Summary of HTSC Conference Call Company Overview - Company: HTSC (Haitong Securities Company) - Ticker: 6886.HK (H-shares), 601688.SS (A-shares) - Industry: Financial Services, specifically Brokerage and Asset Management Key Points Financial Performance and Projections - Asset Sale Impact: HTSC closed the sale of its US subsidiary, AssetMark, for US795 million in investment gains expected to be booked in Q3 2024, which will support 2024 earnings despite a year-over-year drop in investment income due to weaker equity market performance and regulatory tightening [2][4][16] - Revenue Forecasts: - 2024 earnings forecast raised by 28.5% due to the sale-related gains - 2025 earnings forecast lowered by 5.8% due to expected declines in asset management revenue and investment-related income [4][16] - Revenue Breakdown: AssetMark contributed approximately 45-50% of HTSC's asset management net revenue in 2023, generating Rmb3.79 billion in gross revenue and Rmb862.9 million in net profit [2][16] Market Conditions and Regulatory Environment - Regulatory Normalization: There are signs of regulatory normalization, but ongoing uncertainties remain regarding the earnings cycle and market conditions, particularly as A-share average daily trading (ADT) has dropped over 20% year-over-year in Q3 2024 [12][13] - Future Deployment of Proceeds: The proceeds from the AssetMark sale may be reserved for future capital needs, with potential deployment into cross-border equity and derivatives businesses, contingent on improved market conditions and regulatory environments [3][17] Valuation and Ratings - Current Valuation: HTSC's shares are considered fairly valued, with a price target of HK$9.60 for H-shares and Rmb13.10 for A-shares, implying a 14% upside for H-shares and 1% for A-shares [8][9] - Rating: Equal-weight (EW) rating for both H- and A-shares, reflecting cautious optimism due to expected ROE trends [15][18] Earnings Estimates and Ratios - Earnings Estimates: - 2024: Net profit expected to increase by 28.5% - 2025: Net profit expected to decrease by 5.8% - 2026: Estimates largely unchanged [4][6] - Key Ratios: - 2024 ROE projected at 8.2%, declining to 6.2% in 2025 due to the one-off gains from the AssetMark sale [15][24] Risks and Opportunities - Upside Risks: - Earlier-than-expected regulatory relaxation could enhance HTSC's capital deployment capabilities and improve profit margins [18] - Potential market share gains from competitors undergoing mergers [18] - Downside Risks: - Weaker equity market performance could negatively impact investment income and overall profitability [19] - Further declines in market ADT and margin finance volume could adversely affect brokerage and interest income [19] Conclusion - HTSC is navigating a challenging environment with significant changes due to the recent asset sale. While the immediate outlook for 2024 appears positive due to one-off gains, the company faces headwinds in 2025 and beyond, necessitating careful monitoring of market conditions and regulatory developments. The current valuation reflects a balanced view of these factors, with modest upside potential.
HTSC_ Resuming coverage – we rate both the H- and A-shares EW