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.
Analyst Contributors
Nan Li, CFA Wendy Chen [email protected] [email protected]
Jessica Wu [email protected]
Lucy Li [email protected]
Goldman Sachs Global Investment Research 2 August 18, 2016 Orient Securities Co. (3958.HK)
Table of contents
Overview: A differentiated AM franchise; geared to trading 5 Company profile: Building a more diversified platform 7 Key strengths 13 Key risks 17 Financials 21 Valuation: Our 12-m TP of HK$9.2 based on P/B-ROE framework 27 Disclosure Appendix 30
The prices in the body of this report are based on the market close of Aug 16, 2016.
Exhibit 1: DFZQ: SWOT analysis
Strengths Weaknesses •Solid investment •Less diversified revenue management and trading base, relatively high capabilities investment/trading •Strong potential in high- exposure subject to market end retail business volatility •Market-oriented operating •Above-average balance and management sheet leverage mechanism with proven •Lack of scale advantage vs innovation and risk industry leaders management capabilities
Opportunities Threats •Strategic focus on •A- share and bond market expanding high-net-worth downturns to significantly as well as institutional and affect trading, brokerage corporate client base and part of AM business •Growing synergies to help •Talent and market share build comprehensive loss amid competition, fee platform rate pressure •Capital-intermediary •Credit risk from margin business including stock- finance and collateralized based lending lending
Source: Gao Hua Securities Research
Goldman Sachs Global Investment Research 3
August 18, 2016 Goldman Sachs Global Investment Research
Exhibit 2: DFZQ: One-page financial summary
2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E Income Statement (Rmb mn) Growth rate (%) Operating Revenue 3,283 5,543 15,539 8,238 10,506 13,077 Operating Revenue 30 69 180 -47 28 24 Net fee and commission income 1,620 2,200 5,830 4,159 4,474 5,007 Operating Profit 69 144 223 -57 24 32 Brokerage commission 1,149 1,423 3,465 2,030 1,952 1,988 Net Profit 65 132 213 -59 26 32 Investment banking income 228 448 895 993 1,142 1,289 Total assets 25 77 93 10 10 12 Asset Management 214 282 1,396 1,066 1,311 1,661 Total equities 5 18 90 24 6 8 Other fee income 29 47 74 69 69 69 Net interest income (654) (764) (259) 923 1,572 1,926 Prop trading income 2,149 3,906 9,342 2,480 3,621 5,080 DuPont analysis Other income 168 201 626 676 838 1,063 ROA 1.8% 2.8% 4.6% 1.4% 1.6% 1.9% x Leverage 3.6x 5.0x 5.9x 5.6x 5.4x 5.5x Operating expense 2,077 2,605 6,041 4,139 5,411 6,366 ROE 6.6% 13.8% 27.5% 7.7% 8.5% 10.5% Operating Profit 1,206 2,939 9,499 4,099 5,095 6,711 Net fee and commission income 3.0% 2.6% 3.7% 1.9% 1.9% 1.9% Brokerage commission 2.1% 1.7% 2.2% 0.9% 0.8% 0.7% Provision 72 5 (0) 240 240 317 Investment banking income 0.4% 0.5% 0.6% 0.5% 0.5% 0.5% Pre-tax Profit 1,134 2,934 9,499 3,859 4,855 6,394 Asset management 0.4% 0.3% 0.9% 0.5% 0.5% 0.6% Income Taxes 152 575 2,125 772 971 1,279 Other fee income 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% Minority interests (25) 17 49 66 76 77 Net interest income -1.2% -0.9% -0.2% 0.4% 0.7% 0.7% Net Profit 1,007 2,342 7,325 3,021 3,808 5,038 Prop trading income 3.9% 4.6% 5.9% 1.1% 1.5% 1.9% Net total revenues 6.0% 6.6% 9.9% 3.8% 4.4% 4.9% Balance Sheet (Rmb mn) Total operating expense -3.8% -3.1% -3.8% -1.9% -2.3% -2.4% Key asset items: Pretax Profits 2.1% 3.5% 6.0% 1.8% 2.0% 2.4% Deposit held on behalf of clients 9,405 18,662 43,515 34,916 36,233 40,060 Net Income 1.8% 2.8% 4.6% 1.4% 1.6% 1.9% Clearing reserves 3,147 5,649 8,825 6,983 7,247 8,012 Trading securities 5,116 7,274 31,871 36,188 37,997 39,897 Operating Revenue Breakdown (%) Financial assets AFS 30,634 40,432 59,877 59,877 62,871 66,014 Net fee and commission income 49 40 38 50 43 38 Total current assets: 54,012 92,862 187,385 205,853 223,766 250,672 Brokerage commission 352622251915 Total long-term investments: 2,039 2,251 3,123 3,123 3,123 3,123 Investment banking income 7 8 6 12 11 10 Total assets 60,852 107,530 207,898 227,848 250,588 280,713 Asset Management 7 5 9 13 12 13 Net interest income -20 -14 -2 11 15 15 Key liability and equity items: Prop trading income 65 70 60 30 34 39 Customer brokerage deposits 10,894 21,783 43,193 41,900 43,480 48,073 Other income 645999 Total current liabilities: 40,368 72,869 118,784 130,514 147,737 171,243 Total 100 100 100 100 100 100 Total long-term debt: 4,400 13,043 52,348 51,962 54,561 57,289 Total Liabilities 45,074 88,905 172,522 184,114 204,103 230,522 Efficiency (%) Total shareholder's equity 15,550 18,353 34,958 43,317 46,068 49,773 Cost/Income 61 43 35 49 50 47
Note: (1) Accounting items are presented following China GAAP; (2) 2013-2015 data from company’s A-share audited financial reports. Orient Securities Co. (3958.HK)
Source: Company data (2013-2015), Gao Hua Securities Research (2016E-2018E).
4
August 18, 2016 Orient Securities Co. (3958.HK)
Overview: A differentiated AM franchise; geared to trading
Overview Established in 1997, DFZQ is a fast-growing securities firm with a full-services platform and national distribution network. The company listed its A-share in March 2015. Shenergy, a wholly state-owned enterprise (SOE) engaged in power and energy industries, is the single largest shareholder with 25.05% stake. The company is run by an experienced management team with a strong track record in innovation and risk management. DFZQ has built a differentiated franchise in AM, particularly in active equity products. The revenue base is not as diversified as industry leaders such as CITIC Securities, with trading as the largest revenue source contributing 65% to net revenue on average during 2013-2015 following China GAAP. This may weigh on the earnings outlook in the near term given a challenging operating/market environment for Chinese brokers in 2016, in our view. Over the long term, the company plans to develop a more client-focused and stable business mix. The company ranked No.12 in terms of net assets and operating income, No.12 in terms of net profit, and No.10 in terms of total assets among PRC securities companies as of YE2015 (Source: Wind Information). DFZQ has established a nation-wide distribution network with 120 branches in total as of March 31, 2016, majority of which are located in economically developed regions of mainland China including 45 in Shanghai. It serves a broad customer base with approximately 900,000 clients, of which 86% were active as of YE2015. In 2015, DFZQ’s total assets amounted to Rmb207.9 bn (US$ 32.0bn), with shareholder’s equity of Rmb35.0 bn (US$5.4bn), net profit of Rmb7.3 bn (US$1.1bn), and ROAE of 27.5%, above the industry average of 21% according to Securities Association of China (SAC). Company strategy DFZQ aims to become a leading provider of comprehensive financial services. To achieve this goal, the company plans to build a more balanced franchise by allocating more capital to wealth management, active asset management, and capital-intermediary businesses (e.g., stock-based lending) as well as its overseas platform. We expect the firm to diversify its revenue drivers away from principal investment income into interest income, AM, and IB revenues during 2016-2018. Key strengths An early mover in the brokerage asset management business with a proven track record, favorable mix of active management products, and performance-based fee model. It was among the first batch of securities firms to conduct collective asset management (CAM) business in 2005 and to obtain a mutual fund management license in 2013. Discretionary funds accounted for 89% of its Rmb117 bn AUM as of March 31, 2016. Good potential in wealth management, in our view, given: 1) strong presence in Shanghai and other economically developed regions in China, 2) focus on affluent and high-net- worth individuals, and 3) growing synergies within its business units (e.g., IB and AM). Market-oriented management, employee incentives, and above-average operating efficiency. Key risks Potential A-share market weakness could negatively affect DFZQ’s trading, brokerage and to a less extent asset management businesses. The company’s relatively large proprietary trading business has historically resulted in a volatile revenue stream, although the company has been reducing asset allocation to investments (44% of total assets at YE15 vs. 59% at YE13) and diversifying from equity trading (25% of total investment book at YE15) into less volatile fixed-income and market-making activities.
Goldman Sachs Global Investment Research 5 August 18, 2016 Orient Securities Co. (3958.HK)
Rising competition from peers and potential new entrants may continue to drive down industry-wide commission rates and slow down growth in the traditional brokerage business over time. Credit risk may arise from stock-based lending and corporate bond investment and underwriting. Financials We forecast the company’s net income to be volatile, growing 26%/32% in 2017E/2018E, post a 59% decline in 2016E from a high base in 2015, reflecting: 1) Volatile investment revenue down 15% FY15-18E CAGR, dragged by lower investment return estimates (2.6%/3.6%/4.1% in 2016E/17E/18E vs. 13% in 2015) amid challenging A- share market conditions in 2016, lower yield environment, and a potential revision in regulation limits on leveraged fixed-income investment. We expect contribution from trading to net revenue to decline to 35% on average during FY16-18E from 65% during FY13-15. 2) Stable brokerage income after sharp fall in 2016E (-41% yoy) from a high base in 2015. A modest market share recovery through 2018 is likely as we expect the company to gain more traction with high-end retail and institutional investors on the back of potential slowdown of A-share trading velocity/mass retail participation. We forecast modest brokerage market share recovery to 1.5% in 2018E vs. 1.5%/1.3%/1.2% in 2013/14/15. We estimate 11%/10% /10% commission rate decline yoy in FY16E/17E/18E post 22% contraction in 2015. 3) IB revenue growth at 13% FY15-18E CAGR driven by both underwriting and financial advisory income on growing demand for direct financing and DFZQ’s stable positon. 4) Steady AM revenue growth at 6% FY15-18E CAGR driven by 16% CAGR AUM expansion, although 2016E results may be negatively affected by potential decline in performance fees given the weak market environment. AM revenue may contribute 13% of net revenue on average for FY16E-18E vs. 7% during FY13-15. 5) Robust growth of NII driven by expansion of stock-based lending balance (16%/20% CAGR for margin finance/stock-based lending over FY15-18E) albeit at lower yields over time. The company’s funding cost and pace of new borrowing could come down as well amid rate cuts. We forecast NII will contribute 15% of net revenue in 2018E vs. -2% in FY15. 6) Stable CIR at around 49% on average for FY16E-18E, broadly in line with the average level during 2013-15 but higher than that in FY15 due to revenue decline and lower operating leverage amid a market downturn in FY16. We forecast impairment charges each year equivalent to 0.1% of total assets during 2016E-18E to factor in potential loss from available-for-sale (AFS) investment and stock-based lending business. Valuation We believe the P/B-ROE framework using global peers and a blended ROE is the most appropriate methodology to value China brokers. The blended ROE refers to the average of 2016E ROE and long-term (2022E) ROE. By using blended ROE, we can factor in China brokers’ near-term profitability as well as long-term ROE outlook post reforms/business model evolvement such as capital market reforms, derivative market development, and asset management business growth. Using this valuation methodology, we derive our 12-month target price for DFZQ of HK$ 9.2, based on 1.17x 2016E P/B after applying a blended ROE of 9.6%. DFZQ trades at 1.03x 2016E P/B, representing an 18% discount to H-share peers. We think DFZQ’s discount over our existing H-share coverage is justified given its less diversified revenue base and large trading exposure, resulting in volatile earnings. We initiate with Neutral with 8% potential upside (vs 9% for H-share peers).
