China Galaxy Securities, a $US50 billion Hong Kong investment bank that has seen its share price drop more than 60% since late May, thinks its stock is a bargain.
“China Galaxy Securities (CGS) recorded a net profit of RMB5.6bn, jumped 3.19x year-on-year (YoY) and in line with its pre-announcement, thanks to the bullish market in 1H15. The counter is trading at 0.77x 2015E PBR, due to the uncertain outlook of A-share market. It is overly bearish, in our view,” it said in a recent note.
The bank’s stock is down around 65% since its 2015 high in late May, falling sharply when China’s stock market indices started plummeting in June.
The Hang Seng, where China Galaxy is traded, has lost a quarter of its value since then. The mainland’s Shanghai Composite fell 35% during the same period.
Here’s CGS’s stock 2015 performance:
China’s financial sector absolutely exploded during Q2, making up a chunk of the country’s GDP.
“Growth in financial-sector value added came in at 17.4% year-on-year in the first half, up from 15.9% in the first quarter,” Tom Orlik, an economist at Bloomberg, wrote in a recent note. “That is more than double the growth rate of the economy as a whole.”
Orlik thinks it may have added 0.5% to the country’s GDP rate during that period.
That financial sector surge was a result of the country’s year-long stock boom, with indices jumping around 150%.
The boom ended with June’s stock crash. The Chinese government basically pulled out all the stops to stabilise the market. It did everything from throwing money at the problem to cancelling IPOs and new share-issues. But it didn’t work. Stocks started crashing again in August.
What this has done is majorly disrupt the financial services industry, so banks like CGS are unlikely to see the same business in Q3 2015 that they did in Q3 2014.
Orlick wrote that given “the increase in financial sector output tied to surging equity market valuations and turnover, it will be tough to sustain in the face of the market correction.”
But CGS doesn’t seem phased:
“Our FY15E net profit is largely unchanged at RMB9bn, which implies 2H15E net profit at RMB3.4bn,” the bank said in its note.
“Given that the company posted a net profit of RMB987m in July, it suggests we only need a monthly net profit of RMB482m in the remaining five months. This target should be very achievable, in our view.”
Good luck with that.