15.48 1.1 1.0 0.9 11.8 10.1 8.5 9.4 11.0 11.4 1.9 2.3 2.4 4.9 4.8 4.8 CGS 6881 HK Hold 14 6.99 0.9 0.9 0.8 10.9 9.2 8.8 8.9 9.8 9.6 2.1 2.3 2.2 4.2 4.3 4.4 CMS 6099 HK Hold 16 12.24 1.1 1.0 1.0 12.2 10.1 9.4 9.4 10.6 10.6 2.4 2.8 2.8 3.9 3.8 3.8 CSC 6066 HK Buy 7 7.09 0.9 0.8 0.7 8.0 6.9 6.6 12.6 12.8 11.9 2.9 3.0 2.9 4.4 4.3 4.1 Orient Securities 3958 HK NR 12 7.65 1.0 0.9 0.8 14.1 11.2 9.8 7.1 8.8 10.5 1.5 1.7 1.9 4.7 5.3 5.6 Everbright Securities 6178 HK NR 10 10.74 0.9 0.8 0.8 12.8 10.6 9.8 7.0 8.5 8.7 n/a n/a n/a n/a n/a n/a CICC 3908 HK NR 6 12.50 1.2 1.1 1.0 11.3 10.5 8.4 11.8 11.1 11.7 2.2 2.0 2.0 5.4 5.6 5.8 Haitong Intl 665 HK NR 3 4.51 1.0 0.9 0.9 9.7 8.4 7.5 10.2 11.1 12.2 1.8 1.9 1.9 5.8 6.0 6.4 Guotai Junan Intl 1788 HK NR 2 2.49 1.8 1.6 1.5 14.1 12.7 10.7 13.9 14.9 15.9 2.7 2.7 2.4 5.1 5.5 6.7 Sector 180 1.1 1.0 0.9 12.1 10.2 9.2 9.3 10.3 10.6 2.0 2.2 2.3 4.2 4.2 4.3 CHINA - A SHARE CITICS 600030 CH NR 29 17.00 1.4 1.3 1.2 16.7 14.6 12.2 8.1 9.0 10.2 2.0 2.3 2.5 4.0 4.0 4.0 HTS 600837 CH NR 23 14.89 1.4 1.3 1.2 18.1 15.5 13.4 8.4 9.2 9.6 1.7 1.9 2.1 4.9 4.9 4.7 GTJA 601211 CH NR 26 20.75 1.6 1.5 1.4 15.8 13.8 11.4 10.7 11.7 n/a n/a n/a n/a n/a n/a n/a GFS 000776 CH NR 18 17.12 1.5 1.4 1.3 14.5 12.7 10.9 10.7 11.3 12.0 2.5 2.7 3.0 4.2 4.2 4.1 Huatai 601688 CH NR 18 18.58 1.5 1.4 1.3 18.6 16.1 14.4 8.2 8.8 9.5 1.8 1.9 2.0 4.5 4.5 4.8 CGS 601881 CH NR 14 11.39 1.7 1.6 1.2 21.1 19.0 13.9 8.5 8.8 9.1 2.2 2.2 2.4 3.9 4.0 3.9 CMS 600999 CH NR 16 17.38 1.8 1.6 1.4 18.9 16.1 13.7 9.9 10.9 11.4 2.5 2.8 3.3 3.9 3.9 3.5 Guosen 002736 CH NR 16 13.37 2.0 1.8 2.0 19.2 16.2 14.6 11.1 11.5 11.9 2.5 2.6 2.7 4.5 4.5 4.5 Shenwan Hongyuan 000166 CH NR 17 5.62 1.6 1.4 1.1 16.9 15.0 13.4 10.2 10.0 8.6 2.2 2.3 2.3 4.6 4.4 3.8 Everbright Securities 601788 CH NR 10 14.94 1.3 1.2 1.0 19.4 18.0 15.7 6.8 7.1 6.6 2.0 2.1 1.9 3.4 3.4 3.4 Industrial Securities 601377 CH NR 8 7.62 1.5 1.3 1.1 19.4 16.6 15.6 7.2 7.9 7.9 1.7 1.7 1.7 4.2 4.6 4.5 Changjiang Securities 000783 CH NR 8 9.30 1.8 1.6 1.3 20.4 17.9 14.3 9.3 9.9 9.9 2.4 2.6 2.8 3.9 3.8 3.6 Sinolink Securities 600109 CH NR 5 10.96 1.7 1.6 1.3 22.3 19.0 13.7 8.1 9.0 10.6 3.0 3.4 3.9 2.7 2.6 2.7 Sector 208 1.6 1.4 1.3 17.9 15.6 13.2 9.2 9.9 8.8 1.9 2.0 2.2 3.7 3.7 3.6 REGIONAL