Goldman Sachs Global Investment Research 6 August 18, 2016 Orient Securities Co. (3958.HK)
Company profile: Building a more diversified platform
A fast-growing Shanghai-based company with strong investment expertise… The predecessor of DFZQ, Oriental Securities Limited Liability Company, was founded in 1997. The entity was converted into a joint-stock limited company in 2003. The company’s A-share listed on the Shanghai Stock Exchange in March 2015, after raising net proceeds of Rmb9.8 bn. Shenergy is the largest shareholder (25.05% of stake), followed by two other Shanghai-based state-owned enterprises (SOEs) including Shanghai Haiyan Investment Management Company Limited (4.66%) and Wenhui Xinmin United Press Group (4.19%). DFZQ has gradually built a full-service platform featuring: Fast-growing business with net profit/total assets growing at 170%/85% FY13-15 CAGR vs. industry CAGR of 77%/46% during the same period as per Securities Association of China (SAC); investment income being the largest revenue contributor during this period. An extensive geographical presence with 120 securities branches in all 31 provinces in China, covering approximately 770,000 active clients (as of 1Q16); with Shanghai as its headquarters, provides a large base of affluent retail, institutional investors, and corporate clients. A solid brokerage asset management (AM) franchise, focusing on active equity products and performance-based fee structure; DFZQ is the largest shareholder (about 40%) in China Universal since 2005, a No. 7 mutual fund by AUM in China, according to Asset Management Association of China (AMAC). A differentiated wealth management (WM) business; high-end clients (6.8% of retail client base) contributed 78% of retail brokerage account balances as of March 31, 2016; institutional and corporate clients made up 55% of client funds. An experienced senior management team; market-oriented incentives and operating structure.
Exhibit 3: Since 1997, DFZQ has grown from a regional securities firm to a full-service national operator through a number of acquisitions and expansions Key historical events
Established as Orient Securities Limited Liability 1997 Company
Restructured into a joint-stock limited company, 2003 also renamed to DFZQ China Universal Asset Management Limited 2005 Liability Company, the predecessor of China Universal was established Acquired the securities business of North 2006 55 branches as of 2006 Securities Limited Liability Company. Acquired Shanghai Jiulian Futures Brokerage Co., 2007 Ltd, the predecessor of Orient Securities Futures, to expand into futures and related business. Established Orient Securities Capital Investment to Established Orient Securities Asset 2010 launch private equity investment business, and Management as the first asset management established Orient Finance Hong Kong subsidiary of a PRC securities firm Expanded investment banking services through Established Orient Securities Innovation 2012 the establishment of Citi Orient by cooperating Investment to provide alternative investment with Citigroup Global Markets Asia Limited products
2015 A shares listed on the Shanghai Stock Exchange
Source: Company data
Goldman Sachs Global Investment Research 7 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 4: Shenergy is the company’s largest shareholder (25.05% of stake), followed by two other Shanghai-based SOEs including Shanghai Haiyan Investment Management Company Limited (4.66%) and Wenhui Xinmin United Press Group (4.19%) Shareholding structure as of July 2016
Shanghai Haiyan Investment Wenhui Xinmin Shenergy Other A Shares Other H Shares Management Company United Press Group Shareholders Shareholders Limited Group
25.05% 4.66% 4.19% 50.5% 15.56%
The Company
100% 100% 100% 66.67% 100% 100% 39.96%
Orient Orient Securities Orient Orient Securities Orient Securities China Securities Citi Orient Innovation Finance Hong Capital Investment Asset Management Universal Futures Investment Kong
Source: Company data
Exhibit 5: DFZQ operates four principal business segments
Segment Wealth Management Investment Securities Sales & Investment Banking Others Management Trading
Operation ● Equity proprietary ● Equity underwri ng and ● Treasury business and ● Securi es brokerage ● Asset management trading sponsorship others ● Fixed income investment ● Futures brokerage ● Fund management ● Debt underwri ng ● Overseas business proprietary trading ● Private equity ● Securi es financing ● Deriva ves trading ● Financial advisory investment ● NEEQ market‐making ● Alterna ve investment ● Securi es research
% of revenue FY2015 38% 9% 43% 5% 6% FY2014 38% 4% 42% 7% 10% PBT margin FY2015 51% 65% 87% 38% -303% FY2014 43% 42% 62% 27% -88%
Source: Company data
…that aims to focus on high-end customers and business diversification to deliver more stable growth DFZQ aims to become a leading provider of comprehensive financial services. To achieve this goal, the company plans to balance its business mix by allocating more capital to WM, active AM, and capital-intermediary businesses (e.g., collateralized stock repurchase and margin finance) as well as its overseas business. The overseas business is modest in terms of scale (less than 1% of total revenue in FY15).
Building an integrated wealth management platform
DFZQ has a modest presence in brokerage (1.2% trading market share in 2015, according to Wind) despite possessing a relatively larger base of affluent and high-end retail customers than peers such as GF Securities. We believe DFZQ’s full-service platform (e.g., nationwide branch network) would allow the firm to compete more effectively vs. smaller brokers in those segments since these high-end clients require more frequent and customized services than mass-market clients. The company intends to strengthen its WM
Goldman Sachs Global Investment Research 8 August 18, 2016 Orient Securities Co. (3958.HK)
business by: 1) increasing cross selling and cooperation across business units, including securities financing, investment banking, and asset management, 2) establishing a product center offering both in-house and externally-sourced financial products, 3) centralizing middle- and back-office operations to headquarters through the “Orient Cloud” platform.
Leverage expertise in investment and trading to build a stronger client franchise
DFZQ has historically held a strong position in principal investment, and we believe it is in a unique position to leverage this investment expertise to grow a client-oriented business model (e.g., asset management and market-making). The company plans to focus on active asset management business, by: 1) leveraging its brand strength, 2) expanding product lines built on its expertise in traditional equity products, 3) diversifying its client base by tapping into institutional and corporate clients, such as insurance, trusts, and large enterprises.
While we expect DFZQ’s trading business to decline in terms of balance sheet allocation and revenue contribution in FY16-18 given trading returns have declined sharply post the rally of equity and fixed-income markets in 2015, the company is proactively developing its market-making business, which requires strong pricing/trading skills and balance sheet to provide liquidity to clients.
According to China Foreign Exchange Trading Center, DFZQ ranked top 5 among all the securities firms (by volume of the fixed-income market-making business) in the PRC interbank bond market every month in 2015. It was ranked No.3 (by trading volume of market-making transactions) on National Equities Exchange and Quotations (NEEQ) as of December 31, 2015. In addition, the company has been providing banks, securities firms, trust companies and asset management companies with investment advisory services in fixed income transactions since 2013.
Peer comparison: Above-peer profitability and operating efficiency, but less diversified revenue mix, modest scale in IB and brokerage
We think DFZQ is well-positioned in AM with strong operating efficiency. Similar to other Chinese brokers, revenue stream is highly cyclical depending on the A-share market performance and volume, more so for DFZQ due to its relatively large investment book. We see Huatai Securities (HTSC), China Merchants Securities (CMS), China Everbright Securities (CES) as the closest comparables for DFZQ.
We summarize the key differences of DFZQ with peers as below:
Brokerage & IBD – modest scale in brokerage trading volume and outlets, relatively low market share in equity and bond underwriting
Trading – large trading book relative to total assets with high investment yield in 2015 and above-average return since 2013, majority of investment is fixed-income and booked as available-for-sale securities
AM – the highest active AUM under brokerage AM and higher performance fees exposure
Above-average efficiency measured by CIR and brokerage sales per outlet
Relatively high balance sheet leverage, above-average ROA/ROE in market upcycle
Overall strong results during a market upcycle, but non-investment income generation ability has room to catch up, in our view.
Goldman Sachs Global Investment Research 9 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 6: Compared with our existing coverage, DFZQ has 1) a modest scale in brokerage and investment banking, 2) a solid AM franchise with strong operating efficiency, and 3) a large exposure to trading Franchise comparison in 2015 (numbers are in Rmb mn unless stated otherwise)
CITICS HTS GFS HTSC CMS CES CICC DFZQ As % of total revenue 35% 36% 41% 48% 49% 45% 31% 22% Outlets mkt share 3.6% 3.5% 3.2% 3.0% 2.4% 1.8% 0.2% 1.5% Brokerage Brokerage mkt share 6.4% 5.0% 4.9% 8.4% 4.1% 2.9% 0.5% 1.2% - institutional clients brokerage 5.5% 5.0% 4.6% 4.3% 5.5% 3.4% 2.7% 3.6% Fee rate (bp, net) 4.3 4.5 5.0 2.7 5.4 4.7 6.4 4.9 As % of total revenue 9% 7% 6% 6% 10% 7% 33% 6% Investment ECM mkt share (incl. CB) 9.5% 3.6% 4.9% 4.8% 4.6% 1.6% 2.8% 0.6% banking DCM mkt share 3.4% 1.2% 1.2% 0.3% 2.2% 0.8% 0.8% 0.4% As % of total revenue 37% 31% 31% 26% 22% 24% 23% 60% Investments scale 156,727 98,828 157,121 79,821 85,978 31,630 25,388 85,046 Prop as % of total assets 25% 17% 37% 18% 29% 16% 27% 41% trading & Equities as % of total 31% 41% 20% 52% 25% 62% 12% 25% investment FICC as % of total 69% 59% 80% 48% 75% 38% 88% 75% Investment yield 9.7% 9.8% 7.4% 5.8% 7.6% 13.2% 5.4% 13.3% As % of total revenue 5% 13% 9% 16% 10% 13% -1% -2% Net interest Client deposits mkt share 6.0% 4.8% 5.1% 5.1% 3.9% 2.5% 0.7% 1.3% income Margin balance mkt share 6.3% 5.3% 5.7% 5.6% 5.3% 3.3% 0.3% 1.2% As % of total revenue 12% 7% 11% 1% 5% 8% 10% 9% Asset MF AUM controlled mkt share 4.3% 0.9% 3.7% 2.5% 2.6% 0.9% 0.1% 1.2% mgmt CAM AUM mkt share 8.5% 3.8% 19.2% 6.4% 3.4% 2.7% 0.5% 1.6% % of Active AUM 38.3% 20.8% 63.4% 26.8% 17.5% 25.9% 81.7% 89.7% Sales/outlet 176 122 127 107 127 110 405 129 Staff cost/revenue 28% 22% 33% 31% 30% 25% 50% 25% Staff cost per head (avg) 0.98 0.95 1.07 1.38 0.86 0.60 1.81 1.15 Efficiency CIR (excl. biz tax) 39% 32% 41% 39% 40% 35% 63% 35% ROAA 3.6% 3.4% 4.0% 3.0% 4.5% 4.9% 2.7% 4.6% ROAE 16.6% 18.0% 22.5% 17.5% 24.3% 23.1% 16.0% 27.5% Total assets 616,108 576,449 419,097 452,615 291,656 197,073 94,109 207,898 Scale and Leverage (ending) 4.4x 5.4x 5.4x 5.6x 6.0x 4.9x 5.7x 5.9x leverage Leverage (ending, active) 3.3x 4.2x 3.9x 4.0x 4.2x 3.1x 4.2x 4.7x Note: % of Active AUM indicator based on AMAC disclosures, except for CICC and DFZQ whereby company-reported numbers are used.
