Huatai Securities - Dragged by investment income
- 4Q24 profit declined 11% y/y, below expectations due to underperforming investment income and higher staff cost; final DPS of RMB0.37 declared, with FY24 DPS up 21% y/y
- While optimisation of financial assets likely complete (-10% q/q or -25% y/y), it’s expected to drag investment income growth; we revise down FY25F/26F earnings by 29%/25% accordingly
- Net brokerage fees the bright spot – 4Q24 up 86% y/y; expect FY25F to rise further, by 23% y/y, riding on elevated ADT
- Maintain BUY on strong franchise across retail and institutional, lowered HTSC-H TP to HKD16 on 0.8x FY25F (prev: 1.0x)
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As the company recorded a huge Rmb6,336mn gain from the sale of AssetMark in 3Q24, it declared a final DPS of RMB0.37, bringing the FY24 payout ratio to 31% and DPS to RMB0.52 (+21% y/y).
Underperformance in investment income. After outperforming in investment income during FY23, HTSC saw some pullback in FY24. Financial assets declined consecutively over the past four quarters, cumulatively down 25% y/y. Leverage, measured by (total assets-client deposits)/total equity, was down from 5.0x in FY23 to 4.0x in FY24. The company explained that the limited quota on equity derivatives and volatile bond market were the key reasons for the balance sheet contraction, and thereby underperforming investment income. Excluding the AssetMark gains, net investment income (incl. FX gains)/profit before tax would have declined by 31%/37% y/y, respectively.
Regarding its investment strategy, management guided they will focus on “steady return” in the future. We expect the re-leverage process will be gradual and risk appetite is likely to be more conservative. We revised down FY25F/26F earnings by 29%/25%, respectively, to reflect this as well as the higher staff costs.
Brokerage fees and margin finance income growth remains promising, riding on elevated activity. In terms of business mix, 36% of HTSC revenue (ex-commodity income) came from gross brokerage fees and margin financing income, relatively higher than major peers, e.g., CICC’s 25% (3908 HK, BUY) and CITICS’ 32% (6030 HK, BUY). It thereby directly benefits more from the heightened onshore ADT and margin financing balance. We forecast brokerage fees/margin financing interest income to grow by 22%/15%, respectively, in FY25F on stronger volume, partially offset by further margin contraction.
Company plans to accelerate international expansion – a key factor to watch. While the company did not outline a concrete plan during its earnings call, we think the sale of AssetMark for USD1.8bn gave the company an extra war chest to explore inorganic alternatives, or ramp up its overseas presence outside HK.
Earnings call Q&A summary
Q: How will the company strengthen its competitive edge as a top-tier investment bank under the new policies and market conditions? What are the new strategies?
A: The company will enhance its edge by deepening its core business capabilities, improving client services, and sharpening market and risk insights. It plans to expand internationally, leveraging its A+H+GDR listing status and unified global support system across China, HK, US, UK, and Singapore. A key update is the 2024 launch of a self-developed global trading platform to support cross-border growth. It will also integrate AI into advisory, research, and trading to maintain its tech-driven leadership and boost productivity.
Q: What are the company’s unique strengths in the ETF business, and how will it stay ahead in a fast-growing market?
A: The company excels in ETFs through subsidiaries, with Huatai-PineBridge’s CSI 300 ETF nearing Rmb360bn as the largest non-money market fund ETF. Its strengths include digital and AI-driven product development tailored to client needs. To stay ahead, it will enrich passive investment offerings, enhance market-making, and build a robust ETF ecosystem, ensuring liquidity and meeting demands in an AI-led passive investment era.
Q: How does the company view AI’s impact on the securities industry, and what specific AI products has it launched?
A: The company views AI as a game-changer, boosting efficiency and innovation in securities. Since 2019, it has explored AI, starting with natural language processing, and now uses advanced models to strengthen competitiveness. Specific products include AI tools for advisory, research, and trading, built on a unified database covering all industries under China’s National Development and Reform Commission (NDRC). It aims to develop a proprietary AI platform to enhance client services and maintain its tech edge.
Q: What drove the company’s strong net interest income growth in 2024, and what are the main components of interest income and expenses?
A: Net interest income jumped 180% y/y in 2024, driven by stable income and lower costs. Interest income, with over 60% from financing (e.g., margin lending), held steady despite rate declines, thanks to higher MSFL balances. Bond investments and cash reserves added modest gains. Interest expenses fell 20% as domestic and international borrowing costs dropped (90bps and 80bps, respectively) in a low-rate environment. Securities lending income declined as balances fell from Rmb70bn to Rmb10-11bn due to regulatory changes. The company will keep income stable while cutting financing costs further.
Q: What are the company’s plans for international business growth in 2025, and what will fuel this expansion?
A: In 2025, the company will focus on helping Chinese firms expand globally, a key mission as their capabilities grow. It will strengthen global resource allocation via enhanced trading, settlement, and risk systems. Growth drivers include the 2024 launch of the global trading platform and high-level competition with global banks; these build on 2024’s Rmb18.2bn revenue, up 40.6%, with the company aiming to deepen its role in China’s global economic push.
Q: How has the financing market’s recovery since September 2024 affected the company’s MFSL business, and how will it maintain its lead amid competition?
A: The financing market rebounded post-Sep 24, with balances rising by Rmb270bn, 17% growth, lifting the company’s leading MFSL business. The company aims to avoid price competition ahead by offering differentiated products. For instance, it started to offer ETF as the underlying asset for margin financing, which has been widely welcomed by both retail and institutional clients.
Q: How will the company adapt its fixed-income business to a volatile bond market in a low-rate environment?
A: The company sees low rates as a lasting trend, shifting from credit to interest-rate bonds and from holding to trading. It also launched an AI-driven bond trading robot in 2024, automating pricing and hedging for faster client service. It will enhance risk analysis, market-making, and global fixed income, currencies, and commodities (FICC) expansion to sustain profitability and pricing power.
Q: Why did total assets decrease in 2024, and what are the company’s next steps for asset management?
A: Total assets dropped 10.1% to Rmb814.27bn in 2024 due to derivative quota limits and bond market swings, reducing equity derivative and bond holdings. This optimised risk metrics and freed up capital for innovation. Next, it will refine its asset-liability mix, targeting high-quality assets for better yields and matching liabilities to control costs, aiming to maximise resource efficiency and steady returns.
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