Nomura Holdings 8604 JP Outperform 23 667 0.8 0.8 0.8 10.6 10.0 8.6 8.4 8.4 9.7 n/a n/a n/a n/a n/a n/a Daiwa Securities 8601 JP NR 10 665 0.8 0.8 0.8 10.9 10.4 10.3 8.0 8.1 7.7 0.5 0.5 0.5 16.0 15.2 15.4 Yuanta Financial 2885 TT NR 5 13.10 0.8 0.7 0.7 10.9 9.8 9.0 7.1 7.7 8.1 0.6 0.6 0.5 11.7 13.1 16.4 Samsung Securities 016360 KS NR 3 40,850 0.8 0.8 0.7 14.8 13.6 12.2 5.8 5.8 6.2 0.7 0.7 0.7 8.4 8.2 8.5 Daewoo Securities 006800 KS NR 7 11,400 0.9 0.9 0.9 16.3 14.4 12.9 6.0 6.5 7.1 0.7 0.7 0.7 9.0 9.5 9.9 Sector 48 0.8 0.8 0.8 11.8 10.9 9.9 7.6 7.8 8.5 0.3 0.3 0.3 6.5 6.5 7.0 GLOBAL

Goldman Sachs GS US Hold 94 228.60 1.2 1.1 1.0 12.5 11.2 10.0 10.0 10.4 10.8 0.9 0.9 0.9 11.6 11.4 11.7 UBS UBSG VX NR 67 16.80 1.2 1.1 1.1 12.5 11.7 10.6 8.0 9.7 10.6 0.4 0.6 0.6 19.0 17.0 17.1 Morgan Stanley MS US Hold 84 45.20 1.2 1.1 1.0 13.4 11.6 10.7 9.0 9.8 10.5 0.7 0.8 0.9 12.3 11.8 11.8 Credit Suisse Group CSGN VX NR 39 14.52 0.8 0.8 0.7 18.9 12.3 9.4 4.4 7.0 8.5 0.2 0.4 0.5 21.6 19.9 18.7 Lazard LAZ US NR 6 46.25 4.5 4.0 3.2 13.5 12.6 11.9 38.0 39.8 n/a 9.4 10.1 n/a 4.1 3.9 n/a Sector 289 1.2 1.1 1.0 13.6 11.6 10.3 9.1 10.2 10.1 0.8 0.9 0.8 14.7 13.8 13.7

Source: Bloomberg, Daiwa forecasts Note: Daiwa forecasts for CITICS, HTS, GTJA, GFS, Huatai, CGS, CMS and CSC H-share; Bloomberg consensus for other stocks. Prices as of 17 Jul 2017.

CSC Financial Co Ltd (6066 HK): 18 July 2017

Risks As a securities firm, CSC bears inherent risks associated with the securities markets, including market volatility, changes in investment sentiment, fluctuations in trading volume and liquidity changes. We have identified 2 key risks related to market risk, which we believe could adversely affect the company’s financial performance.

Risk 1: Greater-than-peers commission rate decline due to the rise of Internet broking The traditional brokerage business has seen declining commission rates over the past few years due to fierce price competition and online brokerage services. Given the A-share market is a retail-driven market, the fact that investors mostly look at price (commission rates) and most brokers are not able to offer differentiated services has exacerbated the situation. And in 2015, the spike in ADT meant brokers were more willing to cut commission rates as they were able to be compensated by the large trading volume.

Furthermore, due to the rise in the Internet brokerage model, more and more brokers are willing to cut commission rates to compete for market share. The general mainstream commission rate for newly-opened retail brokerage accounts in tier-1 cities has already fallen to 3bp for mass-market retail clients, and 2.5bp for high-net-worth accounts.

As a result, average brokerage gross commission rates in the sector declined from 6.7bp in 2014 to 5.4bp in 2015, and then to 4.8bp in 2016, on our estimates. And we see further downside given the break-even point (assuming CNY600m ADT) is as low as around 2.3- 3.5bp (depending on the business scale of the specific broker and its cost structure), on our estimates.

