Company Note Stockbroking & Exchanges│Hong Kong│June 11, 2019

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Hong Kong CITIC Securities BUY Negatives largely reflected; time to revisit Consensus ratings*: Buy 10 Hold 7 Sell 7 ■ Trading at 0.94x rolling forward PBR, CITIC Securities’ (CITICS) valuation reflects Current price: HK$14.26 most of the negatives in our view, as it is back to the trough level of 2018, when Target price: HK$16.60 investors had deep concerns about the trade dispute. ■ The investment banking business has performed well YTD, and the official launch of Previous target: HK$20.00 the Science and Technology Innovation Board (STIB) in July is a potential catalyst. Up/downside: 16.4% ■ We lower our FY19E/FY20E EPS forecast by 16.1%/17.3% to reflect more CGS-CIMB / Consensus: N/A conservative assumptions for average daily turnover (ADT) and net investment gains. Reuters: ■ Therefore, our target price is revised down from HK$20 (1.3x 2019E PBR) to Bloomberg: 6030 HK HK$16.60 (1.11x 2019E PBR), based on the Gordon Growth Model. Market cap: US$32,636m ■ Maintain BUY, as the launch of the STIB is likely to draw investors’ attention to the stock. HK$255,958m Average daily turnover: US$50.7m Trough valuation reflects poor market conditions HK$397.5m The escalating tension between China and the US on trade negotiations led the ADT of Current shares o/s: 12,117m the A-share market to fall sharply from RMB803bn in April to RMB490bn in May (Figure Free float: 82.4% 3). The CSI300 also dropped nearly 7% last month. However, we believe the current *Source: Bloomberg valuation of CITICS reflects most of the negatives, as its latest rolling forward PBR of

Key changes in this note 0.94x is very close to the trough level of last year, when investors were very bearish FY19F Revenue lowered by 7.3%. because of the trade dispute (Figure 1). FY19F EPS lowered by 16.1%. FY19F ROE lowered by 1.3ppt. YTD results still reported growth At the holding company level, CITICS’ total net profit of RMB1.07bn for April and May Price Close Relative to HSI (RHS) does not look very exciting compared with the total net profit of RMB3.02bn in Q1. But 21.000 116 19.000 108 the 5M2019 net profit of RMB4.09bn is already very close to the net profit of RMB4.16bn 17.000 100 in 1H18. Unless the June 2019 results are exceptionally poor, CITICS is likely to report 15.000 92 low-teens profit growth in 1H19 at the holding company level. 13.000 84 11.000 76 200 150 100 Investment banking business has performed well YTD 50

Vol m Vol CITICS’ scale of equity underwriting reached RMB114.6bn YTD, up 40.6% YoY, Jun-18 Sep-18 Dec-18 Mar-19 according to WIND. Its scale of fixed income underwriting reached RMB293.4bn YTD, up

Source: Bloomberg 20% YoY.

Price performance 1M 3M 12M Absolute (%) -9.2 -21.5 -26 Major beneficiary of the STIB Relative (%) -5.8 -19.2 -15.1 We believe CITICS’ solid performance in the investment banking business YTD should bode well for its STIB business. CITICS is a major player in the STIB, with nine Major shareholders % held companies submitting IPO applications, representing a market share of 7.5%, based on CITIC Limited 16.5 the number of companies. As the STIB is likely to have the first IPO in July, we expect

more investors to revisit CITICS when there is increasing news flow about the new board.

(Note: Other leading players include CSC Financial, CICC and HTSC.) Insert

Earnings forecasts lowered; maintain BUY ADT YTD is about RMB619bn, lower than our full-year forecast of RMB700bn, as investors have stayed on the sidelines because of the uncertain outcome of the trade negotiations. Therefore, we lower our 2019E ADT forecast to RMB550bn, which should provide a buffer. We also cut our FY19E/FY20E EPS by 16.1%/17.3% to reflect lower assumptions for ADT, net investment gains and the latest RMB exchange rate. Overall, our Gordon Growth Model-based target price is revised down from HK$20 to HK$16.6 (equivalent to 1.11x 2019E PBR, with medium-term ROE lowered from 9.8% to 9.25%).