Source: Company data, Wind, AMAC, Respective companies’ annual reports (2015)
Exhibit 7: DFZQ has the largest proportion of revenue Exhibit 8: …resulting in AFS and trading assets exposure to investment income… collectively accounting for 44% of DFZQ’s total assets Operating revenue breakdown Total assets breakdown
(%) Operating Revenue Breakdown (2015) Total Assets Breakdown (2015) 110 100% Others 9% 9% Others 100 14% 16% 3 6 4 4 2 4 5 90% 20% 19% 19% 5 27% 9 10 12% 90 16 13 8% 13 80% 23% 1% 23 Interest 9% AFS 80 income 70% 15% 37 31 22 8% 29% 24 22% 13% 70 26 10 29% 31 60 Trading 60% Trading 60 5 19% 20% 3% 48% 8 income 22% 5% 1 10 50% 50 11 6 15% 12 7 33 3% 6% 20% Repo assets 7 6 Asset 40% 6% 13% 22% 40 9 7 management 16% 15% 13% 9 30% 12% 2% 30 11% 3% Margin 48 49 6 Investment 7% loans 20 41 45 35 36 banking 20% 36% 31 30% 22 28% 28% 27% 10 10% 24% 22% 21% Customer Brokerage deposit 0 (2) (1) 0% -10 CITICS HTS GFS HTSC CMS CES CICC DFZQ CITICS HTS GFS HTSC CMS CES CICC DFZQ
Source: Company data, Respective companies’ annual reports Source: Company data, Respective companies’ annual reports
Goldman Sachs Global Investment Research 10 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 9: DFZQ’s ROE has been more volatile than peers Exhibit 10: DFZQ’s 2015 ROA is above peers due to large given higher exposure to prop trading proprietary trading gains ROE comparison DuPont comparison with our coverage
(In 2015) CITICS HTS GFS HTSC CMS CES CICC Avg DFZQ DFZQ Peer avg ROE (%) ROE 16.6% 18.0% 22.5% 17.5% 24.3% 23.1% 16.0% 19.7% 27.5% 30 27.5 leverage 4.6x 5.3x 5.6x 5.9x 5.4x 4.7x 6.0x 5.4x 5.9x 24.5 ROA 3.6% 3.4% 4.0% 3.0% 4.5% 4.9% 2.7% 3.7% 4.6% 25 20.7 Brokerage 3.4% 2.7% 4.2% 3.5% 5.1% 4.8% 3.4% 3.9% 2.2% 20 15.5 IBD 0.8% 0.5% 0.6% 0.4% 1.1% 0.8% 3.6% 1.1% 0.6% 13.7 13.714.4 Asset mgmt 1.1% 0.5% 1.1% 0.1% 0.5% 0.9% 1.1% 0.8% 0.9% 15 13.812.2 Other fees 0.1% 0.1% 0.0% 0.0% 0.1% 0.1% 0.3% 0.1% 0.0% 7.7 10 7.4 5.3 6.6 6.1 NII 0.5% 1.0% 0.9% 1.1% 1.1% 1.4% -0.1% 0.9% -0.2% 4.2 5 Prop/inv't gains 3.6% 2.4% 3.1% 1.9% 2.3% 2.5% 2.5% 2.6% 5.9% Others 0.1% 0.3% 0.2% 0.2% 0.2% 0.1% 0.2% 0.2% 0.4% 0 Revenue 9.6% 7.6% 10.2% 7.2% 10.5% 10.7% 11.0% 9.5% 9.9% 2008 2009 2010 2011 2012 2013 2014 2015 -5 Opex -4.2% -2.8% -4.7% -3.3% -4.7% -4.4% -7.5% -4.5% -3.8% Tax + others -1.8% -1.4% -1.5% -1.0% -1.2% -1.4% -0.9% -1.3% -1.4% -10 NPAT 3.6% 3.4% 4.0% 3.0% 4.5% 4.9% 2.7% 3.7% 4.6% -15 (11.6) CIR (incl. biz tax) 43% 37% 46% 45% 45% 41% 68% 47% 39%
Note: Company’s 2008-2012 data from its A-share audited financial reports.
Source: Company data (2008-2015), Respective companies’ annual reports for Source: Company data, Respective companies’ annual reports peer avg.
Exhibit 11: DFZQ’s revenue growth is faster than peers, if Exhibit 12: Non-investment income generation ability has we strip away prop trading room to catch up Non-proprietary revenue growth (%) Non-proprietary revenue / non-prop assets (%)
2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E CITICS 29 67 56 (16) 6 10 CITICS 7.2 7.0 8.6 8.4 8.4 8.1 HTS 11 31 100 (26) 15 16 HTS 8.1 4.3 5.8 4.0 4.2 4.3 CMS 46 76 132 (36) (0) 10 CMS 7.8 5.9 10.2 7.1 6.6 6.4 CES (7) 58 132 (34) 0 8 CES 7.9 5.6 8.2 6.9 6.7 6.5 HTSC 30 44 111 (36) 3 13 HTSC 7.7 4.4 6.9 4.3 4.2 4.1 GFS 8 74 135 (25) 6 13 GFS 7.8 5.5 9.7 8.1 7.7 7.4 CICC (3) 44 67 (9) 5 14 CICC 13.3 12.2 13.2 10.4 9.5 9.7 DFZQ (10) 44 279 (7) 20 16 DFZQ 4.5 2.7 5.3 4.4 4.6 4.5 Average 13 55 126 (24) 7 13 Average 8.0 6.0 8.5 6.7 6.5 6.4
Source: Company data (2013-2015), Gao Hua Securities Research (2016E- Source: Company data (2013-2015), Gao Hua Securities Research (2016E- 2018E) 2018E)
Goldman Sachs Global Investment Research 11 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 13: DFZQ has a relatively modest scale in IB IBD market share
IBD market share by underwriting amount 2011 2012 2013 2014 2015 ECM CITICS 8.4% 11.5% 6.6% 6.8% 9.5% HTS 3.0% 2.4% 4.5% 7.0% 3.6% GFS 4.0% 5.4% 0.9% 5.5% 4.9% HTSC 1.7% 2.0% 3.1% 4.7% 4.8% CMS 5.0% 3.3% 1.8% 3.6% 4.6% CES 2.2% 1.1% 0.8% 0.2% 1.6% CICC 6.6% 5.7% 9.0% 3.2% 2.8% DFZQ 1.3% 0.5% 0.2% 0.9% 0.6%
ECM - IPOs CITICS 6.5% 17.1% n.a. 7.9% 7.7% HTS 3.2% 2.5% n.a. 2.4% 1.9% CGS 1.7% 0.8% n.a. 2.0% 3.8% GFS 3.3% 6.8% n.a. 18.5% 2.9% Huatai 3.1% 5.1% n.a. 4.0% 7.4% CMS 4.0% 4.1% n.a. 10.5% 3.2% CES 2.9% 0.7% n.a. 1.2% 8.2% CICC 2.3% 1.4% n.a. 3.1% 2.8% DFZQ 1.6% 0.3% n.a. 0.7% 1.8% DCM CITICS 5.7% 5.1% 3.9% 5.0% 3.4% HTS 0.8% 1.8% 1.3% 0.9% 1.2% GFS 0.9% 0.7% 0.8% 1.1% 1.2% HTSC 0.3% 0.6% 0.8% 1.1% 0.6% CMS 0.6% 0.8% 0.9% 1.1% 2.2% CES 0.4% 0.4% 0.3% 0.2% 0.8% CICC 4.6% 3.8% 1.5% 1.8% 1.1% DFZQ 0.1% 0.1% 0.3% 0.4% 0.4%
Source: Wind
Exhibit 14: DFZQ scores highly in asset management capability Comparison of our covered brokers CITICS HTS GFS CICC HTSC CMS CES DFZQ IBD franchise 54453322 Asset management capacity 52443324 Branch network 44414333 Net capital level 44423322 Brokerage franchise 44325323 Client financing 54444433 Sales and trading 54452323 Operating efficiency 35313323 Global network 32141121
Total 3833312828262024 Note: Higher scores indicate higher market share/capabilities, 5 being the highest and 1 being the lowest.
Source: Gao Hua Securities Research
Goldman Sachs Global Investment Research 12 August 18, 2016 Orient Securities Co. (3958.HK)
Key strengths
1. An early mover into brokerage AM with favorable asset mix and track record DFZQ has been proactively leveraging its investment and trading expertise to manage clients’ assets. As an early mover in the industry, the company has developed a differentiated and profitable AM franchise. An early mover into brokerage AM DFZQ was among the first batch of securities firms in China to conduct collective asset management (CAM) business in 2005 and to obtain mutual fund management license in 2013. It was one of the earliest asset management firms qualified as an investment manager for insurance funds in 2012. Contribution from investment management segment to total revenue rose from 4.5% in FY13 to 12.6% in 1Q16. AUM increased to Rmb117 bn as of 1Q16 from Rmb40bn in 2013. In addition, DFZQ is the largest shareholder of China Universal, which was ranked No. 7 among fund management companies by AUM as of 1Q16, according to Asset Management Association of China (AMAC). Healthy product mix Unlike its peers focusing on volume growth and the passive channel business, DFZQ holds a strong position in high-margin active equity products. According to AMAC, it was ranked No. 5 in terms of AM fee income and No. 11 in terms of active management AUM in YE15. We note that majority of the CAM fee income (Rmb887 mn, or 4.62% of average AUM) in FY15 was performance-based fees. We think the company is well- positioned to further strengthen its AM franchise in the longer run given rising asset allocation demand from households. Having said that, DFZQ’s incentivized fee structure could make AM revenue more volatile than traditional mutual funds. Strong track record The company has achieved solid performance for all of its asset management products. From 2005 to March 31, 2016, the average annualized return of all discretionary management equity products was 23.1%, compared with 12.6% return of CSI 300 Index during the same period. Orient Securities Asset Management had 151 employees, among which 65 were investment and research professionals. The turnover rate of the investment and research team was only 3% in 2015.
Exhibit 15: Majority of DFZQ’s AM products are under Exhibit 16: … which has achieved good investment return discretionary management… over the past few years DFZQ’s AM product mix DFZQ’s annualized return vs CSI300
CAM TAM Rmb bn DFZQ discretionary product annualised return SAM MF CSI 300 price index return % Discretionary (RHS) 60% 120 100% 50% 100 90% 89% 90% 40% 80 80% 74% 30% 60 70% 65% 40 60% 20%
20 50% 10%
- 40% 0% 2013 2014 2015 1Q16 2013 2014 2015 2005 - Mar 2016 -10% Note: TAM=Targeted Asset Mgmt.; SAM= Specific Asset Mgmt.; MF= Mutual Fund.