China Securities Sector: average brokerage commission rate (bp) 18 16.3 16 13.2 14

12 9.7 10 8.0 7.8 7.7 8 6.7 5.4 6 4.0 4 2 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Securities Association of China, Daiwa estimates Note: refers to gross commission rate

The average stock and fund brokerage commission for CSC declined from 6.3bp in 2014 to 4.9bp in 2015, and then remained at 4.9bp in 1H16. For CSC, we estimate its gross commission rate break-even point is around 2.5bp.

Risk 2: Over-controlled cost-to-income ratio While we like CSC’s low CIR, there is a risk that it affects the long-term competitiveness of the company due to the loss of talent and important clients. We believe the long-term competitiveness of a securities firm depends on its senior management and key business staff. Prolonged under-incentivising of staff may adversely affect the morale and stability of the workforce. As of 30 June, 2016, around 89.2% of the company’s mid-level management had been promoted internally. As CSC aims to become a large best-in-class full-service investment bank, we believe fast growth of its staff costs is necessary and will likely continue in the future, but at a more moderate pace.

CSC Financial Co Ltd (6066 HK): 18 July 2017

And for other components that lead to its lower-than-peer “other operating expenses” ratio, such as marketing and research, we see them as the company’s investment in its brand- value in this highly competitive and rapidly-evolving market. Under-investing in these areas could expose its brand value, product competitiveness, and ultimately client recognition to risks.

China Securities Sector: staff costs as % of operating revenue China Securities Sector: "other operating expenses" as % of operating revenue 35% 30%

30% 20% 25%

20% 10% 15%

10% 0% 2013 2014 2015 2016 2013 2014 2015 2016 CITICS HTS Huatai CITICS HTS Huatai GFS CGS China Securities GFS CGS China Securities Source: Companies, Daiwa Source: Companies, Daiwa

CSC Financial Co Ltd (6066 HK): 18 July 2017

Appendix Company background and industry position CSC is one of only 3 CSC was established on 2 November 2005 and has become a leading large full-service China securities firms investment bank. At the end of 2015, CSC was the 10th largest securities firm in China in rated “Class A Grade terms of operating revenue and the 11th largest in terms of total assets. The company had AA” by the CSRC for 7 225 branches and 20 futures branches in 30 provinces, and 8,633 employees at end- straight years from 2010 1H16. CSC is one of the only 3 China securities firms that were rated “Class A Grade AA” to 2016 by the CSRC for 7 consecutive years from 2010 to 2016, the highest rating granted by the CSRC.

The company’s principal business segments include investment banking, wealth management, trading and institutional client services, as well as investment management. Its customer base consists of 5.3m wealth management clients, of which around 151,600 were mid-to-high-end clients, 13,400 corporate clients and around 9,000 institutional clients at end-1H16.

CSC provides comprehensive investment banking services and has a premier investment banking client base which covers industry-leading large corporations and SMEs. Over the past 3 years, it has won broad industry recognition:

 “Best Comprehensive Securities and Investment Bank in China” in 2014 and 2015 by Securities Times.

 Ranked 2nd in the category of “Best Investment Bank in China” by New Fortune magazine for 3 consecutive years from 2013 to 2015.

 “Best DCM House” in 2016 by Finance Asia.

 According to the Securities Association of China (SAC), CSC was ranked 2nd in the industry in 2015 in terms of its net revenue from the investment banking business.

CSC provides a wide variety of wealth management businesses, primarily consisting of brokerage and wealth management, margin financing and securities lending and repurchase businesses. In 2015 and 1H16, its brokerage business commanded 3.8% and 3.9% shares of the total trading volume in China. In terms of margin financing and stock lending balance, CSC took a market share of 3.1% and was ranked 10th among its peers at end-1H16. Its collateralised stock repurchase business had a market share of 2.3% as of end-1H16.

The company served over 9,000 institutional clients as of end-1H16, including mutual funds and private equity funds, QFII, RQFII, commercial banks, insurance companies, pension funds, sovereign funds, hedge funds, finance companies, investment companies, listed companies and asset management companies. It provides these institutional clients with equity and fixed income sales and trading, investment research, prime brokerage and QFII business services. It also provides agency sale services through its online and offline brokerage network. It was ranked 4th in terms of net income from the agency sales of financial products in 2015, according to the SAC.

The company’s investment management services include asset management through collective asset management (CAM), targeted asset management (TAM) and specialised asset management (SAM) schemes, fund management services through mutual fund products and segregated account management products by China Securities Funds, and private equity investment management through China Securities Capital.