Financial Summary Dec-16A Dec-17A Dec-18A Dec-19E Dec-20E Analysts Turnover (RMB m) 45,273 48,185 41,995 47,896 54,082 Recurring net profit (RMB m) 10,363 11,433 9,392 11,110 12,589 Wong Chi Man Adjusted Net margin (%) 33.21 35.15 35.41 36.10 36.53 T (852) 3698 6317 Recurring EPS (RMB) 0.86 0.94 0.78 0.92 1.04 E [email protected] PER (x) 14.50 12.81 15.51 13.76 12.15 Mark Lau PBR (x) 1.05 0.98 0.95 0.96 0.91 T (852) 3698 6393 ROAA (%) 1.8 2.0 1.5 1.7 1.7 E [email protected] ROAE (%) 7.4 7.8 6.2 7.1 7.7

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Stockbroking & Exchanges│Hong Kong CITIC Securities│June 11, 2019

Figure 1: Rolling forward PBR of CITICS Figure 2: Rolling forward PER of CITICS

SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG

Figure 3: ADT of the A-share market (RMB bn)

SOURCES: CGIS RESEARCH, WIND

Figure 4: 5-year share price chart of CITICS

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Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19

Jun-17 Jun-14 Jun-15 Jun-16 Jun-18 Jun-19

Feb-15 Feb-16 Feb-17 Feb-18 Feb-19

Aug-14 Dec-14 Aug-15 Dec-15 Aug-16 Dec-16 Aug-17 Dec-17 Aug-18 Dec-18

SOURCES: CGIS RESEARCH, WIND

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Stockbroking & Exchanges│Hong Kong CITIC Securities│June 11, 2019

BY THE NUMBERS

P/BV vs ROE 12-mth Fwd FD Core P/E vs FD Core EPS 1 22 Growth 30% 21 24% 1 20 18% 1 19 12% 18 6% 1 17 0% 16 -6% 1 15 -12% 1 14 -18% 13 -24% 1 12 -30% Jan-15A Jan-16A Jan-17A Jan-18A Jan-19F Jan-15A Jan-16A Jan-17A Jan-18A Jan-19F Jan-20F 12-mth Fwd Rolling FD Core P/E (x) (lhs) Rolling P/BV (x) PageTwoROAE EPSgrFDNrm (lhs) FD Core EPS Growth (rhs)

Profit & Loss (RMB'000) Dec-16A Dec-17A Dec-18A Dec-19E Dec-20E Investment banking 5,470,917 4,320,427 2,968,251 4,623,426 5,629,177 Brokerage 12,574,497 11,523,441 10,382,464 11,739,295 12,911,441 Trading 407,164 150,314 160,151 184,174 202,591 Asset management 6,860,180 6,327,008 6,146,006 6,108,152 6,330,113 Others 462,014 343,460 637,949 700,000 800,000 Commission and fee income 25,774,772 22,664,650 20,294,821 23,355,047 25,873,323 Interest income 11,232,779 12,806,665 13,654,422 12,891,949 14,459,592 Net investment gains 8,265,068 12,713,196 8,045,850 11,648,817 13,749,322 Total revenue 45,272,619 48,184,511 41,995,093 47,895,812 54,082,238 Other income and gains 4,792,153 8,774,471 9,067,609 9,000,000 9,000,000 Total revenue and other income 50,064,772 56,958,982 51,062,702 56,895,812 63,082,238 Staff cost (11,507,497) (12,141,247) (10,524,690) (11,518,917) (12,892,852) Commission and fee expenses (3,331,110) (3,707,615) (2,868,013) (3,327,297) (3,671,274) Interest expenses (8,884,626) (10,402,063) (11,232,013) (12,273,022) (14,253,134) Others (12,430,139) (15,139,062) (14,702,387) (15,336,949) (15,933,800) Operating expenses (36,153,372) (41,389,987) (39,327,103) (42,456,186) (46,751,060) Operating profit 13,911,400 15,568,995 11,735,599 14,439,627 16,331,178 Share of profits of associates 349,849 602,957 742,865 900,000 1,050,000 Share of profits of JCEs (438) 1,092 (11,210) - - Exceptional items 1,748 737 (1,683) - - Income before tax 14,262,559 16,173,781 12,465,571 15,339,627 17,381,178 Income tax expense (3,281,419) (4,196,311) (2,589,143) (3,681,510) (4,171,483) Minority interests (615,971) (544,205) (486,532) (547,931) (620,856) Net income 10,365,169 11,433,265 9,389,896 11,110,185 12,588,840 Recurring net income 10,363,421 11,432,528 9,391,579 11,110,185 12,588,840

