Financials 7 June 2018

Haitong Securities (6837 HK)

Target price: HKD12.00 (from HKD13.40) Share price (7 Jun): HKD9.99 | Up/downside: +20.1%

A bottom-fishing opportunity Leon Qi, CFA (852) 2532 4381  We expect an improved earnings trend at its key subsidiaries in 2H18 [email protected]  Concerns on book-value risk look overdone Kevin Jiang (852) 2532 4383  Reiterating Buy (1); lowering TP to HKD12.0; adding to our top picks [email protected]

What's new: We believe Haitong Securities’ (HTS) share-price Forecast revisions (%) underperformance in the past 2 years is likely to end soon. Concerns on Year to 31 Dec 18E 19E 20E losses from its EU business and book-value risk have been fully priced in, Revenue change (2.9) (1.7) (1.2) Net profit change (6.1) (2.9) (0.2) in our view, and these concerns should gradually ease going forward. Core EPS (FD) change (6.1) (2.9) (0.2) Source: Daiwa forecasts What's the impact: Concerns on book-value risks overdone. HTS shares are currently trading at a 25% discount to the company’s end-2018E Share price performance

BVPS. We believe the market has been overly bearish on HTS’ book-value (HKD) (%) growth. For Haitong , as most of its impairments have been written off 13.5 105 and redundancies dealt with, we now expect Haitong Bank to deliver better 12.5 94 11.5 83 earnings in 2018 after completing its 2-year restructuring. For its domestic 10.5 71 proprietary trading business, our sensitivity analysis suggests a 10% further 9.5 60 decline in 2018E A-share market annual returns would only result in a 1.0% Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 drop in our 2018E BVPS for HTS. Haitong Se (LHS) Relative to HSI (RHS)

HTS’ normalised BVPS annual growth rate over 2018-20E is 6% on our 12-month range 9.52-13.50 estimate, in addition to a 4% dividend yield at its current valuation. Market cap (USDbn) 14.64 3m avg daily turnover (USDm) 13.34 Shares outstanding (m) 11,502 Key beneficiary of Chinese Depositary Receipt (CDR) launch. We Major shareholder Bright Food (Group) Co. Ltd (4.7%) expect HTS to be a key beneficiary of the upcoming launch of CDRs, underpinned by its leading underwriting franchise and strong experience in Financial summary (CNY) overseas businesses. In 2017, HTS generated 17% of its total revenue Year to 31 Dec 18E 19E 20E (PRC GAAP) from its overseas businesses, the largest among major Revenue (m) 42,604 48,653 54,709 securities firms in our coverage. Operating profit (m) 13,656 15,798 17,534 Net profit (m) 10,011 11,699 13,067 Core EPS (fully-diluted) 0.870 1.017 1.136 Asset management. HTS’ early initiatives to reduce its channel business EPS change (%) 16.2 16.9 11.7 and promote active management of its AUM mix in 2017 led to an AUM rise Daiwa vs Cons. EPS (%) 7.6 10.9 10.0 PER (x) 9.4 8.0 7.2 despite regulatory headwinds in 1Q18. According to AMAC, its active Dividend yield (%) 3.3 3.8 4.3 management AUM increased by 2% QoQ to CNY89bn at end-1Q18, while DPS 0.267 0.312 0.349 the implied channel business AUM contracted by 34% QoQ to CNY234bn PBR (x) 0.8 0.7 0.7 (see page 2). ROE (%) 8.3 9.1 9.5 Source: FactSet, Daiwa forecasts What we recommend: We reiterate our Buy (1) rating and lower our SOTP-based 12-month TP to HKD12.0 (from HKD13.4) mainly due to: 1) a 6% cut to our 2018E net profit as we assume lower ADT of CNY520bn (vs. CNY580bn) and higher proprietary trading losses, and factor in their impact on BVPS, and 2) the rolling forward of our valuation basis by 6 months to average 2018-19E BVPS. We see the current valuation of 0.7x 2018E PBR as a bottom-fishing opportunity and now add the to our sector top picks. Downside risk: weaker-than-expected recovery of Haitong Bank.

How we differ: We expect HTS’ major subsidiaries to drive further ROE gains; hence, our 2018-20E EPS are 8-11% above consensus.

