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Why only ‘idiots’ are buying Citic Securities; Analysts flag broker’s shares as offering good value

The Hong Kong-listed shares of China’s largest securities company are trading near book value

PUBLISHED : Thursday, 17 December, 2015, 1:56pm
UPDATED : Thursday, 17 December, 2015, 2:00pm

Despite management turmoil and a credit rating downgrade, Citic Securities may offer an attractive opportunity for investors, as a low valuation and strong business fundamentals support a recovery in the stock price going forward, according to analysts.

China’s largest securities firm has seen close to a dozen executives detained or arrested since August, including its general manager Chen Boming, as China widens its probe into insider trading on the heels of the stock market crash this summer.

Last month, chairman Wang Dongming also said he would step down after the next board election, with media reports saying he was forced out for failing to properly supervise his underlings. In late November, Citic Securities said in a filing that the country¡¯s top watchdog had started an investigation into the company for alleged violations of securities regulations, without providing details of conditions that sparked the probe.

Rating agency Standard & Poor’s on Tuesday lowered Citic Securities’ long-term issuer credit rating to “BBB” from “BBB+” and said it would monitor the company for further downgrades in the future. The ratings agency cited the “unexpected management reshuffle” and “heightened industry risk” as concerns.

Shares of Citic have tumbled 45 per cent in Shanghai and 40 per cent in Hong Kong so far this year.

However, some analysts said the sell-off may have created a good opportunity for brave investors.

“We reaffirm our buy rating,” said Bank of China International (BOC) analysts in a recent research note, citing Citic’s depressed share price and strong business fundamentals.

BOC analysts also said it was unlikely that more of its managers would go missing or face investigations in the near future.

In mid-November, Citic announced the appointment of Zhang Youjun as its next chairman to succeed Wang , suggesting “the management shifts since August are coming to an end”.

On a forward price-to-book ratio, Citic’s stock looks attractive. The Hong Kong-listed shares trade at a level equal to the company’s book value, while its Shanghai-listed shares trade at a slightly more expensive 1.2 times book value.

“We believe the current valuation level presents low downside risk,” BOC said.

In addition, the firm has seen a recovery in its brokerage and margin finance businesses, thanks to improving sentiment among Chinese equity investors.

Citic’s brokerage trading volume surged 46 per cent month on month in November, benefitting from a strong recovery in market turnover. Its margin lending balance jumped 17 per cent in November from the previous month, returning it to the top position among Chinese brokers.

However, BOC International also cautioned of potential risks, including unexpected market volatility and “regulatory risks of irregular activities” by Citic.

The broker said it had a “buy” on the shares, with a Shanghai share price target of 21.33 yuan and a Hong Kong share price target of HK$22.62.

Meanwhile, Daiwa Capital also maintained its “outperform” rating for Citic’s Hong Kong shares with a price target of HK$21.

Daiwa added that its expects the brokerage to be restructured as a result of the turmoil.

The revamp could increase Citic Group’s control in the securities firm. Other outcomes include a consolidation of Citic and China Securities, or a regulator-driven takeover by another securities firm, Daiwa analysts said.

Regardless of whichever scenario unfolds, Citic shareholders are “unlikely to face major downside,” Daiwa said.