EPS (RMB) 0.855 0.944 0.775 0.917 1.039 Recurring EPS (RMB) 0.855 0.944 0.775 0.917 1.039

DPS (RMB) 0.350 0.400 0.350 0.413 0.468

Balance Sheet (RMB'000) Dec-16A Dec-17A Dec-18A Dec-19E Dec-20E Financial assets 268,476,963 321,175,151 303,633,623 363,000,000 407,500,000 Advances to customers 65,021,193 73,982,611 57,197,814 76,659,418 86,130,116 Others 28,051,520 27,651,731 67,980,355 71,866,005 76,012,066 Cash held on behalf of customers 129,876,778 92,386,338 92,420,971 97,141,341 110,910,932 Bank balances and cash 36,713,034 34,303,141 52,226,605 31,839,067 33,789,372 Total current assets 528,139,488 549,498,972 573,459,368 640,505,831 714,342,486

PPE, net 3,923,261 8,264,559 8,046,233 7,880,406 7,689,116 Financial assets 38,975,935 36,698,109 22,561,994 25,335,492 28,378,551 Others 26,400,155 31,113,004 49,065,122 50,263,496 51,635,205 Total non-current assets 69,299,351 76,075,672 79,673,349 83,479,395 87,702,873

Total assets 597,438,839 625,574,644 653,132,717 723,985,226 802,045,359

Accounts payable 134,397,672 99,854,891 97,773,997 102,141,341 115,910,932 Financial assets sold under repo 121,414,243 111,619,927 121,669,027 131,000,000 141,000,000 Due to banks and other financial institutions 19,550,000 9,835,000 19,314,867 20,500,000 22,500,000 Others 96,581,535 168,384,614 156,794,628 192,053,024 228,769,237 Total current liabilities 371,943,450 389,694,432 395,552,519 445,694,365 508,180,169

Bonds payable 69,752,175 77,641,633 88,057,370 99,000,000 105,000,000 Others 9,954,544 5,096,020 12,691,332 15,042,166 16,406,382 Total non-current liabilities 79,706,719 82,737,653 100,748,702 114,042,166 121,406,382

Total liabilities 451,650,169 472,432,085 496,301,221 559,736,531 629,586,551

Shareholders' equity 142,695,946 149,799,046 153,140,769 160,010,037 167,599,293 Minority interests 3,092,724 3,343,513 3,690,727 4,238,658 4,859,514

Book value per share (HK$) 13.54 14.59 14.99 14.92 15.63

SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG

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Stockbroking & Exchanges│Hong Kong CITIC Securities│June 11, 2019