Source: Company data Source: Company data, Bloomberg
Goldman Sachs Global Investment Research 13 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 17: This outperformance is largely driven by asset Exhibit 18: China Universal, the mutual fund (MF) in allocation, where 29% of CAM assets were invested in which DFZQ has a 40% stake, saw 95% AUM CAGR from equities last year 2013-2015 DFZQ’s CAM product by asset mix (YE2015) vs. GFS, which China Universal’s AUM and fee income has a strong franchise in active AM as well
Rmb bn Rmb mn CAM product By AUM (Rmb mn) % AUM AUM MF AUM MF Fee income (RHS) by asset mix GFS DFZQ GFS DFZQ 600 2,000 1,728 Equity 8,309 7,764 2% 29% 500 1,700 Bond 212,388 14,586 62% 54% 400 1,400 Fund 57,728 2,002 17% 7% 300 1,100 200 800 800 Cash 42,446 1,491 12% 6% 713 Others 19,971 1,202 6% 4% 100 500 - 200 Total 340,841 27,046 100% 100% 2013 2014 2015 1Q16
Source: Wind Source: Wind
2. Strong potential to grow wealth management business We believe DFZQ could tap into the opportunities presented by its high-end retail and institutional customers considering its: 1) strong footing in Shanghai and other economically developed regions, 2) differentiated wealth management franchise, and 3) growing synergies within business units. Focus on high-end customers Among its 921,600 retail clients, 6.8% are affluent and high-net-worth individuals with an account balance in excess of Rmb500,000 and Rmb5 mn as of March 31, 2016. These high-end customers generated 78% of retail client account balance (as of 1Q16). In addition, the company had 3,800 institutional and corporate clients in the securities brokerage business, generating 55% of total account balance (as of 1Q16). Shanghai as strategic location Shanghai is home to 180,000 high-net worth individuals (HNWI) with personal wealth of over Rmb10 mn in 2015 and per capita disposable income of urban residents at Rmb47,710 in 2014, based on Wind data. With growing personal wealth, the demands of investors for comprehensive financial services are also rising. Also, Shanghai provides convenient access to fast-growing institutional investors including mutual funds and private hedge funds based there. 60% of DFZQ’s 3,698 staff and 38% of its 120 brokerage branch offices are located in Shanghai. Growing synergies and collaboration to promote one-stop services Leveraging its integrated business platform, DFZQ is able to achieve business synergies among different units and subsidiaries to provide customized services to its high-end client base. The share of cash equity commission declined to 41% of WM revenue in 1Q16 from 72% in 2013, driven by growth in securities financing and future brokerage (Exhibit 23). We see increasing cross-selling and collaboration potential across business units, including securities financing, investment banking, and asset management. Leveraging its strong network of securities brokerage branches, DFZQ has been efficient in the distribution of asset management products — one of the key drivers of its AUM growth.
Goldman Sachs Global Investment Research 14 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 19: Among DFZQ’s 921,600 retail clients, 6.8% are Exhibit 20: These high-end customers generated 78% of high-end clients retail client account balance as of 1Q16 Number of client accounts, as of 1Q16 % account balance by high-end clients
Number of client accounts (k) % of high-end clients % of brokerage and wealth mangement 85% revenue contributed by high-end clients 1,000.0 8.2% 9.0% 7.6% 900.0 8.0% 6.8% 800.0 7.0% 80% 700.0 6.0% 600.0 4.8% 5.0% 75% 500.0 895.6 921.6 4.0% 400.0 639.3 685.3 3.0% 70% 80.6% 300.0 77.7% 200.0 2.0% 75.7% 100.0 1.0% 65% - 0.0% 66.5% 2013 2014 2015 1Q16 60% Note: High-end clients defined as individuals with account balance in excess of 2013 2014 2015 1Q16 Rmb500,000.
Source: Company data Source: Company data
Exhibit 21: The company had 3,800 institutional and Exhibit 22: There is room for DFZQ to improve its cross- corporate clients in securities brokerage business, selling ability and better monetize its high-end client generating 55% of account balance as of 1Q16 base Account balance by client type Revenue from sales of financial products, FY2015 Revenue from sales of financial Account balance, Institutional Retail (Rmb mn) Rmb bn products 1,400 3.00% 350 As % of total revenue (RHS) 1,200 300 2.50% 1,000 250 2.00% 800 200 1.50% 600 150 1.00% 400 100 200 0.50% 50 - 0.00% - CITICS GFS HTSC CMS CES CICC DFZQ HTS 2013 2014 2015 1Q16
Source: Company data Source: Company data
Exhibit 23: Share of cash equity commission declined Exhibit 24: DFZQ ranked No. 9 in terms of transaction from 72% in 2013 to 41% of WM revenue in 1Q16, driven volume of collateralized stock repurchases by growth in securities financing and future brokerage As of 2015 Brokerage revenue breakdown Securities brokerage Futures brokerage Rank Broker Amt to be repurchased Mkt Share Securities financing % securities brokerage (RHS) (Rmb bn) 10,000 100% 1 HTS 57.5 8.1%
8,000 80% 2 CITICS 52.9 7.5% 72% 3 HTSC 38.9 5.5% 6,000 60% 4 GTJA 33.6 4.7% 53% 54% 5 Zhongtai Sec 27.0 3.8% 4,000 41% 40% 6 Guosen Sec 26.3 3.7% 7 GFS 25.8 3.6% 2,000 20% 8 Huarong Sec 25.7 3.6% 9 DFZQ 25.0 3.5% - 0% 2013 2014 2015 1Q16 10 CMS 22.9 3.2%
Source: Company data Source: Company data , Wind
3. Market-oriented incentive and operating structure
Goldman Sachs Global Investment Research 15 August 18, 2016 Orient Securities Co. (3958.HK)
We believe the company benefits from its above-peer operating efficiency, experienced management team, and strong track record in risk management. Above-peer operating efficiency The firm has achieved above-peer revenue output per head at both the group and brokerage level, and compensation level in FY15 was in line with peers. We note that this reflects the company’s focus on management efficiency and efforts to encourage capital-light branches with less staffing and space. Experienced management team The core management team has over 10 years of experience in the securities and financial industries on average. Mr. Pan Xinjun, Chairman, and Mr. Jin Wenzhong, President have been with the company for over 13 and 18 years, respectively. Strong track record in risk management The company has established a comprehensive risk management system and an effective internal control mechanism. Since China Securities Regulatory Commission (CSRC) started publishing the classification evaluation results for securities firms in 2010, the company has received AA or A regulatory rating for six consecutive years (AA being the highest rating received by PRC securities firms). During 2013-15, DFZQ was not subject to any administrative penalties.
Exhibit 25: DFZQ’s investment department saw the Exhibit 26: DFZQ has a high return on human capital fastest expansion of headcount among other (higher revenue per head), while compensation per head departments is in line with sector peers Headcount by department, 2013-2015 Revenue per head vs. compensation per head, 2015
Staff Mix 2013 2014 2015 '13 to '15 2015 Revenue per head ('000 RMB) Comp per head ('000 RMB RHS) CAGR 5,000 2,000 Stuff number 2,938 2,962 3,698 12% Parent cos 2,206 2,262 2,707 11% 4,000 1,600 Brokerage 1,723 1,757 2,028 8% IB 224 233 255 7% 3,000 1,200 Research 156 140 151 -2% Investment 58 92 144 58% 2,000 800 Finance 128 148 189 22% AM 101 73 146 20% 1,000 400 IT 162 178 219 16% 4,839 4,202 3,916 3,571 3,437 3,124 3,017 2,498 2,326 Management 155 173 289 37% - - Others 231 168 277 10%
Note: Data from company’s A-share audited financial reports.
Source: Company data (2013-2015) Source: Company data, Respective companies’ annual reports.
Goldman Sachs Global Investment Research 16 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 27: DFZQ has become more efficient at its branch Exhibit 28: …resulting in DFZQ having fewer brokerage level, as seen by the increasing proportion of Type B and staff per branch compared with peers C offices over the years… Brokerage revenue per brokerage staff against brokerage Type B and C offices are “capital-light” branch offices that staff per branch, as of 2015 provide fewer types of client services
Type A Type B Type C % of Type B and C (RHS) 3,500 # of branches % of branches 120 60% 3,000 HTS 2,500 HTSC 100 50% 49% 2,000 DFZQ CITICS 80 40% GFS 1,500 CMS CES
37% staff ('000) 60 30% 1,000
40 20% 500 Brokerage rev per brokerage brokerage rev per Brokerage 20 10% - - 10 20 30 40 50 10% Brokerage staff per branch 0 0% 2013 2014 2015 Note: We estimate GFS’ brokerage staff at 75% of total employees in 2015, in line with the trend in 2013-2014.
Source: Company data Source: Company data, Gao Hua Securities Research
Key risks
DFZQ’s revenue base is less diverse than industry peers. Potential A-share market weakness could negatively affect DFZQ’s trading results and brokerage commissions, and to a smaller extent its asset management business, in our view. We think this, coupled with DFZQ’s lack of scale and above-average balance sheet leverage, adds volatility to ROE through market cycles. Moreover, we expect the company to face rising competition over the near/medium term. Credit risk may arise from stock-based lending and margin finance businesses. 1) Investment loss from investment and trading activities DFZQ has relatively high investment / trading exposure subject to market volatility. Total investment assets (in trading and AFS) amounted to Rmb80,245 mn as of March 31, 2016, out of which Rmb43,187 mn was proprietary investment. Investment income is the largest driver of the company’s revenue so far, and has accounted for 60% of DFZQ’s 2015 net revenue vs. average 28% for our coverage (Exhibit 7). However, a potential slowdown in equity and bonds market could hinder DFZQ’s profitability through lower investment yields, in our view. For example, we estimate a 1pp decrease in investment return/yield could negatively impact DFZQ’s 2016E NPAT by 19.9%.
As of YE15, DFZQ made a total investment of Rmb6.5bn with China Securities Finance Co., Ltd (CSF), and this balance is booked under AFS financial assets. According to the agreement, while CSF executes unified operation and investment management, all the investors including DFZQ share investment risks as well as potential income in proportion to their contributions. Our sensitivity analysis (Exhibit 32) implies that if the market value of these investments were to decrease by 20%, it would adversely affect DFZQ’s 2016E NPAT by 25% with the requirement of higher provisions.
On a separate note, the company has actively reallocated some equity investment to relatively more stable fixed income investment, as shown by the decreasing proportion of equity investment to 23% in 1Q16 vs. 32% in 2015, and the estimated total bond investment leverage (we use bond positions/(bond positions - repo borrowings backed by bond)) is below our sector average. Having said that, the leverage level could be higher if we consider only principal investment of bonds, and strip out the portion for liquidity management.
Goldman Sachs Global Investment Research 17 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 29: DFZQ has above-peer earnings sensitivity to investment return 2016E NPAT sensitivity analysis
Equity Net Brokerage Average margin ECM Investment Average Cost-to- market commission market financing underwriting return AUM income ratio ADT rate share balance amount
Change by +10% +1bp +5% +10% +5% +1pp +5% -2pp CITICS 3.8% 10.2% 1.9% 3.2% 0.3% 11.8% 2.1% 4.2% HTS 4.5% 11.7% 2.3% 3.8% 0.3% 8.6% 1.0% 3.6% GFS 6.1% 13.9% 3.0% 5.1% 0.5% 12.7% 2.5% 4.6% HTSC 6.8% 28.3% 3.4% 6.0% 0.3% 12.8% 0.3% 3.7% CMS 7.2% 15.2% 3.6% 6.3% 0.5% 10.2% 0.9% 4.0% CES 7.4% 18.0% 3.7% 6.5% 0.4% 8.2% 1.6% 4.1% CICC 4.5% 7.8% 2.2% 1.0% 1.2% 15.9% 1.9% 6.0% DFZQ 4.6% 10.8% 2.3% 3.0% 0.2% 19.9% 1.3% 3.9%
Note: The blue-shaded numbers denote the top 2-3 brokers by earnings sensitivity.
