East Money Information:H116earnings negatively impacted by the A-share market but Q2earnings improved over Q116

H116 net profit down 68% YoY, but Q216 net profit up 88% QoQ

    The company reported H116 revenue of Rmb1.166bn (-25.7% YoY) and net profit ofRmb337m (-67.7% YoY), basically in line with the preliminary earnings estimates. ROEand net margin were 3.76% and 28.9% in H116, down significantly from 43.9% and66.4% in H115. The good news is: Q216 net profit came in at Rmb220m, up 87.7%QoQ, showing a sequential improvement.

    Fund distribution revenue down notably, main reason for H116 net profit drop

    In H116, financial e-commerce/securities/financial data/advertisements accounted for41%/44%/11%/5% of the company's revenue, respectively. Financialdata/advertisement revenue was +9.5%/+8.6% YoY. Securities revenue wasRmb509m, becoming an important earnings support. However, against a sluggishsecurities market and intensified competition, fund distribution revenue droppedsubstantially and dragged down the company's revenue. In H116, total operating costswere Rmb776m (up 120% YoY), mainly due to an increase in administrative expenses(Rmb524m in H116, Rmb281m of which was from Dongcai Securities), indicating itslarge strategic investment to explore Internet finance business.

    Securities business progressing steadily

    The company's securities business was progressing steadily, with brokerage share risingrapidly. In June 2016, brokerage share reached 0.80%, registering a 10% compoundmonthly growth rate since May 2015. Its brokerage share ranking advanced to No. 33from No. 71, with commission rate at 0.029% in H116. Currently, the company'scustomers are mainly minor customers, and we expect its customer mix to optimize. InH116, Dongcai Securities recorded an investment loss of Rmb93.32m (includingchanges in fair value); investment performance was below our expectation. Thesecurities subsidiary completed a capital increase in H116, with net asset increased toRmb5.59bn. We believe the substantial enhancement in capital strength should helpfurther explore its securities business.

    Valuation: slightly cut EPS estimates and price target; maintain Buy

    Given the investment loss (missing our expectation) and intensified competition in thesecurities sector, we are cutting our 2016-18E EPS estimates by 9%/5%/5% and lowerour PE-based price target to Rmb24.84 (maintaining 2017E target PE at 48x). Wecontinue to be bullish on the prospects of the company's Internet securities business.

    Maintain Buy.