See important disclosures, including any required research certifications, beginning on page 5

Haitong Securities (6837 HK): 7 June 2018

Major securities firms: revenue contribution from overseas Major securities firms: monthly net profit (parent and asset businesses (2017) management companies) 20% (CNYm) May-18 May-17 YoY (%) 5M18 5M17 YoY (%) 17% CITICS 490 540 -9% 3,357 2,586 30% HTS 933 713 31% 2,838 2,985 -5% 15% 13% GTJA 564 604 -7% 3,310 3,376 -2% GFS 501 454 10% 2,141 2,675 -20% Huatai 397 427 -7% 3,637 4,552 -20% CGS 258 203 28% 1,228 1,496 -18% 10% 9% 8% CMS 389 306 27% 1,650 1,779 -7% 7% 5% Total 3,533 3,247 9% 18,161 19,449 -7%

5% 3%

0% CITICS HTS GTJA GFS Huatai CGS CMS

Source: Companies, Daiwa Source: CSRC, WIND, Daiwa Note: All on PRC GAAP basis Note: May 2018 and 5M18 net profits are calculated on monthly key financial information disclosed by CITICS, HTS, GJTA, GFS, Huatai, CGS and CMS

Major securities firms: active asset management AUM and QoQ Major securities firms: channel business AUM and QoQ growth growth (CNYbn) (CNYbn) -1% 700 1,200 +5%

600 1,000 500 +28% -22% 800 +33% +10% +14% 400 +2% -2% 600 300 -34% -2% +31% 400 200 +2% +5% 100 200 0 0 CITICS HTS GTJA GFS Huatai CMS CSC CITICS HTS GTJA GFS Huatai CMS CSC

End-2017 End-1Q18 End-2017 End-1Q18

Source: AMAC, Daiwa Source: AMAC, Daiwa Note: The implied channel business AUMs are calculated as total AUMs minus active management AUMs

HTS: AUM and blended fee rate of AM business HTS: pre-tax profit contributions from major subsidiaries 1,200 (CNYbn) 0.6% 45%

1,000 0.5% 39% 40% 800 0.4% 35% 600 0.3% 32%

400 0.2% 30%

200 0.1% 24% 25% 0 0.0% 2013 2014 2015 2016 2017 20% Total AUM Blended fee rate (RHS) 2016 2017 2018E

Source: Company, Daiwa estimates Source: Company, Daiwa estimates Note: The AUM includes HT Asset Management and HFT Investment Note: Major subsidiaries include HTS’ asset management companies, finance lease company, HTI and Haitong Bank

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Haitong Securities (6837 HK): 7 June 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E A-share ADT (CNY bn) 202 322 1,103 567 496 520 580 580 Brokerage mkt share of company (%) 4.8 4.8 4.8 4.5 4.7 4.7 4.8 4.8 Commission rate for company (%) 0.092 0.078 0.061 0.051 0.044 0.042 0.040 0.040 Margin finance bal (mkt) (CNY bn) 347 1,026 1,174 939 1,026 1,091 1,219 1,311 Stpck repo bal (mkt) (CNY bn) 111 365 1,015 959 1,108 1,148 1,219 1,311 Stock market annual return (%) (6.7) 52.9 9.4 (12.3) 6.6 (3.0) 0.0 0.0 Bond market annual return (%) (0.5) 10.3 8.2 1.8 0.2 4.0 4.0 4.0 Mkt annual equity financing (YoY, %) (6.5) 74.8 69.0 44.5 17.1 50.0 50.0 30.0 Mkt annual debt financing (YoY, %) (2.6) 38.0 37.2 23.9 (15.0) 10.0 10.0 10.0 Cost-to-income (%) 46.7 38.3 38.1 45.2 42.8 38.1 35.7 33.0

Profit and loss (CNYm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Gross fee and commission income 6,751 9,516 21,813 12,711 11,225 11,966 14,437 16,817 Gross interest income 3,671 7,700 18,322 16,181 15,124 16,304 19,013 21,915 Investment income 2,150 5,709 11,057 6,108 9,328 8,969 10,106 11,135 Other income 231 742 4,094 7,492 5,647 5,365 5,097 4,842 Total Revenue 12,803 23,667 55,286 42,492 41,325 42,604 48,653 54,709 Fee and commission expense (-) (849) (1,296) (3,842) (1,746) (1,669) (1,631) (1,826) (1,946) Finance costs(-) (1,484) (4,340) (13,566) (12,341) (11,458) (12,710) (15,472) (19,131) Business tax(-) 0 0 0 0 0 0 0 0 Other Operating Expenses (5,132) (7,778) (17,240) (17,444) (16,016) (14,607) (15,557) (16,098) Operating profit 5,338 10,253 20,637 10,961 12,181 13,656 15,798 17,534 Profit from Assoc/JV 117 167 481 200 708 843 930 1,036 Other Inc/Exp/Extord. (+/-) 0 0 0 0 0 0 0 0 Pre-tax profit 5,455 10,420 21,119 11,162 12,889 14,499 16,727 18,570 Tax (1,174) (2,301) (4,278) (2,231) (3,014) (3,100) (3,577) (3,971) Min. int./pref. div./others (246) (408) (1,002) (887) (1,257) (1,388) (1,451) (1,532) Net profit (reported) 4,035 7,711 15,839 8,043 8,618 10,011 11,699 13,067 Net profit (adjusted) 4,035 7,711 15,839 8,043 8,618 10,011 11,699 13,067 EPS (reported)(CNY) 0.421 0.804 1.480 0.700 0.749 0.870 1.017 1.136 EPS (adjusted)(CNY) 0.421 0.804 1.480 0.700 0.749 0.870 1.017 1.136 EPS (adjusted fully-diluted)(CNY) 0.421 0.804 1.480 0.700 0.749 0.870 1.017 1.136 DPS (CNY) 0.120 0.300 0.484 0.220 0.230 0.267 0.312 0.349 Source: FactSet, Daiwa forecasts