Source: Gao Hua Securities Research
Exhibit 30: Proportion of investment into equities Exhibit 31: Sales & Trading as % of total net revenue increased to 32% in 2015 (vs. 23% in 2013), but quickly decreased to 47% in 2015 (vs. 64% in 2013), showing a dropped back to 23% in 1Q16 more diversified earnings base DFZQ’s proprietary trading return vs. investment asset Investment income and proprietary trading income allocation
Rmb bn As % of total net revenue Prop return 14.4% 27.6% 44.5% n.a prop invest. 60 80% 93% 76% 75% 16% as % of total 23% 22% 32% 23% % equities & others invest. 50 income 60%
40 42% Bond 40% 32% 14% Fixed 34 income 30 20% 39% 33 Equity & 33% Securities 30 22% 24% 20 Others & Deriv. 24 0% 2013 2014 2015 1Q16 10 16 -20% -35% 7 8 10 - -40% 2013 2014 2015 1Q16
Source: Company data Source: Company data
Exhibit 32: Should market value (MV) of the investments with CSF fall by 20%, it could adversely affect DFZQ’s 2016E NPAT by 25% through higher impairment loss Scenario analysis of DFZQ’s investment with CSF
Investment with CSF (Rmb mn) 6,461 if MV drop by -10% -20% -30% Provision required 646 1,292 1,938 Pre-provision Income 4,350 4,350 4,350 Provision 240 240 240 Additional provision 407 1,053 1,699 Adjusted Provision 646 1,292 1,938 Pre-tax profit 3,704 3,057 2,411 After-tax net profit 2,917 2,432 1,948 Impact on EPS (0.05) (0.14) (0.22) Change -9% -25% -40%
Source: Company data, Gao Hua Securities Research
Goldman Sachs Global Investment Research 18 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 33: >40% of DFZQ’s bond investments are rated Exhibit 34: DFZQ has below-peer leverage on bond AAA or above (including treasuries) investment Bond investment by rating Bond investment leverage, x, (YE15)
2013 2014 2015 1Q16 Bond investment leverage, x Treasury 4,799 5,389 5,998 7,293 3.5 x Credit bonds 3.0 x AAA or higher 5,674 6,220 7,616 6,370 2.5 x AA to AAA 13,204 18,426 20,359 19,343 Sector avg: 1.8x Below AA 44 60 40 290 2.0 x Total 23,720 30,094 34,014 33,297 1.5 x
1.0 x as % of total Treasury 20% 18% 18% 22% 0.5 x AAA or higher 24% 21% 22% 19% 0.0 x AA to AAA 56% 61% 60% 58% CITICS HTS HTSC GFS CES CMS CICC DFZQ DFZQ - Below AA 0% 0% 0% 1% prop only Total 100% 100% 100% 100%
Source: Company data Source: Company data, Gao Hua Securities Research
2) Rising competition over the near/medium term Rising competition from peers and potential new entrants may continue to drive down industry-wide commission rates and slow down growth in the traditional brokerage business over time. In 2015, brokerage pricing competition intensified, and the average industry-wide commission rate was cut by 26% (based on Wind, SAC data). This could pose a modest headwind for DFZQ to maintain its brokerage market share and fee rates, even though its institutional/high-end retail client base is less sensitive to pricing, in our view. Exhibit 35: Potential headwind for DFZQ to maintain its Exhibit 36: DFZQ’s onshore brokerage trading volume is brokerage market share and fee rates less volatile than peers, partially due to its Brokerage commission rate change, yoy institutional/high-end client focus Brokerage trading volume change, yoy
DFZQ Sector average Trading Volume YoY QoQ Change (%) 4Q15 1Q16 4Q15 1Q16 0.080% CITICS 46% -29% -29% -40% 0.075% HTS 56% -27% -17% -39% 0.070% CMS 49% -34% -7% -45% CES 72% -28% 3% -51% 0.065% HTSC 69% -19% -10% -41% 0.060% GFS 70% -21% -7% -42% 0.055% DFZQ 77% -16% 3% -43% Sector Avg 63% -25% -9% -43%
0.050% 0.045% 0.040% 2012 2013 2014 2015 Note: Data for company from its A-share audited financial reports.
Source: Company data (2012-2015), Wind Source: Wind
We believe focusing on WM and AM services to high-end retail, institutional, and corporate clients, such as brokerage financing and product cross selling could help DFZQ as these are differentiated services to targeted clients vs. brokers targeting the mass end of the market. At the moment, we see substantial room for DFZQ to improve its cross-selling ability and better monetize its high-end client base (Exhibit 22).
Goldman Sachs Global Investment Research 19 August 18, 2016 Orient Securities Co. (3958.HK)
3) Credit risk arising from stock-based lending and corporate bond investment and underwriting The expansion of its capital intermediary business, including margin finance and collateralized stock repo, may expose DFZQ to credit risks. We expect such stock-based lending may account for 23% of total assets by YE18E vs. 18% at YE15. The company manages the risks by: 1) controlling client selection and credit assessment such as due diligence and collateral ratio, 2) real-time monitoring of collateral ratios, 3) alerting clients and closing out client position, if necessary.
Current buffer from collaterals seems comfortable: Overall collateral ratio for margin finance and securities lending was at 290.4% and 283.8% as of YE15 and March 31, 2016 respectively, compared with 150%/130% alert/liquidation level as of 1Q16. If the market value were to decline 40%, collateral ratio would stay above 150%, as illustrated in Exhibit 37. DFZQ liquidated in total Rmb11mn, or 0.06% of total margin finance and securities lending balance in 2015. As of YE15 and March 31, 2016, collateral ratio of collateralized stock repurchase was 359% and 284%, respectively, (Exhibit 38). There was no loss from the stock repurchase business so far.
Further, we note that there could be more impairment losses from its bond portfolios, as potential bond default events and ongoing deleveraging of bond investors may continue to affect the value of lower-grade bonds. 78% of the company’s bond investment portfolio was in credit bonds as of March 31, 2016. The percentage of credit bond rated AA and above was higher than 99% as of March 31, 2016 (Exhibit 33). We forecast impairment charges for each year equivalent to 0.1% of total assets during 2016E-18E to factor in potential losses from AFS investment and stock-based lending business.
Exhibit 37: Margin finance and securities lending portfolio Exhibit 38: Collateralized stock repurchase and had 284% collateral ratio as of 1Q16 repurchase agreement portfolio also has a healthy Margin finance and securities lending portfolio collateral ratio of 284% as of 1Q16 Stock repurchase portfolio
MF & Securities Coverage Ratio MV down by 20% Stock repurchase Coverage Ratio MV down by 20% Lending MV down by 40% MV down by 40% 350% 400%
300% 350% 300% 250% 250% 200% Alert level: 150% 200% 150% Alert level: 150% 150% Minimum level: 130% 100% 100% Minimum level: 130% 50% 50%
0% 0% YE15 1Q16 YE15 1Q16
Source: Company data Source: Company data
Goldman Sachs Global Investment Research 20 August 18, 2016 Orient Securities Co. (3958.HK)
Financials
We forecast DFZQ to post -47%/28%/24% revenue growth in 2016E/2017E/2018E (-6% CAGR1) and -59%/26%/32% NPAT growth (-12% CAGR) from historically high levels in 2015. We expect NII, IB, and AM to be the major growth drivers in 2016, partially offsetting the slowdown in brokerage commissions and proprietary trading.
Exhibits 40 and 41 illustrate our income statement and balance sheet forecasts, respectively; while Exhibit 39 summarizes our key earnings growth assumptions by business lines.
Brokerage: We forecast brokerage commission income to decline by 41% in 2016E and contract by 17% CAGR through 2018E from a historically high base. DFZQ saw brokerage commission growth of 144% in 2015 (vs. 24% in 2014, respectively), as a result of the extremely volatile market conditions in the past year. However, market activities have been weak since the start of 2016, with ADT lowered to Rmb537 bn year-to-date (vs. Rmb1,048 bn in 2015), as per Wind. We expect modest market share recovery to 1.5% in 2018E from 1.5%/1.3%/1.2% in 2013/2014/2015, as the company focuses on high-end retail and institutional/ corporate client base, which is stickier than low-end retail clients. We estimate the proportion of brokerage commission income may rise to 24% of total revenue in 2016E and then come down to 19% in 2017E and 15% in 2018E vs. average 28% in 2013-2015 based on company data.
IB: Steady revenue growth at 13% CAGR driven by 14% CAGR in underwriting income and 11% CAGR in financial advisory income. We expect DFZQ to benefit from rising direct financing. We estimate the share of IB revenue could rise to average 11% of net revenue in 2016E-18E from average 7% in 2012-2014 as IB revenue maintains stable growth vs. volatile trading and brokerage revenues.
Investment: Revenue decline by 69% in 2016E, and 15% CAGR through 2018E reflecting the firm’s transition from a trading house into a more diverse balance sheet- based products and services model, including higher asset allocation to client facilitation and liquidity provision activities. On the other hand, strong proprietary trading return of 13.3% in 2015 is unlikely to be repeated soon, given the lower-yield environment and stagnant market conditions. We forecast the share of trading and investment income to decrease to 39% of net revenue in 2018E vs. average 65% in 2013-2015.
AM: Steady growth of 6% CAGR. We forecast AUM under CAM scheme to grow by 83% over 2015-2018E. We believe stable management fee income growth will offset the volatile incentive income, which is dependent on market conditions. We estimate the share of AM revenue to increase to 13% in 2018E from average 7% in 2013-2015.
Robust growth of NII driven by expansion of stock-based lending (16%/20% CAGR balance growth for margin finance/stock-based lending in FY15-18E) albeit at lower yields over time. The company’s funding cost and pace of new borrowing could come down as well, in our view, given rate cuts last year. We forecast NII to contribute to 15% of net revenue in 2018E vs. -2% in FY15.
Stable CIR at around 49% for FY16E-18E, broadly in line with the average levels during 2013-15 but higher than that in FY15 due to revenue decline and lower operating leverage amid market downturn in FY16. We forecast impairment charges for each year equivalent to 0.1% of total assets during 2016E-18E to factor in potential losses from its available-for-sale investment and stock-based lending business.
1 CAGR in this section refers to 2015-2018E CAGR.
Goldman Sachs Global Investment Research 21 August 18, 2016 Orient Securities Co. (3958.HK)
Balance sheet: Assets to grow at 11% CAGR with a higher proportion being allocated to its client financing business and a lower proportion to proprietary trading; liabilities mix to shift towards more active debt-raising (vs. declining share of customer deposits). We expect balance sheet leverage adjusted for client deposits to go down to 4.3x in YE16E from 4.7x in YE15 before gradually rising to 4.7x by YE18E.
