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Orient Securities Co. (3958.HK) Solid Asset Mgmt Franchise, Geared

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Orient Securities Co. (3958.HK) Solid Asset Mgmt Franchise, Geared August 18, 2016 INITIATION Orient Securities Co. (3958.HK) Neutral Equity Research Solid asset mgmt franchise, geared to trading; initiate with Neutral Investment view Investment Profile Orient Securities (DFZQ) is a major Shanghai-based securities company with Low High competitive advantages such as: 1) early mover into the brokerage asset Growth Growth mgmt (AM) business with a favorable asset mix; 2) robust growth potential in Returns * Returns * Multiple Multiple the wealth mgmt business due to its presence in the economically developed Volatility Volatility regions of China and focus on high-networth individuals; 3) market-oriented Percentile 20th 40th 60th 80th 100th incentives/operating structure. However, trading income – a major revenue Orient Securities Co. (3958.HK) source in 2013-2015 (c. 65%), which we expect will continue through to 2018E Asia Pacific Banks Peer Group Average (39%) – has been volatile recently despite its efforts to grow a more client- * Returns = Return on Capital For a complete description of the investment profile measures please refer to the oriented/stable business portfolio over the long term. Initiate with Neutral. disclosure section of this document. Key data Current Core drivers of growth Price (HK$) 8.37 We forecast DFZQ’s net income to be volatile, growing at 26%/32% yoy in 12 month price target (HK$) 9.20 Market cap (HK$ mn / US$ mn) 35,838.2 / 4,621.3 2017E-2018E, post a 59% decline in 2016E after a record high profit in Foreign ownership (%) -- 2015. We expect AM, IBD and interest income to provide stable revenue 12/15 12/16E 12/17E 12/18E growth during 2016E-2018E, while investment/brokerage to be weak in EPS (Rmb) 1.53 0.52 0.60 0.80 EPS growth (%) 180.1 (66.0) 15.8 32.3 2016E before rebounding in 2017E/2018E. P/B (X) NM 1.0 1.0 0.9 P/E (X) NM 13.7 11.8 9.0 Dividend yield (%) NM 2.3 3.0 3.9 Risks to the investment case P/PPOP (X) 3.2 7.5 6.0 4.6 PPOP growth (%) 223.2 (56.9) 24.3 31.7 Upside: Better-than-expected ADT/margin finance balance, prop trading Preprovision ROA (%) 6.0 1.9 2.1 2.5 ROA (%) 4.64 1.39 1.59 1.90 gains; Down: trading losses, market share loss in brokerage/underwriting. ROE (%) 27.5 7.7 8.5 10.5 Valuation Price performance chart In line with our coverage of China brokers, our 12-month target price is 8.6 10,000 based on a PB-ROE framework of global peers. Our target price of 8.5 9,700 HK$9.20 is based on 1.17X FY16E P/B using blended ROE of 9.6% 8.4 9,400 (average of 2016E and long-term (2022E) ROE) and implies 8% potential 8.3 9,100 upside, in line with our H-share peer average of 9%. 8.2 8,800 8.1 8,500 Industry context 8.0 8,200 We see Huatai Securities, China Merchants Securities and China May-16 Jun-16 Jul-16 Everbright Securities as close comparables to DFZQ within our coverage. Orient Securities Co. (L) Hang Seng China Ent. Index (R) INVESTMENT LIST MEMBERSHIP Share price performance (%) 3 month 6 month 12 month Neutral Absolute -- -- -- Rel. to Hang Seng China Ent. Index -- -- -- Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/17/2016 close. Coverage View: Neutral Nan Li, CFA +86(10)6627-3021 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with companies Jessica Wu covered in its research reports. As a result, investors should be +86(10)6627-3487 [email protected] Beijing Gao Hua Securities Company Limited aware that the firm may have a conflict of interest that could Lucy Li affect the objectivity of this report. Investors should