20160318-招商证券_香港_-广发证券-01776.HK-Geographically_concentrated_SME_niche_player_with_good_profitability__initiate_BUY_with_TP_of_HKD21.19_13页_624kb

GFS Summary

Core Content

Guangfa Securities (GFS) is a leading Chinese securities firm with a strong presence in Guangdong Province, which has a rapidly growing SME market. The firm is well-positioned to benefit from the expansion of SMEs and the adoption of the registration-based IPO system, as well as the growth of the NEEQ (National Equities Exchange and Quotations). GFS has a substantial client base, including retail, wealth management, high-net-worth, and institutional clients, and is expanding its business segments to include investment banking, wealth management, trading, and investment management.

Main Points

• SME Market Growth: Guangdong Province has seen a rapid increase in the number of SMEs, with a CAGR of 17.7% from 2003 to 2014. This presents a significant opportunity for GFS' investment banking services.
• Client Base: As of 31 December 2014, GFS had over 4.18 million brokerage clients, with a notable portion being wealth management and high-net-worth clients. It also had over 1,900 institutional clients.
• Earnings Forecasts (FY15-17E):
  • FY15E: NPAT is expected to grow by 156.5% YoY to RMB12.9 billion, driven by strong performance in fee and commission income, interest income, and investment income.
  • FY16E: NPAT is forecasted to decline by 35.5% YoY to RMB8.3 billion, due to a cooling A-share market, lower ADT, and a drop in the commission rate.
  • FY17E: NPAT is expected to grow by 25.2% YoY to RMB10.4 billion, as the stock market stabilizes and the high base effect fades.
• Business Segments: GFS operates in four main segments: investment banking, wealth management, trading and institutional client services, and investment management. Each segment contributes differently to the firm's overall income.
• Valuation: Using the SOTP (Sum of the Parts) method, the target price (TP) for GFS is HK$21.19, which implies an upside of 36.0% from the closing price of HK$15.58 as of 16 March 2016. The TP is based on different P/E and P/B multiples for each segment.
• Key Financial Metrics:
  • Leverage Ratio: Expected to be 4.53x in FY15E, 3.52x in FY16E, and 4.16x in FY17E.
  • ROE and ROA: ROE is forecasted to be 22.15% in FY15E, declining to 10.52% in FY16E and rising to 12.23% in FY17E. ROA is expected to be 3.88% in FY15E, 2.11% in FY16E, and 2.63% in FY17E.
• Risks: The main risks include a larger-than-expected decline in the commission rate, smaller-than-expected stock market turnover, loss of market share in the IPO business, and weaker-than-expected investment income.

Key Information

• Commission Rate: Expected to decrease to 0.036% in FY17E, with a significant impact on NPAT. A drop to 0.030% could result in a 48.7% YoY decline in NPAT.
• Fee and Commission Income: Expected to grow by 111.5% in FY15E, decline by 31.8% in FY16E, and recover by 17.8% in FY17E.
• Interest Income: Expected to surge by 212.7% in FY15E, decline by 34.1% in FY16E, and recover by 7.7% in FY17E.
• Investment Income: Expected to grow by 107.0% in FY15E, decline by 22.5% in FY16E, and rebound by 25.6% in FY17E.
• Operating Expenses: Expected to increase by 115.4% in FY15E, decrease by 26.2% in FY16E, and increase by 8.6% in FY17E.
• Client Turnover: The stock and fund trading turnover is expected to increase significantly in FY15E, while the balance of margin financing and securities lending is expected to decline in FY16E and recover in FY17E.
• Equity Underwriting Amount: Expected to grow in FY15E due to the increased number of IPOs.
• Bond Underwriting Amount: Also expected to increase in FY15E, benefiting from the expansion of NEEQ.
• BVPS: Expected to rise to RMB10.07 in FY15E, with continued growth in FY16E and FY17E.
• Shareholdings: As of 30 September 2015, the top ten shareholders held 75.44% of the total shares, with Jilin Aodong Pharmaceutical Group and Liaoning Cheng Da being the largest shareholders.
• Company Profile: GFS was established in 1991 and listed on the Shenzhen Stock Exchange in 2010 and the Hong Kong Stock Exchange in 2015. It has a nationwide branch network with 282 branches by June 2015 and has a strong presence in the SME market.
• Valuation Parameters:
  • P/E Ratio: 17.5x for FY16E.
  • P/B Ratio: 1.72x for FY16E.
  • EPS: Expected to be RMB1.09 in FY16E.
  • BVPS: Expected to be RMB10.65 in FY16E.
  • DPS: Expected to be RMB0.34 in FY16E.
  • Dividend Yield: Expected to be 2.4% in FY16E.

Summary Table

Financial Highlights

• Total Assets: Expected to grow from RMB117.29 billion in FY13 to RMB449.53 billion in FY17E.
• Total Liabilities: Expected to increase from RMB82.55 billion in FY13 to RMB356.69 billion in FY17E.
• Shareholders' Funds: Expected to grow from RMB34.61 billion in FY13 to RMB88.88 billion in FY17E.
• BVPS: Expected to grow from RMB5.85 in FY13 to RMB11.66 in FY17E.
• Leverage Ratio: Expected to be 4.53x in FY15E, 3.52x in FY16E, and 4.16x in FY17E.

Conclusion

GFS is well-positioned to benefit from the rapid growth of SMEs in Guangdong Province and the expansion of the NEEQ. However, it faces challenges such as a decline in the commission rate and potential market volatility. The firm's valuation is considered attractive based on its financial performance and market position. The SOTP method is used to determine the target price, and the firm's earnings sensitivity to key factors like ADT and commission rate is also analyzed.