Exhibit 39: We expect a modest market share recovery in brokerage and rapid expansion in DFZQ’s CAM AUM Key earnings drivers by business lines (in Rmb bn, unless stated otherwise)
2013 2014 2015 2016E 2017E 2018E Brokerage Sector ADT (stocks + funds) 202 312 1,080 624 604 668 DFZQ mkt share 1.5% 1.3% 1.2% 1.4% 1.5% 1.5% Commission rate 0.073% 0.063% 0.049% 0.043% 0.039% 0.035% IBD A-share ECM volume 323 547 912 943 1,100 1,273 DFZQ mkt share 0.3% 0.7% 0.5% 0.7% 0.7% 0.7% Commission rate 3.7% 3.2% 3.2% 2.6% 2.6% 2.6% A-share DCM volume 4,019 6,246 12,110 13,059 14,926 16,801 DFZQ mkt share 0.3% 0.5% 0.5% 0.5% 0.6% 0.6% Commission rate 1.1% 0.6% 0.7% 0.7% 0.6% 0.6% Financial advisory income growth 204% 112% 208% 10% 11% 12% Asset management CAM AUM growth 34% -15% 90% 44% 21% 5% Fee rate 1.3% 1.4% 4.6% 1.1% 1.2% 1.4% Net interest income Margin finance Sector balance growth 287% 196% 14% -6% 19% 14% DFZQ mkt share 0.8% 1.0% 1.2% 1.4% 1.5% 1.5% Return on avg balance 8.6% 8.3% 12.3% 8.3% 7.6% 7.8% Investment Trading +AFS assets as % of total 59% 44% 44% 42% 40% 37% Investment yield 6.5% 9.3% 13.3% 2.6% 3.6% 4.1% Note: (1) Commission rates and investment yields are calculated on average annualized basis. Investment yield = investment income / average investment balance, whereby investment balance includes both trading assets and AFS assets. (2) 2013- 2015 data from company’s A-share audited financial reports.
Source: Wind, Company data (2013-2015), Gao Hua Securities Research (2016E-2018E).
Goldman Sachs Global Investment Research 22 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 40: DFZQ’s income statement: -47%/28%/24% revenue growth in 2016E/2017E/2018E (-6% CAGR) and -59% /26%/32% NPAT growth (-12% CAGR) Key income statement items
INCOME STATEMENT YoY growth FY15-18E (Rmb in mn) 2013 2014 2015 2016E 2017E 2018E 2014 2015 2016E 2017E 2018E CAGR Net Fee and commission income 1,620 2,200 5,830 4,159 4,474 5,007 36% 165% -29% 8% 12% -5% Brokerage commission 1,149 1,423 3,465 2,030 1,952 1,988 24% 144% -41% -4% 2% -17% Investment banking income 228 448 895 993 1,142 1,289 96% 100% 11% 15% 13% 13% Asset Management 214 282 1,396 1,066 1,311 1,661 31% 396% -24% 23% 27% 6% Net interest income (654) (764) (259) 923 1,572 1,926 17% N.M N.M 70% 23% N.M. Investment income 2,273 4,042 9,778 3,024 4,314 5,983 78% 142% -69% 43% 39% -15% Memo: Prop trading income 2,149 3,906 9,342 2,480 3,621 5,080 82% 139% -73% 46% 40% -18% Others 44 65 190 132 146 160 48% 192% -30% 10% 10% -6%
Net Total Revenues 3,283 5,543 15,539 8,238 10,506 13,077 69% 180% -47% 28% 24% -6%
Administrative expenses 1,932 2,342 5,222 3,757 4,923 5,415 21% 123% -28% 31% 10% 1% Compensation expenses 1,106 1,448 3,827 2,207 3,141 3,710 31% 164% -42% 42% 18% -1% Other administrative expenses 827 894 1,396 1,549 1,782 2,049 8% 56% 11% 15% 15% 14% Business tax 144 263 818 383 489 607 82% 212% -53% 28% 24% -9% Total Operating Expense 2,077 2,605 6,041 4,139 5,411 6,366 25% 132% -31% 31% 18% 2%
PPOP 1,206 2,939 9,499 4,099 5,095 6,711 144% 223% -57% 24% 32% -11% Pretax Profits 1,134 2,934 9,499 3,859 4,855 6,394 159% 224% -59% 26% 32% -12% Attributable net income 1,007 2,342 7,325 3,021 3,808 5,038 132% 213% -59% 26% 32% -12% Note: (1) Accounting items are presented following the format of China GAAP; (2) 2013-2015 data from company’s A-share audited financial reports; (3) N.M stands for “Not Meaningful”.
Source: Company data (2013-2015), Gao Hua Securities Research (2016E-2018E).
Exhibit 41: DFZQ’s balance sheet: Assets to grow at 11% CAGR over FY15-18E with a rising proportion being allocated to the capital-based intermediary business Key balance sheet items
BALANCE SHEET YoY growth FY15-18E (Rmb mn) 2013 2014 2015 2016E 2017E 2018E 2014 2015 2016E 2017E 2018E CAGR Assets Cash 10,986 23,803 55,344 64,157 69,792 82,180 117% 133% 16% 9% 18% 14% Corp fund 1,581 5,141 11,829 29,241 33,558 42,120 225% 130% 147% 15% 26% 53% Deposit held on behalf of clients 9,405 18,662 43,515 34,916 36,233 40,060 98% 133% -20% 4% 11% -3% Clearing reserves 3,147 5,649 8,825 6,983 7,247 8,012 79% 56% -21% 4% 11% -3% Trading securities 5,116 7,274 31,871 36,188 37,997 39,897 42% 338% 14% 5% 5% 8% Repo assets 2,795 13,519 26,498 33,520 40,559 49,077 384% 96% 27% 21% 21% 23% Financial assets AFS 30,634 40,432 59,877 59,877 62,871 66,014 32%48%0%5%5%3% Total current assets: 54,012 92,862 187,385 205,853 223,766 250,672 72% 102% 10% 9% 12% 10% Total long-term investments: 2,039 2,251 3,123 3,123 3,123 3,123 10%39%0%0%0%0% Total fixed assets: 1,367 1,453 1,644 1,812 1,998 2,203 6% 13% 10% 10% 10% 10% Other assets 3,284 10,772 15,301 16,548 21,108 24,025 228% 42% 8% 28% 14% 16% Of which: margin loans 2,807 9,946 14,241 16,224 20,694 23,554 254% 43% 14% 28% 14% 18% Total assets 60,852 107,530 207,898 227,848 250,588 280,713 77% 93% 10% 10% 12% 11%
Liabilities and shareholder's equity Short-term borrowings 6,315 11,985 18,980 21,922 25,320 29,244 90% 58% 16% 16% 16% 16% Customer brokerage deposits 10,894 21,783 43,193 41,900 43,480 48,073 100% 98% -3% 4% 11% 4% Repo liabilities 21,214 37,106 47,880 55,302 63,873 73,774 75% 29% 16% 16% 16% 16% Total current liabilities: 40,368 72,869 118,784 130,514 147,737 171,243 81% 63% 10% 13% 16% 13% Total long-term debt 4,400 13,043 52,348 51,962 54,561 57,289 196% 301% -1% 5% 5% 3% Total Liabilities 45,074 88,905 172,522 184,114 204,103 230,522 97% 94% 7% 11% 13% 10% Minority interests 228 272 418 418 418 418 20%53%0%0%0%0% Total common shareholder's equity 15,550 18,353 34,958 43,317 46,068 49,773 18% 90% 24% 6% 8% 12% Total liabilities and shareholders' equity 60,852 107,530 207,898 227,848 250,588 280,713 77% 93% 10% 10% 12% 11% Note: (1) Accounting items are presented following the format of China GAAP; (2) 2013-2015 data from company’s A-share audited financial reports.
Source: Company data (2013-2015), Gao Hua Securities Research (2016E-2018E).
Goldman Sachs Global Investment Research 23 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 42: Asset mix: Decreasing portion of asset Exhibit 43: Liabilities mix: Rising share of active allocation to trading and AFS assets borrowing vs. declining share of customer deposits (%) (%)
Total asset breakdown (DFZQ) Total liabilities breakdown (DFZQ) 100 100 Other 5 6 6 11 11 11 7 8 10 Others 17 18 20 10 5 15 13 13 80 5 80 30 28 27 25 15 Repo assets 9 7 16 18 7 Long-term 60 8 60 debts 8 61 Margin 55 59 44 39 42 44 finance 40 44 45 40 42 Short-term 40 38 Trading and borrowings AFS 20 20 securities 24 25 25 25 23 21 21 Customer 21 23 18 Client 17 17 deposits deposits - - 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E and clearing
Source: Company data (2013-2015), Gao Hua Securities Research (2016E- Source: Company data (2013-2015), Gao Hua Securities Research (2016E- 2018E). 2018E).
Exhibit 44: We expect DFZQ to experience lower ROA than peers in 2016 due to sharper decline in trading income and performance-based asset management fees, but gradually close the gap with higher contribution of NII DuPont analysis of DFZQ 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E ROE 13.7% 7.4% 4.2% 6.6% 13.8% 27.5% 7.7% 8.5% 10.5% leverage 4.0x 3.3x 3.0x 3.6x 5.0x 5.9x 5.6x 5.4x 5.5x ROA 3.4% 2.2% 1.4% 1.8% 2.8% 4.6% 1.4% 1.6% 1.9% Brokerage 3.7% 2.6% 2.0% 2.1% 1.7% 2.2% 0.9% 0.8% 0.7% IBD 0.8% 1.1% 0.5% 0.4% 0.5% 0.6% 0.5% 0.5% 0.5% Asset mgmt 0.2% 0.2% 0.2% 0.4% 0.3% 0.9% 0.5% 0.5% 0.6% Other fees 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% NII 0.3% -0.2% -0.4% -1.2% -0.9% -0.2% 0.4% 0.7% 0.7% Prop/inv't gains 2.4% 2.1% 2.9% 3.9% 4.6% 5.9% 1.1% 1.5% 1.9% Others 0.4% 0.5% 0.5% 0.3% 0.2% 0.4% 0.3% 0.4% 0.4% Revenue 8.2% 6.6% 5.7% 6.0% 6.6% 9.9% 3.8% 4.4% 4.9% Opex -3.8% -3.7% -4.1% -3.8% -3.1% -3.8% -1.9% -2.3% -2.4% Tax + others -0.9% -0.6% -0.2% -0.4% -0.7% -1.4% -0.5% -0.5% -0.6% NPAT 3.4% 2.2% 1.4% 1.8% 2.8% 4.6% 1.4% 1.6% 1.9% CIR (incl. biz tax) 47% 57% 72% 63% 47% 39% 50% 52% 49%
ROA gap vs. peers -0.3pp -0.7pp -0.7pp -0.2pp 0.1pp 0.8pp -0.4pp -0.3pp -0.1pp
Note: (1) Accounting items are presented following the format of China GAAP; (2) 2013-2015 data from company’s A-share audited financial reports.
