Haitong Securities -A:Integrated business structure with strong cost management

Market share is likely to stabilize in 2016 with an integrated business model

    Haitong Securities is one of the largest brokers in China and offers the mostcomprehensive financial services. It is near the lead in the sector in terms of equityresearch capabilities and number of investment consultants. Even with fiercecompetition, its brokerage market share was up 4.42% YoY to 4.99% in 2015.Although Haitong's brokerage market share fell to 4.71% in 4M16, we expect it tostabilize with the support of the company's integrated financial business model.Haitong's commission rate and margin trading & securities lending (MT&SL) interestrate are largely equivalent to others in the industry. Since Haitong has neverimplemented a low-price strategy to expand its businesses, we expect any decline in itscommission rate and MT&SL interest rate to be in line with the industry average.

    Strong cost management with steady and conservative strategy

    Over the past few years, Haitong has shown strong cost control with a steady andconservative strategy. In 2015, Haitong's SG&A expense ratio was only 29%, onlyslightly higher than Guosen among listed brokers, and much lower than majorcompetitors such as CITICS, Guotai Junan and Huatai. In Q116, the company's SG&Aexpense ratio was 36%, also at the lower end among listed brokers. Based on historicaldata, Haitong's SG&A expense ratio has been about 10ppts lower than CITICS's since2014. We expect Haitong to alleviate downward earnings pressure by enhancing itscost management to offset pressure from a revenue decrease.

    Cutting 2016-18E EPS on sluggish market and intensified competition

    We are cutting our 2016-18E EPS 37%/30%/29% to Rmb0.71/0.92/1.04, mainly as: 1)we are lowering our 2016-18E core sector assumptions for average daily turnover andaverage MT&SL balance; 2) we are reducing the investment yield assumption forHaitong in 2016-18E, given reduced overall investment yield in the market; and 3)Haitong's aggregate NPAT (parent level) was Rmb2.613bn in 5M16

    Valuation: New price target of Rmb19.27; maintain Buy rating

    Given the attributes of the industry, we switched to PB/ROE methodology to derive ourtarget valuation. Under a stable market assumption, we estimate Haitong's averageROE at 9.1% in the next five years, with long-term sustainable ROE at 10.0%. Wederive our new price target of Rmb19.27 on 2x target PB based on 2016E BVPS,implying 21x 2017E PE and 1.87x PB. We maintain our Buy rating, given its relativelystable earnings and valuation being at a historical low.