consider +65-6654-5426 [email protected] Goldman Sachs (Singapore) Pte this report as only a single factor in making their investment Wendy Chen +65-6654-5218 [email protected] Goldman Sachs (Singapore) Pte decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research August 18, 2016 Orient Securities Co. (3958.HK) Orient Securities Co.: Summary Financials Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E Investment banking fees 894.8 993.1 1,141.5 1,289.0 Cash & equivalents 55,343.5 64,157.4 69,792.0 82,180.0 Commissions 3,465.3 2,030.2 1,951.9 1,987.7 Cash and securities for reg. -- -- -- -- Principal transactions 9,341.9 2,479.7 3,621.4 5,079.8 Total securities 91,824.9 96,141.7 100,944.9 105,988.3 Asset management 1,396.0 1,066.1 1,311.4 1,661.2 Repos 26,498.2 33,520.2 40,559.5 49,077.0 Other 700.1 745.8 907.7 1,132.7 Securities borrowed -- -- -- -- Net interest income (258.8) 923.2 1,572.0 1,926.2 Broker receivables -- -- -- -- Credit card fee -- -- -- -- Customer receivables 0.0 0.0 1.0 2.0 Provision for consumer loans 0.4 (239.5) (239.5) (317.1) Other receivables 1,535.4 1,692.8 1,866.3 2,057.6 Net revenue 15,539.3 8,238.1 10,506.0 13,076.7 Total receivables 1,535.4 1,692.8 1,867.3 2,059.6 Personnel/compensation (3,826.7) (2,207.5) (3,141.0) (3,710.0) Property plant and equipment, net 1,643.7 1,812.1 1,997.9 2,202.6 Tot. non-int. exp. (inc. loan loss prov.) (6,040.3) (4,379.0) (5,650.9) (6,682.7) Intangibles 128.7 128.7 128.7 128.7 Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0 Other assets 30,923.2 30,395.3 35,299.1 39,078.7 Profit/loss on disposal of assets 0.0 0.0 0.0 0.0 Total assets 207,897.6 227,848.2 250,588.3 280,712.9 Total other net 0.0 0.0 0.0 0.0 Pretax profit 9,499.1 3,859.1 4,855.1 6,394.0 Comm. paper and short-term debt 18,979.8 21,921.7 25,319.6 29,244.1 Provision for income taxes (2,124.9) (771.8) (971.0) (1,278.8) Deposits 43,193.3 41,899.8 43,480.2 48,072.5 Minority interest (48.9) (66.5) (75.7) (77.3) Total securities sold, not bought 0.0 0.0 0.0 0.0 Net income pre-pref. dividends 7,325.2 3,020.8 3,808.4 5,037.9 Repos 47,880.1 55,301.5 63,873.2 73,773.6 Preferred dividends 0.0 0.0 0.0 0.0 Securities loaned -- -- -- -- Net income pre-exceptionals 7,325.2 3,020.8 3,808.4 5,037.9 Other 0.0 0.0 1.0 2.0 Post tax exceptionals 0.0 0.0 0.0 0.0 Brokers payables -- -- -- -- Net income post tax exceptionals 7,325.2 3,020.8 3,808.4 5,037.9 Customer payables 43,193.3 41,899.8 43,480.2 48,072.5 EPS (pre-exceptionals,basic) (Rmb) 1.53 0.52 0.60 0.80 Total payables 67,574.9 70,810.0 78,041.5 89,770.1 EPS (diluted, pre-except) (Rmb) 1.53 0.52 0.60 0.80 Accrued expenses & other liabs. 0.0 0.0 0.0 0.0 Total long-term debt 52,347.9 51,962.5 54,560.6 57,288.6 DPS (Rmb) 0.45 0.17 0.21 0.28 Other liabilities 4,718.9 6,039.9 7,627.5 9,690.1 BVPS (Rmb) 6.62 6.87 7.30 7.89 Total liabilities 172,521.8 184,113.9 204,102.8 230,522.4 Tangible BVPS (Rmb) 6.67 6.91 7.35 7.94 Capital units & pref securities -- -- -- -- Preferred stock 0.0 0.0 0.0 0.0 Total common equity 34,958.1 43,316.7 46,067.9 49,772.8 Minority interest 417.6 417.6 417.6 417.6 Total stockholders' equity 35,375.7 43,734.4 46,485.5 50,190.4 Growth & margins (%) 12/15 12/16E 12/17E 12/18E Net revenue growth 180.3 (47.0) 27.5 24.5 Total liabilities & equity 207,897.6 227,848.2 250,588.3 280,712.9 Net income growth 212.8 (58.8) 26.1 32.3 EPS growth 180.1 (66.0) 15.8 32.3 Pretax margin 61.1 46.8 46.2 48.9 After tax margin 47.1 36.7 36.3 38.5 Ratios (%) 12/15 12/16E 12/17E 12/18E Net interest income growth 66.1 456.7 70.3 22.5 ROA 4.6 1.4 1.6 1.9 ROE 27.1 7.6 8.4 10.4 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.
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