CSC Financial Co Ltd (6066 HK): 18 July 2017

CSC: segment revenue mix (2015) CSC: segment revenue mix (2016)

Investment Others Investment Investment Others management 2.0% banking management 3.0% 5.7% 13.9% 8.9%

Trading and Investment institutional Trading and institutional banking client services 26.6% 22.2% client services 20.3%

Wealth Wealth management management 56.2% 41.1%

Source: Company, Daiwa Source: Company, Daiwa Note: as of 2015 Note: as of 2016

China Securities Sector: ranking of major China securities firms (CNYm) Operating income Rank Net profit Rank Total asset Rank Net asset Rank Net capital Rank ROE(%) Rank CITICS 38,002 1 10,981 2 597,439 1 145,789 1 93,504 1 7.36 17 HTS 28,012 2 8,931 3 560,866 2 121,958 2 78,664 3 7.39 16 GTJA 25,765 3 11,353 1 411,749 3 110,752 3 80,338 2 10.08 8 GFS 20,712 4 8,409 4 359,801 5 81,353 5 66,819 4 10.29 7 Huatai 16,917 5 6,519 5 401,450 4 85,660 4 45,122 8 7.59 15 Shenwan Hongyuan 14,815 6 5,504 6 263,148 6 52,829 8 n/a n/a 10.62 4 CSC 13,259 7 5,313 8 181,695 11 41,263 11 36,198 10 14.78 2 CGS 13,240 8 5,185 9 245,881 7 58,354 7 53,109 5 8.97 12 Guosen 12,749 9 4,556 10 193,029 10 48,445 10 46,368 6 9.27 10 CMS 11,695 10 5,417 7 243,058 8 59,915 6 45,524 7 9.99 9 Everbright Securities 9,165 11 3,077 11 177,637 12 48,637 9 39,747 9 6.87 19 Zhongtai Securities 8,337 12 2,533 14 123,026 16 32,800 15 22,695 14 7.80 14 Founder Securities 7,760 13 2,582 12 152,339 13 36,197 13 21,859 15 7.30 18 Essence Securities 7,674 14 2,552 13 122,588 17 21,581 18 16,739 17 11.83 3 Industrial Securities 7,589 15 2,344 16 136,535 14 34,298 14 30,797 12 8.15 13 Ping An Securities 7,356 16 2,215 18 90,950 20 25,648 17 20,474 16 9.07 11 CICC 7,322 17 1,840 19 101,948 19 18,497 19 14,164 18 10.43 5 Orient Securities 6,877 18 2,427 15 212,411 9 40,938 12 33,890 11 6.13 20 Changjiang Securities 5,857 19 2,217 17 107,095 18 25,742 16 24,165 13 10.43 5 Huarong Securities 5,320 20 1,577 20 135,750 15 10,800 20 13,993 19 15.52 1

Source: Wind, SAC, Companies and Daiwa Note: (1) On China GAAP; (2) for 2016 or as of end-2016; (3) All in terms of group level (including minority stakes; net profits before minority interests)

History and restructuring China Securities Finance In July 2005, the State Council approved in principle the restructuring of Huaxia Securities. Limited, the fore-runner To acquire all securities business and related assets originally owned by Huaxia Securities, of CSC, acquired all the China Securities Finance Limited, the predecessor of CSC, was jointly established by securities business and CITIC Securities and China Jianyin on 2 November 2005 with registered capital of related assets originally CNY2.7bn, in which CITIC Securities and China Jianyin contributed CNY1.62bn and owned by Huaxia CNY1.08bn in cash, or 60% and 40%, respectively, of the equity interest. Securities According to the asset acquisition agreement dated 12 December 2005 and its supplemental agreements and other relevant agreements entered into between China Securities Finance Limited and Huaxia Securities, CSC primarily acquired Huaxia Securities’ normal brokerage business, investment banking business and fund agency business. China Securities Finance Limited would not assume any responsibility for any debt or legal liabilities of Huaxia Securities, except for the accrued salaries and benefits payable to certain employees of the acquired business.

Converted into a joint- Huaxia Securities filed for bankruptcy in 2008 and was officially declared bankrupt in stock company and January 2009. The above acquisition has been duly completed. Currently, the liquidation of renamed China Huaxia Securities is still ongoing. Securities Finance Co. Ltd in September 2011 On 28 September 2011, China Securities Finance Limited was converted into a joint-stock limited company and renamed China Securities Finance Co., Ltd. Upon the completion of the conversion, its registered capital was increased to CNY6.1bn.

