East Money Information:Moving up to 26th in brokerage share,eating into traditional players’market shares

Brokerage share rose to 0.97%; breakthroughs likely in credit business

    East Money has eaten into the market shares of traditional brokers since entering thesecurities industry. Its brokerage market share rose to 0.97% as of August 2016,enabling it to move up from April 2015's 75th to the current 26th in the industry.Assuming brokerage share expands at the current pace (10.5% compound monthlygrowth rate from May 2015to the present), the company is likely to move into the top20in terms of brokerage share by year-end. With the credit business a key area forbreakthroughs, the company offered a 5.99% preferential financing rate in Q2and a6.99% rate on small stock-based loans in Q3. Since it has licenses to conduct a fullrange of securities business, we expect the company to achieve breakthroughs on morefronts, in addition to brokerage, soon.

    Earnings are highly cyclical and highly correlated to A-share market sentiment

    The company earns most of its revenue from fund distribution/securities, so its earningsare highly correlated to A-share market sentiment and highly cyclical. This year, itsearnings have missed our expectations amid increased competition in fund distributionand an A-share market downturn. We are lowering our 2016-18E EPS 26%/11%/9%due to: 1) lower H116commission rates than we expected; 2) a weak foundation forbusinesses such as investment banking; and 3) a possible further drop in funddistribution revenue amid a market downturn/fiercer competition.

    Validating East Money's fair valuation using sum of the parts

    Based on 50x 2017E PE, we are cutting our price target 7.5% to Rmb22.98, implying37x/31x/26x 2018-20E PE. Considering the big volatility in the company's earnings, wevalue eastmoney.com, fund distribution, financial data and internet brokerageseparately from a mid- to long-term investment perspective and sum the value of thosesegments. A fair valuation for the company derived from sum of the parts is largely inline with our PE-derived valuation.

    Valuation: Reiterate Buy rating on medium-/long-term investment value

    The company's share price has been weak YTD, hovering around its trough since June2015. Despite the highly cyclical nature of earnings and a high 2016E PE multiple, weview a valuation premium as reasonable, given the company's high growth potential.We are firmly optimistic about the prospects of the company's internet brokeragebusiness. At the current valuation, we think the company has medium-/long-terminvestment value. We reiterate our Buy rating. Our PT is based on 50x 2017E PE.