Source: Company data (2010-2015), Gao Hua Securities Research (2016E-2018E)
Goldman Sachs Global Investment Research 24 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 45: 2016E earnings sensitivity to key market assumptions Sensitivity analysis (In Rmb bn, unless stated otherwise) Key assumptions Base case Other scenarios Sector ADT 624 300 500 700 900 1100 Sector MF balance 1,104 600 1000 1400 1800 2200 Investment return 2.6% 1.5% 2.5% 3.5% 4.5% 5.5% Mainland underwriting volume ECM 943 800 900 1,000 1,100 1,200 DCM 13,059 10,000 11,500 13,000 13,000 13,000 (a) If all key assumptions are changed NPAT 3.0 1.4 2.6 3.8 5.0 6.2 Change -53% -13% 27% 67% 106% Net assets 43.3 41.7 42.9 44.1 45.3 46.5 Change -4% -1% 2% 5% 7% ROE 7.7%3.7%6.8%9.7%12.5%15.2% Change -4.0pp -1.0pp 2.0pp 4.8pp 7.5pp (b) If only ADT assumption is changed NPAT 3.0 2.3 2.8 3.2 3.6 4.0 Change -22% -9% 5% 19% 33% Net assets 43.3 42.6 43.1 43.5 43.9 44.3 Change -2% -1% 0% 1% 2% ROE 7.7%6.0%7.1%8.1%9.1%10.1% Change -1.7pp -0.6pp 0.4pp 1.4pp 2.4pp (c) If only MF balance assumption is changed NPAT 3.0 2.9 3.0 3.1 3.2 3.2 Change -3% -1% 2% 5% 7% Net assets 43.3 43.2 43.3 43.4 43.5 43.5 Change 0% 0% 0% 0% 1% ROE 7.7%7.5%7.7%7.9%8.1%8.3% Change -0.2pp -0.1pp 0.1pp 0.3pp 0.5pp (d) If only investment return assumption is changed NPAT 3.0 2.3 3.0 3.6 4.3 5.0 Change -24% -2% 20% 42% 64% Net assets 43.3 42.6 43.3 43.9 44.6 45.3 Change -2%0%1%3%4% ROE 7.7%5.9%7.6%9.2%10.8%12.4% Change -1.8pp -0.2pp 1.5pp 3.1pp 4.7pp (e) If only underwriting volume is changed NPAT 3.0 2.9 3.0 3.0 3.0 3.1 Change -3% -1% 0% 1% 1% Net assets 43.3 43.2 43.3 43.3 43.3 43.3 Change 0% 0% 0% 0% 0% ROE 7.7%7.5%7.6%7.7%7.8%7.8% Change -0.2pp -0.1pp 0.0pp 0.0pp 0.1pp Note: ECM = Equity Capital Market, DCM = Debt Capital Market.
Source: Gao Hua Securities Research
Goldman Sachs Global Investment Research 25 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 46: A sharp decline in ROA and ROE was observed in 1Q16 due to weak investment returns and lower brokerage commissions Sector 1Q16 operating results
1Q16 (Rmb mn) CITICS HTS GFS HTSC CMS CES DFZQ Aggregate Income Statement 33% 30% 32% 44% 55% 45% 32% 37% Commission fees 5,439 2,608 3,207 2,122 2,167 1,424 1,223 18,189 Brokerage 2,311 1,393 1,525 1,499 1,326 839 447 9,340 IBD 1,254 873 652 496 475 369 410 4,530 AM 1,666 113 996 60 280 85 225 3,425 Investment 1,190 1,142 1,432 487 (24) 153 346 4,725 NII 322 875 49 653 118 230 (209) 2,038 Net revenue 7,023 4,639 4,778 3,414 2,417 1,850 1,385 25,506 NPAT 1,641 1,754 1,806 1,246 1,009 597 423 8,476 Memo: unrealized FV change (1,660) (1,227) (1,565) (1,377) (1,278) (1,106) (1,590) (9,803) of AFS assets Balance sheet Assets 584,585 564,771 371,144 421,775 252,634 191,438 185,935 2,572,282 Customer advances 57,608 69,403 52,818 50,871 47,762 31,681 10,467 320,610 Trading assets 140,275 94,201 83,062 102,040 48,635 31,408 21,862 521,483 AFS assets 102,033 47,259 86,076 39,069 37,716 15,489 58,383 386,026 Liabilities 442,763 445,924 291,097 340,364 204,492 149,556 151,658 2,025,855 Customer deposits 151,384 111,895 108,840 113,230 77,042 67,758 37,638 667,788 Shareholders’ equity 139,052 108,341 77,667 80,606 48,058 39,940 33,815 527,478
Sequential trend Commission rate (bp) 3.51 3.78 4.49 2.48 4.87 4.12 4.57 3.98 % qoq 19% -23% -1% 0% 0% 15% 5% 2% Investment return 2.0% 3.1% 3.3% 1.3% -0.1% 1.4% 1.6% 2.0% % qoq -6.3pp -12.1pp -1.8pp -5.6pp -8.5pp -9.3pp -8.9pp -6.8pp Adjusted investment return -1.7% -1.3% -1.5% -3.5% -7.5% -11.7% -8.3% -3.6% % qoq -11.8pp -14.6pp -9.8pp -15.2pp -18.4pp -38.4pp -22.9pp -15.4pp ROAA 1.1% 1.2% 1.8% 1.1% 1.5% 1.2% 0.9% 1.3% % qoq -1.3pp -2.1pp -0.9pp -0.6pp -1.3pp -2.1pp -2.0pp -1.4pp ROAE 4.7% 6.5% 9.3% 6.2% 8.4% 5.9% 4.9% 6.4% % qoq -6.5pp -11.6pp -5.6pp -4.2pp -9.3pp -10.9pp -11.9pp -8.0pp Active leverage 3.1x 4.2x 3.4x 3.8x 3.7x 3.1x 4.4x 3.6x % qoq -0.2x 0.0x -0.5x -0.2x -0.5x 0.0x -0.3x -0.2x
% qoq Brokerage -43% -49% -41% -41% -44% -40% -38% -43% IBD -17% 32% -32% -26% -49% -9% 63% -16% AM -8% -73% -21% -159% -20% -84% -7% -24% NPAT -57% -63% -36% -39% -51% -64% -70% -54% Total assets -5% -2% -11% -7% -13% -3% -11% -7% Shareholders’ equity 0% 1% 0% 0% -1% -1% -3% 0%
Note: Accounting items are presented following the format of China GAAP; (2) 1Q16 data for DFZQ from the company’s A- share audited financial report.
Source: Company data (1Q16), Respective companies’ 1Q16 report
Goldman Sachs Global Investment Research 26 August 18, 2016 Orient Securities Co. (3958.HK)
Valuation: Our 12-m TP of HK$9.2 based on P/B-ROE framework
We believe the P/B-ROE framework using global peers and a blended ROE is the most appropriate methodology to value China brokers. The blended ROE refers to the average of 2016E ROE and long-term (2022E) ROE. By using blended ROE, we can factor in China brokers’ near-term profitability as well as long-term ROE outlook post reforms/business model evolvement such as capital market reforms, derivative market development, and asset management business growth.
Using this valuation methodology, we derive our 12-month target price for DFZQ of HK$9.20, based on 1.17X 2016E P/B derived from the global PE/ROE relationship (Exhibit 47). DFZQ’s 9.6% blended ROE reflects:
2016E ROE of 7.7% (vs. peer average of 9.2%), based on our earnings forecast. We forecast DFZQ’s near-term earnings growth in 2016/17E to be lower than peers as a result of uncertainties in prop trading and high 2015 base.
Long-term ROE of 11.5% (vs. peer average of 13.6%), reflecting potential LT competiveness gain after DFZQ gains scale and stability via diversifying business lines.
Exhibit 50 summarizes our key assumptions and rationale behind our 12-m TP for DFZQ.
Exhibit 47: P/B-ROE relationship of global peers
Global Peer PB/ROE Linear (Global Peer PB/ROE) 2016E PB x
3.00 Equation: Implied P/B =14.68*ROE -0.24 SCHW
2.50 CJS
CMS 2.00 HTSC-A GFS-A HTS-A Guoyuan Macquarie 1.50 Sec CITICS-A CES E*TRADE CITICS-A GFS-H HTSC-H CICC CITICS-H HTS-H s 1.00 Daewoo SecSamsung DFZQ* UBS Daiwa MS 0.50 Yuanta Nomura 2015-18E average 0.00 ROE 5.0% 7.0% 9.0% 11.0% 13.0% 15.0%
Notes: CJS=Changjiang Securities; MS=Morgan Stanley; SCHW=The Charles Schwab Corp. We adjust the data point for DFZQ to 2016-22 ROE to reflect that during 2015 they generated an ROE of 27.5% that we view as peak cycle.
Source: Bloomberg, Wind, Goldman Sachs Global Investment Research, Gao Hua Securities Research.
Goldman Sachs Global Investment Research 27 August 18, 2016 Orient Securities Co. (3958.HK)
Exhibit 48: We forecast DFZQ’s 2022E ROE to be 11.5% DFZQ’s 2016E/2022E ROE forecasts vs. peers
CITICS HTSCMS CES GFS HTSC CICC DFZQ 2016E 2022E 2016E 2022E 2016E 2022E 2016E 2022E 2016E 2022E 2016E 2022E 2016E 2022E 2016E 2022E ROE 9.2% 13.8% 8.8% 13.8% 11.4% 14.6% 8.5% 13.1% 9.9% 14.4% 8.0% 13.4% 10.3% 14.5% 7.7% 11.5% leverage 4.1 6.0 5.2 6.0 5.5 6.0 4.3 6.0 5.0 6.0 5.2 6.0 5.8 7.5 5.6 6.0 ROA 2.2% 2.3% 1.7% 2.3% 2.1% 2.4% 2.0% 2.2% 2.0% 2.4% 1.5% 2.2% 1.8% 1.9% 1.4% 1.9% Brokerage 2.1% 0.8% 1.1% 0.7% 2.2% 1.3% 2.5% 1.6% 1.8% 1.2% 1.6% 1.0% 1.5% 1.5% 0.9% 1.2% IBD 0.8% 0.8% 0.5% 0.8% 0.9% 0.8% 0.8% 0.5% 0.7% 1.0% 0.4% 0.6% 3.1% 1.8% 0.5% 0.6% Prop/inv't gains 1.7% 1.9% 1.1% 1.3% 1.4% 1.2% 0.9% 0.8% 1.7% 1.3% 1.1% 1.0% 2.0% 1.5% 1.1% 1.1% Interest income 0.2% 1.3% 0.7% 1.9% 0.4% 1.7% 1.0% 1.8% 0.3% 1.4% 0.6% 1.8% -0.2% 0.2% 0.4% 0.5% Asset mgmt 1.3% 0.9% 0.4% 0.5% 0.5% 0.9% 1.0% 0.6% 1.3% 1.2% 0.1% 0.5% 1.0% 1.2% 0.5% 1.2% Others 0.3% 0.4% 0.4% 0.4% 0.4% 0.2% 0.1% 0.4% 0.3% 0.2% 0.2% 0.2% 0.4% 0.4% 0.3% 0.4% Revenue 6.4% 6.1% 4.3% 5.6% 5.9% 6.1% 6.2% 5.7% 6.1% 6.3% 4.0% 5.1% 7.7% 6.6% 3.8% 5.0% Expense 3.4% 3.1% 2.0% 2.7% 3.2% 3.1% 3.3% 3.0% 3.3% 3.1% 2.0% 2.1% 5.2% 4.0% 1.9% 2.4% Income tax 0.7% 0.7% 0.5% 0.6% 0.6% 0.6% 0.6% 0.5% 0.6% 0.8% 0.5% 0.7% 0.6% 0.6% 0.4% 0.6% NPAT 2.2% 2.3% 1.7% 2.3% 2.1% 2.4% 2.3% 2.2% 2.0% 2.4% 1.5% 2.2% 1.8% 1.9% 1.4% 1.9% Cost-to-income (incl. biz tax) 52% 51% 46% 48% 55% 51% 52% 53% 53% 49% 49% 42% 69% 61% 50% 53%
Source: Gao Hua Securities Research.