CSC Financial Co Ltd (6066 HK): 18 July 2017

CSC: milestones Date Events Nov 2005 China Securities Finance Limited, the predecessor of CSC, was established and acquired all the securities business and related assets originally owned by Huaxia Securities. Jul 2007 China Securities Futures became its wholly-owned subsidiary Sep 2008 Qualified as an inquirer for IPO and as a participant in national interbank funding Apr 2009 Qualified for the provision of intermediary introduction business to futures companies Jun 2009 Qualified to carry out asset management business Jul 2009 China Securities Capital was established and commenced direct equity investment business Jul 2010 Was rated "Class A Grade AA" for the first time by the CSRC (1 of only 3 China securities firms to have maintained the same rating for 7 consecutive years until now) Nov 2010 Qualified for and commenced the margin financing and securities lending business upon the approval of the CSRC Sep 2011 Converted into a joint stock company and renamed China Securities Finance Co. Ltd. Jun and Nov 2012 Qualified for the piloting of the provision of agency services for registration of pledge of securities by the China Securities Depository and Clearing Corporation (CSDC) Shanghai branch and CSDC Shenzhen branch, respectively Jul 2012 China Securities International was established in Hong Kong Aug 2012 Became one of the first 11 pilot securities firms to provide a refinancing business Sep 2012 Qualified to carry out the contractual repurchase transaction business Nov 2012 Qualified to act as lead underwriter for debt financing instruments of non-financial institutions Dec 2012 Qualified to carry out an OTC trading business and agency sales of financial products Sep 2013 China Securities Funds was established and commenced a fund management business; became one of the first 10 securities firms to be rated Grade A, the highest rating in the industry, after the implementation of the Implementation Plan for Bifurcated Review of M&A and Restructuring by the CSRC Oct 2013 Qualified to carry out agency services business for precious metal spot contracts and proprietary business for spot gold contracts. Sep 2014 Qualified for the piloting of internet securities business Oct 2014 Approved to carry out sales of CRMW instruments; China Securities International was approved to enter interbank bond market by the PBOC Jan 2015 Became one of the first securities firms to issue perpetual subordinated bonds; qualified as one of the first batch of participants for stock options trading on the Shanghai Stock Exchange and was conferred with brokerage authority for stock option and proprietary trading; qualified to carry out options settlement business and a stock options market-making business Feb 2015 Qualified to carry out custody of security investment funds Apr 2015 Qualified as a Qualified Domestic Institutional Investor (QDII) Jun 2015 Qualified as institution providing private fund business outsourcing; obtained qualification from the PBOC to carry out a physical precious metals business Sep 2015 Qualified to carry out an interbank gold inquiry business Sep 2016 First Chinese securities firm to issue a CRMW

Source: Company

Relationship with BSCOMC, Central Huijin and CITIC Group China Securities Finance Limited, the predecessor of CSC, was jointly established by CITIC Securities and China Jianyin on 2 November 2005 with 60% and 40% equity interests, respectively.

As approved by the Ministry Of Finance on 19 June 2009, China Jianyin entered into an equity transfer agreement with Central Huijin on 30 December 2009, pursuant to which China Jianyin agreed to transfer its 40% equity interest in the company to Central Huijin for zero consideration. The transfer was approved by the CSRC on 18 November 2010 and was duly completed on 16 December 2010.

Beijing State-owned Capital Operation and Management Center (BSCOMC) is a whole people-owned enterprise approved by the Beijing Municipal Government and established with the entire capital contributed by the Beijing State-owned Assets Supervision and Administration Commission (BJ SASAC) of the State Council. It was incorporated on 30 December 2008 with registered capital of CNY35bn. BSCOMC is an investment and financing entity focusing on the operation of state-owned capital and the management of state-owned equities, with the objective of achieving the securitisation of state-owned capital and maximising its value.

CITIC Securities On 30 July 2010, CITIC Securities entered into an equity transfer agreement with transferred a 45% equity BSCOMC, pursuant to which CITIC Securities agreed to transfer a 45% equity interest in interest to BSCOMC in the company to BSCOMC for a consideration of CNY7.29bn. The transfer was approved July 2010 by the CSRC on 9 November 2010 and was duly completed on 16 December 2010.

