China International Capital Corp - Robust offshore business recovery
- 4Q24 profit up 83% y/y, largely in line, driven by strong net brokerage (+68%) and investment income (+51%)
- Strong sequential recovery in 2H24 offshore profit (+92% h/h); mgt expressed strong optimism on HK market and guided for increased leverage to capture rising demand
- Trimmed FY25F/26F earnings by 7%/5% to reflect higher staff costs, yet still suggesting 76%/20% growth
- Maintain BUY on strong IB franchise, lowered CICC-H TP to HKD22 on a lower multiple of 1.0x FY25F P/B, reflecting tapering A-share momentum
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FY24 common net profit declined by 8% y/y to Rmb4,723mn. While below our earlier forecasts due to higher-than-expected staff costs and distribution to perpetual bond holders, it’s largely in line with the consensus. We revised down FY25F/26F common net profit estimates by 7%/5% to reflect the aforementioned factors, yet still suggest 76%/20% y/y growth, respectively, i.e., structural recovery trend is intact. For instance, 4Q24 annualised ROE surpassed 10% (9M24: 3.6%), suggesting a sharp recovery (note: ROCE, after perpetual bond distribution, is estimated at 9%).
Rising optimism for offshore business. After scaling back CICC’s international assets to HKD152bn (-16% h/h) as of Jun 24, the company re-levered back to HKD194bn (+28% h/h) as of Dec 24 as management turned more positive towards the offshore capital market environment. The management also guided it would lever up in FY25F, as offshore leverage only stood at 6.6x, still far below FY20’s 13.2x. Apart from a strong HK IPO pipeline (76 applications as of Mar’25) and elevated HK ADT (1Q25: c.80% above FY24), the company sees good opportunities in USD bonds, commodities, FX, and cross-border wealth management demand.
The company has shifted more capital from equity to FICC in FY24 for risk management and captured stronger bond performance. FY24 FICC PBT thereby rose 76% to Rmb2,726mn, while equities PBT was down 14% to Rmb3,318mn. We think CICC, traditionally a strong equity house, could lean more towards equities in FY25F to ride on the AI hype-driven HK equity market tailwind. The improved onshore market sentiment may also open a window for the company to replenish capital, so as to fully capture the rising client demand.
Potential value-unlocking from strong IB franchise. We have been pointing out that its strong IB franchise across onshore/offshore markets is key to its success as a world-class investment bank, especially amidst the ongoing A-share institutionalisation and Chinese corporates’ internationalisation. We like the company’s plan to step up efforts in achieving potential synergy from its IB franchise, transitioning from deal-focused to account-focused by offering more comprehensive solutions to companies. For instance, management mentioned it plans to focus on introducing a more systematic approach to referring IB clients for wealth management account openings.
Maintain BUY, CICC-H TP lowered to HKD22 (prev: HKD25). We trimmed the valuation multiple from 1.1x to 1.0x FY25F P/BV as A-share sentiment has largely stabilised and the regulator has directed for more stable instead of explosive growth in the stock market. While we are less likely to see another sudden spike in China brokers’ share prices amidst a more rational market, we think the stability is positive for long-term development, as it’s more favourable for the entry of long-term capital. CICC-H’s current valuation of 0.7x FY25F P/B is undemanding, considering its historical average of 1.0x since IPO, robust 4Q24 recovery, and expected ROE expansion in FY25F due to increased leverage.
Earnings call Q&A Summary
Q: How will CICC adjust its strategic priorities over the next 5-10 years, and what’s the 2025 outlook for its investment banking and product businesses?
A: CICC aims to become a top-tier investment bank by leveraging its strengths in investment banking, private equity (with 7,000+ investees in emerging sectors), and research to support national goals like sci-tech finance and risk resolution. It will focus on strategies such as sci-tech and dual circulation, supported by market recovery and policies. The equities business showed resilience in 2024 with a strong Q4, and for 2025, active markets and robust client demand promise solid performance in IB and products.
Q: What’s CICC’s 2025 capital market outlook, especially for investment banking and trading?
A: CICC is optimistic about 2025, expecting growth from economic policies boosting fundamentals, regulatory efforts stabilising markets, and opportunities in the “Five Major Articles” (e.g., sci-tech, green finance). The active H-share market, with 76 IPOs in the pipeline and key deals like Xiaomi’s refinancing, alongside wealth management expansion, supports a positive outlook for A-shares and H-shares, enhancing investment banking and trading prospects.
Q: What drove CICC’s 2024 investment income, and how will 2025 bond market volatility affect it? How will CICC Fund strengthen its public fund market position?
A: Investment income (RMB10.1bn) was primarily from bonds (about one-third), fuelled by a 2024 bond bull market with RMB60bn+ in bond assets added, plus Q4 equity rebounds. CICC Fund assets under management (AUM) rose 63% to RMB200bn, monetary funds grew to RMB120bn and non-money market funds grew by 40%, and mainly comprised fixed income. It will scale up, leverage REITs and fixed-income-plus (aligned with pension and savings trends), and CICC’s platform for differentiated competition.
Q: What’s CICC’s view on the 2025 A-share regulatory environment and its impact on domestic investment banking? How will it lower its high cost-to-income ratio?
A: CICC expects an improved 2025 A-share regulatory environment, with recovering investor confidence, active H-shares, and policies boosting IPOs. Cost control remained a priority – in FY24, office costs were reduced (declining going forward), IT amortisation was controlled, and capex was cut. Revenue growth from H-share IPOs, cross-border trading, and new products tied to the “Five Major Articles” will boost revenue.
Q: How will CICC transform its investment banking to serve the real economy, and what’s its progress on AI and digitalisation’s role in growth?
A: CICC will transform investment banking by seizing H-share IPO, block trade, and merger opportunities; enhancing synergy with other units (e.g., custody, wealth management post-IPO); and shifting to account-based models, matching assets (e.g., distressed firms) with buy-side clients. It’s expanding SME coverage for sci-tech and green finance with a full-lifecycle service model. AI progress includes “CICC Dianjing” (80k users) with proprietary data, plus tools like “CICC Zhiye” (document review) and AI coding, which are boosting efficiency.
Q: How will CICC’s leverage trend in 2025, and what are its internationalisation strategies?
A: Leverage will rise slightly in 2025; while domestic rules limit increases, overseas flexibility supports growth in opportunities like USD bonds, commodities, forex, and investment banking, balanced by risk control and potential capital supplementation. Internationally, CICC targets strategic markets (Southeast Asia, Middle East, Brazil), intensifying efforts with a new senior leader for CICC International.
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