M&A framework
We previously introduced our M&A framework to evaluate the potential for companies within our Chinese financials coverage to be taken over (for details, please see Introducing M&A framework for China financials; raise GFS TP by 8% to incorporate M&A potential, dated June 29, 2016). We examine the stocks using a mix of qualitative factors (e.g. hostility to new strategic investors, political/regulatory ease) and quantitative factors (e.g. market cap, key shareholder stakes) to incorporate the potential that certain companies could be acquired at a premium to current share price.
To derive the M&A metrics for Chinese financial companies, we consider the key drivers:
Can the target be bought? What strategic factors to consider? What is the target’s positioning within the industry? Coupled with some local context and factors, we believe: (1) key shareholders’ willingness; (2) political/regulatory ease; (3) synergy potential; and (4) size, are the four key metrics to assess the probability of M&A potential (as a target) for companies under our coverage.
(1) Key shareholders’ willingness
Key shareholders of SOE financial companies usually do not want to lose their controlling interests, but it is possible some FIs may consider strategic investment. Some privately owned brokers’ key shareholders may consider M&A or strategic investment. (2) Political/regulatory ease
Hostile takeovers are prohibited in the financial sector (except leasing). Both takeovers and strategic investment require regulatory approval (except leasing). (3) Synergy potential
Brokers: Expand business line for banks or fin-tech companies; access to wealth management product distribution channel. (4) Size
Small-sized players are more likely to become targets because they are more affordable (in transaction amount) and more likely to have sub-scale disadvantage (hence less attractive return now). We scored the four pillars from 1 to 4 to rank companies in terms of M&A likelihood. We then calculated M&A rank based on weighted average scores of each pillar (key shareholders’ willingness: 40%; political/regulatory ease: 30%; market access: 20%; size:
Goldman Sachs Global Investment Research 28 August 18, 2016 Orient Securities Co. (3958.HK)
10%), to reflect the relative importance of each factor. Rank 1 represents high (30%-50%) probability of M&A activity, 2 represents medium (15%-30%) probability, 3 represents low (10%-15%) probability and 4 represents minimal to no probability (0%-10%). For companies with overall M&A score ranked 1 or 2, in line with our standard departmental guidelines, we incorporate an M&A component into our target price. For companies ranked 3 or 4, we do not include any M&A component into our target price.
Within this context, we assign DFZQ an overall M&A rank of “3” as the top 3 SOE shareholders collectively hold 34.9% of the total shares. Hence, we do not incorporate an M&A value into our 12-month target price.
Exhibit 49: We rank DFZQ a “3” under our M&A framework
Decreasing importance
Political/ Market Key shareholders' M&A Name Rating regulatory ease access Size (10%) willingness (40%) rank (30%) (20%)
M&A component assessment DFZQ Neutral 4 2 2 3 3
Source: Gao Hua Securities Research.
Exhibit 50: We use P/B-ROE of global peers and a blended ROE to value DFZQ, and derive our 12-month target price of HK$9.20 based on 1.17x 2016E P/B multiple Key assumptions and rationale behind our 12-m TP for DFZQ vs. peers
Peer P/B vs. ROE based valuation CITICS-A CITICS-H HTS-A HTS-H GFS-A GFS-H HTSC-A HTSC-H CMS CES CICC DFZQ FY16E ROE (a) 9.2% 9.2% 8.8% 8.8% 9.9% 9.9% 8.0% 8.0% 11.4% 8.5% 10.3% 7.7% Long-term ROE (b) 13.8% 13.8% 13.8% 13.8% 14.4% 14.4% 13.4% 13.4% 14.6% 13.1% 14.5% 11.5% average of (a), (b) 11.5% 11.5% 11.3% 11.3% 12.2% 12.2% 10.7% 10.7% 13.0% 10.8% 12.4% 9.6% Corresponding P/B (X) 1.45 1.45 1.42 1.42 1.54 1.54 1.33 1.33 1.67 1.34 1.58 1.17 Historical M&A P/B multiple (X) 2.4 M&A probability based on M&A framework 0% 0% 0% 0% 15% 15% 0% 0% 0% 0% 0% 0% M&A premium adjusted P/B 1.45 1.45 1.42 1.42 1.67 1.67 1.33 1.33 1.67 1.34 1.58 1.17 FY16E BVPS (Rmb) 12.07 12.07 9.76 9.76 10.39 10.39 11.69 11.69 9.07 11.00 7.90 6.87 12m target price with M&A premium 18.0 HKD 20.7 14.2 HKD 16.3 17.8 HKD 20.5 15.9 HKD 18.3 15.6 15.1 HKD 13.8 HKD 9.2 Note: Light grey shading indicates the rationale for our key assumptions.
Source: Gao Hua Securities Research.
Exhibit 51: Valuation comparables in our coverage universe
Mkt cap Stock price P/B (X)P/E (X) ROE (%) ROA (%) NPAT growth (%) Ticker Rating (US$ bn) 16-08-16 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E (HKD) CITIC Securities (H) 6030.HK Buy 34 18.94 1.4 1.3 15.1 14.6 9.2 9.1 2.2 2.3 (33) 4 Haitong Securities (H) 6837.HK Buy 27 14.36 1.3 1.2 14.7 13.0 8.8 9.4 1.7 1.9 (39) 14 Guangfa Securities (H) 1776.HK Neutral 21 18.38 1.5 1.5 15.6 15.5 9.9 9.6 2.0 2.0 (41) 1 Huatai Securities (H) 6886.HK Neutral 23 18.26 1.4 1.3 17.3 17.5 8.0 7.6 1.5 1.6 (39) (1) CICC 3908.HK Buy 3 11.80 1.3 1.2 12.0 12.3 10.3 10.0 1.8 1.7 (9) 8 DFZQ 3958.HK Neutral 14 8.49 1.1 1.0 14.1 11.8 7.7 8.5 1.4 1.6 (59) 26 H share broker average 1.3 1.2 14.8 14.1 9.0 9.0 1.8 1.8 (37) 8.7 (Rmb) CITIC Securities (A) 600030.SS Neutral 34 17.67 1.5 1.4 16.2 15.6 9.2 9.1 2.2 2.3 (33) 4 Haitong Securities (A) 600837.SS Neutral 27 16.15 1.7 1.5 19.1 16.7 8.8 9.4 1.7 1.9 (39) 14 Guangfa Securities (A) 000776.SZ Neutral 21 18.14 1.8 1.7 17.8 17.6 9.9 9.6 2.0 2.0 (41) 1 Huatai Securities (A) 601688.SS Neutral 23 21.70 1.9 1.9 23.7 23.9 8.0 7.6 1.5 1.6 (39) (1) China Merchants Securities 600999.SS Neutral 16 18.55 2.0 1.9 18.7 19.5 11.4 10.1 2.1 2.0 (47) (4) Everbright Securities 601788.SS Sell 9 18.09 1.6 1.6 19.9 20.4 8.5 7.8 2.0 2.1 (54) (3) A share broker average 1.8 1.7 19.2 19.0 9.3 8.9 1.9 2.0 (42) 2
Source: Datastream, Gao Hua Securities Research (2016E-2017E).
Goldman Sachs Global Investment Research 29 August 18, 2016 Orient Securities Co. (3958.HK)
Disclosure Appendix Reg AC We, Nan Li, CFA, Jessica Wu, Lucy Li and Wendy Chen, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Nan Li, CFA: China Brokers, China Financials. Jessica Wu: China Financials. China Brokers: China Galaxy Securities, China International Capital Corp., China Merchants Securities, CITIC Securities (A), CITIC Securities (H), Everbright Securities, GF Securities Co.(A), GF Securities Co.(H), Haitong Securities (A), Haitong Securities (H), Huatai Securities (A), Huatai Securities (H). China Financials: Agricultural Bank of China (A), Agricultural Bank of China (H), Bank of Beijing, Bank of China (A), Bank of China (H), Bank of Chongqing, Bank of Communications (A), Bank of Communications (H), Bank of Nanjing, Bank of Ningbo, Bank of Qingdao Co., China Cinda Asset Management Co., China CITIC Bank (A), China CITIC Bank (H), China Construction Bank (A), China Construction Bank (H), China Everbright Bank, China Huarong Asset Management Co., China Life Insurance Co. (A), China Life Insurance Co. (H), China Merchants Bank (A), China Merchants Bank (H), China Minsheng Banking (A), China Minsheng Banking (H), China Pacific Insurance (A), China Pacific Insurance (H), China Taiping Insurance Holdings, China Zheshang Bank Co., Chongqing Rural Commercial Bank, Far East Horizon, Hua Xia Bank, ICBC (A), ICBC (H), Industrial Bank, New China Life Insurance (A), New China Life Insurance (H), Orient Securities Co., PICC Group, PICC Property and Casualty, Ping An Bank Co., Ping An Insurance Group (A), Ping An Insurance Group (H), Shanghai Pudong Development Bank, Universal Medical. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs is acting as a manager or co-manager of a pending underwriting: Orient Securities Co. (HK$8.37) Goldman Sachs had a non-securities services client relationship during the past 12 months with: Orient Securities Co. (HK$8.37) Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: Orient Securities Co. (HK$8.37) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe
Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 31% 54% 15% 66% 60% 50% As of July 1, 2016, Goldman Sachs Global Investment Research had investment ratings on 2,963 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See 'Ratings, Coverage groups and views and related definitions' below. The Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has provided investment banking services within the previous twelve months.
Goldman Sachs Global Investment Research 30 August 18, 2016 Orient Securities Co. (3958.HK)
Regulatory disclosures Disclosures required by United States laws and regulations See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co- managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs trades or may trade as a principal in debt securities (or in related derivatives) of issuers discussed in this report. The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with subject company, public appearances and trading securities held by the analysts. Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html. Additional disclosures required under the laws and regulations of jurisdictions other than the United States The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman Sachs. In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and other meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to the site visit or meeting. Brazil: Disclosure information in relation to CVM Instruction 483 is available at http://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 16 of CVM Instruction 483, is the first author named at the beginning of this report, unless indicated otherwise at the end of the text. Canada: Goldman Sachs Canada Inc. is an affiliate of The Goldman Sachs Group Inc. and therefore is included in the company specific disclosures relating to Goldman Sachs (as defined above). Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for, this research report in Canada if and to the extent that Goldman Sachs Canada Inc. disseminates this research report to its clients. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private Limited, Research Analyst - SEBI Registration Number INH000001493, 951-A, Rational House, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India, Corporate Identity Number U74140MH2006FTC160634, Phone +91 22 6616 9000, Fax +91 22 6616 9001. Goldman Sachs may beneficially own 1% or more of the securities (as such term is defined in clause 2 (h) the Indian Securities Contracts (Regulation) Act, 1956) of the subject company or companies referred to in this research report. Japan: See below. Korea: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither "registered banks" nor "deposit takers" (as defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This research, and any access to it, is intended for "wholesale clients" (as defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman Sachs. Russia: Research reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Conduct Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request. European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/125/EC is available at http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research. Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho 69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company. Ratings, coverage groups and views and related definitions Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return. Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12
Goldman Sachs Global Investment Research 31 August 18, 2016 Orient Securities Co. (3958.HK)
months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded. Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by either Goldman Sachs Canada Inc. or Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union. European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany. General disclosures This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org). Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analyst's published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research. The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do not necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs. Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the products mentioned that are inconsistent with the views expressed by analysts named in this report. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For research, models or other data available on a particular security, please contact your sales representative or go to http://360.gs.com. Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282. © 2016 Goldman Sachs. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.
Goldman Sachs Global Investment Research 32