CSC Financial Co Ltd (6066 HK): 18 July 2017

Central Huijin is a state-owned investment company established on 16 December 2003 and mandated to exercise the rights and obligations as an investor in major state-owned financial enterprises on behalf of the China Government. Central Huijin does not conduct any other business or commercial activity, and does not intervene in the day-to-day business operations of the enterprises in which it invests. In September 2007, the Ministry of Finance issued special treasury bonds and acquired all the shares of Central Huijin from the PBOC. The acquired shares were injected into China Investment Corporation as part of its initial capital contribution. Central Huijin’s principal shareholder rights are exercised by the State Council. The members of the board of directors and Supervisory Committee of Central Huijin are appointed by, and are accountable to, the State Council.

On 16 August 2010, CITIC Securities entered into an equity transfer agreement with Century Jinyuan, pursuant to which CITIC Securities agreed to transfer an 8% equity interest in the company to Century Jinyuan for a consideration of CNY1,296m. The transfer was approved by the CSRC on 23 November 2010 and was completed on 16 December 2010.

Century Jinyuan transferred around 4.92% and 2.47% equity interests to Shannan Jinyuan and Shanghai Shangyan for considerations of CNY1,245m and CNY700m on 8 March, 2016 and 22 August 2016, respectively.

Shareholding structure and major business subsidiaries CSC: shareholding and group structure

Source: Company, Daiwa Note: * the remaining 45% of the equity interest in China Securities Funds was held by Hangtian Science and Technology Finance Co., Ltd. And Jiangsu Broadcast Media Ltd., both being Independent Third Parties other than being the shareholders of China Securities Funds, holding 25% and 20% of the equity interest, respectively

Senior management profile Mr. WANG Changqing (Chairman, Executive Director, 53). Mr Wang joined the company in November 2005, and has served as an executive director since February 2007, and Chairman of the Board and Chairman of the Executive Committee since September 2011. He has also been a director of China Securities International since July 2012. Mr. Wang is currently the vice chairman of the investment banking committee of the second session of the SAC, the executive vice president of the Securities Association of Beijing, a member of the supervisory committee of the Shanghai Stock Exchange, and a member of the strategic planning committee of the council of the Shenzhen Stock Exchange. Mr. Wang gained a master’s degree in economics from Renmin University in China in January 2002.

CSC Financial Co Ltd (6066 HK): 18 July 2017

Mr. QI Liang (General Manager, Executive Director, 47). Mr. Qi has served as an executive director, the General Manager and a member of the Executive Committee since March 2012. He has also served as the chairman of the board of China Securities International since January 2013. Mr. Qi is the vice chairman of the brokerage committee of the SAC and a member of the bond market committee of the NAFMII. He served as the deputy manager of the company from September 2005 to August 2007 and the vice president of China Galaxy Securities from September 2007 to February 2012. Mr. Qi obtained a master’s degree in economics from the Central University of Finance and Economics in June 1999.

Mr. ZHOU Zhigang (member of the Executive Committee, the Chief Compliance Officer and Chief Risk Officer, 52). Mr. Zhou joined the company in November 2005. He has served as a member of the Executive Committee since February 2009, and the Chief Compliance Officer and Chief Risk Officer since April 2016. He has been a director of China Securities Futures since August 2006. Mr. Zhou served as the deputy general manager and chairman of the company’s Brokerage Business Management Committee from November 2005 to April 2016. He has a Bachelor of Science degree and a Master’s of Science degree from Fudan University, gained in July 1985 and July 1988, respectively.

Mr. PENG Heng (member of the Executive Committee and the Chief Financial Officer, 44). Mr. Peng joined the company in November 2005 and has served as the Administrative Head of the Financial Planning Department since January 2008, a member of the Executive Committee and Chief Financial Officer since January 2009, and the Administrative Head of the Treasury Operation Department since November 2012. He has been a supervisor of China Securities Futures since November 2008 and a director of China Securities Capital since March 2013. Mr. Peng served as the deputy general manager of the Financial Planning Department of the company from November 2005 to December 2007. He obtained a bachelor’s degree in economics and a master’s degree in economics from Renmin University of China in July 1993 and July 1996, respectively. He was also qualified as a Chinese Certified Public Accountant in April 2000.

Mr. YUAN Jianmin (member of the Executive Committee, 55). Mr. Yuan joined the company in November 2005 and has served as a member of the Executive Committee since February 2009. He has been a director of China Securities Futures since August 2006. Mr. Yuan also serves as a member of the margin financing and securities lending committee of the SAC. He served as the deputy general manager, administrative head of the Treasury Operation Department and administrative head of the Securities and Financing Department of the company from November 2005 to January 2016. Mr. Yuan obtained a master’s degree in economics from the Dongbei University of Finance and Economics in November 1999.