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Haitong Securities (6837 HK): 7 June 2018

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment 58,687 100,522 180,050 141,398 119,632 124,652 130,884 137,428 Fee and commission receivables 1,647 4,384 6,264 6,930 7,442 6,601 7,475 8,206 Advances to customers 27,465 64,883 76,325 63,213 61,561 66,013 74,746 82,062 Reverse repo & bank placement 9,037 65,166 77,653 85,229 97,229 107,633 121,425 138,302 Financial assets 57,898 70,819 158,442 154,395 143,775 151,020 163,849 180,495 Long-term equity investments 2,231 5,686 5,137 8,750 10,062 12,075 13,282 14,611 Other assets 12,158 41,161 72,579 100,952 95,006 112,169 143,356 164,652 Total assets 169,124 352,622 576,449 560,866 534,706 580,163 655,016 725,756 Accounts payable 40,430 80,767 129,026 108,817 87,525 85,709 85,904 90,199 Repo and bank placements 27,567 93,526 115,167 46,849 38,096 31,366 53,266 54,666 Financial liabilities 15,303 58,771 88,801 107,196 99,227 122,447 154,374 195,398 Bonds payable 17,940 35,776 100,599 30,970 32,197 38,637 46,364 55,637 Other liabilities 3,779 11,519 25,927 145,076 147,968 162,984 165,115 167,368 Total liabilities 105,018 280,358 459,521 438,907 405,012 441,144 505,023 563,268 Share capital 9,585 9,585 11,502 11,502 11,502 11,502 11,502 11,502 Reserves/R.E./others 51,922 58,780 96,193 98,628 106,254 113,192 121,300 130,356 Shareholders' equity 61,507 68,364 107,695 110,130 117,755 124,693 132,802 141,858 Minority interests 2,598 3,900 9,233 11,828 11,939 14,327 17,192 20,630 Total equity & liabilities 169,124 352,622 576,449 560,866 534,706 580,163 655,016 725,756 BVPS (CNY) 6.417 7.133 10.063 9.584 10.238 10.841 11.546 12.334

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Gross fee and commission (YoY) 29.6 41.0 129.2 (41.7) (11.7) 6.6 20.7 16.5 Operating profit (YoY) 31.4 92.1 101.3 (46.9) 11.1 12.1 15.7 11.0 Net profit (YoY) 32.8 91.1 105.4 (49.2) 7.1 16.2 16.9 11.7 EPS (YoY) (FD) 26.4 91.1 84.0 (52.7) 7.0 16.2 16.9 11.7 ROAE 6.7 11.9 18.0 7.4 7.6 8.3 9.1 9.5 ROAA 2.7 3.0 3.4 1.4 1.6 1.8 1.9 1.9 Net dividend payout 28.5 37.3 32.7 31.5 30.7 30.7 30.7 30.7 Brokerage commission/Op inc 41.4 32.8 39.1 23.1 18.3 18.5 17.9 16.9 Inv banking commission/Op inc 11.6 10.1 7.2 13.5 12.1 12.9 15.7 18.7 Assest mgmt inc / Op inc 6.5 6.2 5.9 5.4 7.0 8.4 9.6 11.2 Interest inc / Op inc 19.3 17.4 11.4 12.7 12.3 12.0 10.7 7.8 Inv inc / Op inc 19.0 29.5 26.5 20.3 31.2 30.0 30.5 31.3 Leverage 2.6 4.9 4.9 4.6 4.1 4.2 4.4 4.5 Cost-to-income 58.3 56.7 62.7 74.2 70.5 67.9 67.5 68.0 Net capital ratio 62.8 57.1 84.6 77.7 70.5 61.6 60.1 57.8 Source: FactSet, Daiwa forecasts

Company profile

Haitong Securities (HTS) is a leading full-service investment bank in China. It was established in Shanghai in 1988 and was listed on the and in 2007 and 2012, respectively. Its principal business lines include brokerage, , asset management, proprietary trading and direct investment.

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Haitong Securities (6837 HK): 7 June 2018

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Haitong Securities (6837 HK): 7 June 2018

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The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

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Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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