China Brokers &Asset Managers:Cutting estimates and target prices;assessing downside risks

Incorporating strong 1H15 results; lowering 2H15E-2017E NPAT.

    Chinese brokers reported strong 1H15 results, with aggregate profit rising305% yoy and driving average 1H15 ROE to 28% (annualized). Weincorporate these strong results into our forecasts, but revise down our2H15E- 2017E earnings forecasts by 26%/6%/3% on average across ourcoverage on lower trading income (mainly in 2H15E), margin finance (MF)balance, and average daily turnover (ADT). We expect brokers to deliveraverage 133% profit growth and 19% ROE in 2015. However, we expectNPAT growth to drop to -16%/+1% in 2016/17 and ROE to moderate to13%/12% as MF growth and trading velocity come down.

    Trough trading multiples price in 5%-6% ROE or no LT ROE upside,reflecting concerns over trading losses and/or reform prospects.

    H/A-share Chinese brokers are trading at average 2015E P/Bs of 1.0X/1.4X.

    This represents the record low level seen in H-share trading history, andthe trough multiple seen for A-shares during 2012-1H14 when the sectordelivered ROEs of 5% to 6%, respectively. Our ROE sensitivity test suggestsit may imply: (a) a pessimistic market scenario of Rmb300 bn ADT and anaverage MF balance of Rmb500 bn (where brokers would deliver 6% ROE);or (b) a scenario slightly worse than our base case (so that ROE is close toCOE) but with no LT ROE upside. Given still-high velocity and MF balanceytd, We believe the possibility of case (a) happening is low. Earning risk ismore likely to come from trading losses. We estimate a 30% loss ofbroker’s equity investments may lower 2016E earnings 25%-30%.

    Rollover to 2016E: cut TPs by avg 30% on lower ROE and valuation.

    We roll over our TP basis to 2016E to factor in earning slowdowns from thepotential 2015 peak level. Based on updated P/B-ROE relationship of peers,we cut our TPs by 30% on avg. to 1.6X 2016E P/B on lower ROE estimatesand peer valuation, which more than offset higher BVPS from the roll-over.

    Prefer brokers with more diversified earnings and low valuation;rerating hinges on corporate earnings improvement.

    Amid potential earnings headwinds from lower NII/brokerage and tradinguncertainties, we prefer large brokers with diversified revenue mix. Our toppick remains GFS-H (on CL) which offers above-peer ROE and an attractivevaluation with 5.9% dividend yield. However, we believe a rerating willhinge on an A-share corporate earnings recovery and capital marketreforms. Key risks: Macro hard-landing, trading losses.