Mr. JIANG Yueqin (member of the Executive Committee, 49). Mr. Jiang joined the company in January 2007 and has served as a member of the Executive Committee since May 2009. He has been chairman of the board of directors of China Securities Funds since September 2013. Currently, Mr. Jiang also serves as a member of the asset management committee of the AMAC. He was also the general manager of Changsheng Fund Management from 2001 to 2006 and the assistant to the general manager and administrative head of the company’s Institutional Business Department and Asset Management Department from January 2007 to January 2016. Mr. Jiang has a Bachelor of Engineering and a Master’s of Engineering from the University of Electronic Science and Technology gained in July 1989 and March 1992, respectively.

Mr. ZHOU Xiaoyu (member of the Executive Committee, 52). Mr. Zhou joined the company in November 2005 and has served as its Administrative Head of the Human Resources Department since November 2011, and as a member of the Executive Committee since January 2016. Mr. Zhou has been a director of China Securities Futures since August 2012. He served as the general manager of the Brokerage Business Management Department, the administrative head of the Treasury Operation Department

CSC Financial Co Ltd (6066 HK): 18 July 2017

and the Margin Financing and Securities Lending Department of the Company from November 2005 to November 2011. Mr. Zhou obtained a Master’s of Engineering from South China University of Technology in July 1991.

Mr. LI Tiesheng (member of the Executive Committee, 45). Mr. Li joined the company in June 2013 and has served as a member of the Executive Committee since June 2013. He served as the deputy manager of Hong Kong Jiangnan Finance, deputy director of Great Wall Securities, general manager of New Jiangnan Investment, and the vice-president of Beijing Branch of China Merchants Bank from March 2000 to July 2013. Mr. Li obtained a Bachelor of Engineering from Beijing Institute of Technology in July 1993 and completed a postgraduate course at Renmin University of China in October 1997.

Mr. WANG Guangxue (member of the Executive Committee and the secretary of the Board, 44). Mr. Wang joined the company in November 2005 and has served as the Administrative Head of the Executive Office of the company since November 2011. He has been a member of the Executive Committee and the Secretary of the Board since January 2014. Currently, Mr. Wang also serves as a member of the Self-discipline Inspection Committee of the SAC. He was assistant to the general manager and deputy general manager of the company’s Investment Banking Department from November 2005 to November 2011. Mr. Wang gained his master’s degree in economics from Fudan University in June 1998. He also obtained a PhD in economics (in-service study) from Fudan University in July 2002. He obtained “sponsor representative” certification for the A- share market in April 2004.

Mr. ZHANG Xinfan (member of the Executive Committee, 47). Mr. Zhang joined the company in November 2005 and has served as a member of the Executive Committee since January 2014 and the Chairman of the Brokerage Business Management Committee since April 2014. He has been a director of China Securities International since June 2014. Mr. Zhang also served as the deputy general manager of the Brokerage Business Management Department, the manager of the securities branch of Beijing Dongzhimen South Street, administrative head of the Wealth Management Department of the Brokerage Business Management committee and the vice-chairman of the Brokerage Business Management Committee of the company from November 2005 to September 2016. Mr. Zhang gained his bachelor’s degree in economics from Dongbei University of Finance and Economics in July 1991, and an EMBA degree from Guanghua School of Management Peking University in April 2001.

Mr. LIU Naisheng (member of the Executive Committee, 45). Mr. Liu joined the company in March 2006 and has served as the Administrative Head of the Investment Banking Department since April 2011. He has been a member of the Executive Committee since January 2014. Mr. Liu is currently a member of the sixth session of the audit committee for mergers and acquisitions of the CSRC. He served as the deputy general manager of the company’s Investment Banking Department from March 2006 to April 2011. Mr. Liu gained a Bachelor of Engineering degree from Beijing Institute of Machinery in July 1995 and an MBA degree (in-service study) from School of Economics and Management, Tsinghua University in July 2007. He obtained “sponsor representative” certification for the A-share market in February 2005.

Mr. HUANG Ling (member of the Executive Committee, 39). Mr. Huang joined the company in November 2005 and has served as the Administrative Head of the Debt Underwriting Department since May 2008. He has been a member of the Executive Committee from January 2014. Mr. Huang served as the assistant to the general manager of the company’s Debt Underwriting Department from November 2005 to May 2008. Mr. Huang gained a master’s degree in economics, majoring in finance from the Graduate School of the PBOC in October 2000. He obtained a PhD in economics, majoring in finance from Hunan University in June 2005.