BY THE NUMBERS… cont’d

Dupont Analysis (as % of average total assets) Dec-16A Dec-17A Dec-18A Dec-19E Dec-20E Investment banking 0.9% 0.7% 0.5% 0.7% 0.7% Brokerage 2.1% 1.9% 1.6% 1.7% 1.7% Trading 0.1% 0.0% 0.0% 0.0% 0.0% Asset management 1.1% 1.0% 1.0% 0.9% 0.8% Others 0.1% 0.1% 0.1% 0.1% 0.1% Commission and fee income 4.2% 3.7% 3.2% 3.4% 3.4% Interest income 1.9% 2.1% 2.1% 1.9% 1.9% Net investment gains 1.4% 2.1% 1.3% 1.7% 1.8% Other income and gains 0.8% 1.4% 1.4% 1.3% 1.2% Total revenue and other income 8.3% 9.3% 8.0% 8.3% 8.3% Operating expenses -6.0% -6.8% -6.2% -6.2% -6.1% Operating profit 2.3% 2.5% 2.4% 1.7% 0.0% Income tax expense -0.5% -0.7% -0.7% -0.4% 0.0% Recurring net profit (ROAA) 1.8% 2.0% 1.5% 1.7% 1.7% Leverage (x) 4.3 4.2 4.2 4.4 4.7 Non-client asset/net asset (x) 3.2 3.4 3.5 3.8 4.0

ROAE 7.4% 7.8% 6.2% 7.1% 7.7%

Key Ratios Dec-16A Dec-17A Dec-18A Dec-19E Dec-20E PER(x) 14.5 12.8 15.5 13.8 12.1 EPS growth (%) - 48 10 - 18 18 13 Yield (%) 2.8 3.3 2.9 3.3 3.7 Payout ratio (%) 40.9 42.4 45.2 45.0 45.0 PBR(x) 1.05 0.98 0.95 0.96 0.91 Total asset/equity (x) 4.19 4.18 4.26 4.52 4.79 Non-client asset/net asset (x) 3.18 3.43 3.54 3.79 3.98 ROAA (%) 1.81 1.96 1.55 1.69 1.73 ROAE (%) 7.4 7.8 6.2 7.1 7.7

Revenue breakdown (%) Investment banking 12.1 9.0 7.1 9.7 10.4 Brokerage 27.8 23.9 24.7 24.5 23.9 Trading 0.9 0.3 0.4 0.4 0.4 Asset management 15.2 13.1 14.6 12.8 11.7 Others 1.0 0.7 1.5 1.5 1.5 Commission and fee income 56.9 47.0 48.3 48.8 47.8 Interest income 24.8 26.6 32.5 26.9 26.7

Net investment gains 18.3 26.4 19.2 24.3 25.4

Key Drivers Dec-16A Dec-17A Dec-18E Dec-19E Dec-20E A-share average daily turnover (RMB'000) 519,090,730 460,911,926 371,587,654 550,000,000 620,000,000 Brokerage market share CITICS 5.8% 5.6% 6.1% 6.2% 6.2% Margin financing balance (RMB'000) 62,639,640 70,935,900 54,050,691 73,659,418 83,130,116 Staff cost-to-income 30.4% 28.3% 28.5% 27.9% 28.6% Cost-to-income 63.2% 63.7% 68.3% 65.0% 63.8% Cost-to-income (ex-impairment) 58.1% 59.6% 68.2% 59.7% 63.8%

Growth Rates: Commission and fee income -24.8% -12.1% -10.5% 15.1% 10.8% Interest income -28.1% 14.0% 6.6% -5.6% 12.2% Net investment gains -57.6% 53.8% -36.7% 44.8% 18.0% Total revenue and other income -31.3% 13.8% -10.4% 11.4% 10.9%

Recurring EPS -47.7% 10.3% -17.9% 18.3% 13.3% SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG

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Stockbroking & Exchanges│Hong Kong CITIC Securities│June 11, 2019

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Galaxy International Securities may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or investment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in this report. Furthermore, Galaxy International Securities may have received compensation for investment banking services from the company(ies) mentioned in this report within the preceding 12 months and may currently seeking investment banking mandate from the subject company(ies). China Galaxy International has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of Galaxy International Securities and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. Analyst Certification The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies covered in this report. Explanation on Equity Ratings BUY : share price will increase by >20% within 12 months in absolute terms

SELL : share price will decrease by >20% within 12 months in absolute terms

HOLD : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL

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