CSC Financial Co Ltd (6066 HK): 18 July 2017

Mr. ZOU Yingguang (member of the Executive Committee, 45). Mr. Zou joined the company in November 2005 and has served as the Administrative Head of the Fixed Income Department since March 2007. He has been a member of the Executive Committee since January 2014. Mr. Zou was a physician at Beijing Xuanwu Hospital from August 1994 to October 1996. He served as a senior business director in the company’s Securities Sales Department and assistant to general manager from November 2005 to March 2007. Mr. Zou gained a bachelor’s degree in clinical medicine from Capital Medical University in July 1994 and a master’s degree in economics from Central University of Finance and Economics in June 2000. He also obtained an MBA degree from China Europe International Business School in September 2012.

Mr. HU Bin (member of the Executive Committee, 35). Mr. Hu joined the company in June 2014 and has served as a member of the Executive Committee and the Administrative Head of the International Business Department since January 2016, and an executive director and the general manager of China Securities International since January 2016. Mr. Hu was the vice president of the capital markets department of CITIC Securities from November 2006 to January 2010; secretary of the general office of China CITIC Group Limited from January 2010 to June 2014; and the secretary of CSC’s disciplinary committee from June 2014 to January 2016. Mr. Hu obtained a bachelor’s degree in economics from Edinburgh Napier University in the UK and Shandong University of Finance and Economics in July 2003, a master’s degree in investment from the University of Birmingham in December 2004, and a PhD in finance from Renmin University of China in June 2012.

CSC Financial Co Ltd (6066 HK): 18 July 2017

Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Steel Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Machinery) Co-head of Asia Pacific Research Iris PARK (82) 2 787 9165 [email protected] Kevin LAI (852) 2848 4926 [email protected] Consumer/Retail Chief Economist for Asia ex-Japan; Macro Economics (Regional) SK KIM (82) 2 787 9173 [email protected] Olivia XIA (852) 2773 8736 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Macro Economics (Hong Kong/China) Thomas Y KWON (82) 2 787 9181 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Head of Automobiles; Transportation and Industrial (Hong Kong/China) Leon QI (852) 2532 4381 [email protected] TAIWAN Regional Head of Financials; Banking; Diversified financials; Insurance Rick HSU (886) 2 8758 6261 [email protected] (Hong Kong/China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional) Yan LI (852) 2773 8822 [email protected] Nora HOU (886) 2 8758 6249 [email protected] Banking (China) Banking; Diversified financials; Insurance Anson CHAN (852) 2532 4350 [email protected] Steven TSENG (886) 2 8758 6252 [email protected] Consumer (Hong Kong/China) IT/Technology Hardware (PC Hardware) Adrian CHAN (852) 2848 4427 [email protected] Kylie HUANG (886) 2 8758 6248 [email protected] Consumer (Hong Kong/China) IT/Technology Hardware (Handsets and Components) Jamie SOO (852) 2773 8529 [email protected] Helen CHIEN (886) 2 8758 6254 [email protected] Gaming and Leisure (Hong Kong/China) Small/Mid Cap John CHOI (852) 2773 8730 [email protected]

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap INDIA Alex LIU (852) 2848 4976 [email protected] Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Internet (Hong Kong/China) Head of India Research; Strategy; Banking/Finance Carlton LAI (852) 2532 4349 [email protected] Saurabh MEHTA (91) 22 6622 1009 [email protected] Small/Mid Cap (Hong Kong/China) Capital Goods; Utilities Dennis IP (852) 2848 4068 [email protected]

Power; Utilities; Renewables and Environment (Hong Kong/China) SINGAPORE Jonas KAN (852) 2848 4439 [email protected] Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of Hong Kong and China Property Head of Singapore Research; Telecommunications (China/ASEAN/India) Cynthia CHAN (852) 2773 8243 [email protected] David LUM (65) 6329 2102 [email protected] Property (China) Banking; Property and REITs Thomas HO (852) 2773 8716 [email protected] Royston TAN (65) 6321 3086 [email protected] Custom Products Group Oil and Gas; Capital Goods

Shane GOH (65) 64996546 [email protected] PHILIPPINES Property and REITs; Small/Mid Cap (Singapore) Micaela ABAQUITA (63) 2 737 3021 [email protected] Jame OSMAN (65) 6321 3092 [email protected] Property Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)

CSC Financial Co Ltd (6066 HK): 18 July 2017

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CSC Financial Co Ltd (6066 HK): 18 July 2017

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CSC Financial Co Ltd (6066 HK): 18 July 2017

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