Huatai Securities (601688) company comment: GDR liquidity and H shares are quite cross-market arbitrage space is limited

Huatai Securities (601688) company comment: GDR liquidity and H shares are quite cross-market arbitrage space is limited

Key points of investment: Huatai Securities’ 82.52 million GDR cash-back repurchase limit period is about to expire. At present, the arbitrage space between the two markets is about 9% -12%. The spread and exchange rate costs in the two markets in the future will determine the direction of fund arbitrage.It is considered that the probability error of cross-border conversion will occur after the expiration of the cashback restriction period.

2019E’s PB estimate is 1.

41 times, maintaining the “overweight” rating.

  Huatai Securities: 82.52 million GDR cash repurchase restrictions are about to expire.

  Huatai Securities issued an announcement on the expiry of the Global Depositary Receipts (GDR) Redemption Repurchase Restriction Period. The company’s GDR Redemption Repurchase Restriction Period will expire on October 17 (Beijing time), and the GDR and A shares will begin on the 18th.Cross-border conversion.

The number of GDRs for which the redemption restriction period has expired is 8251.

50,000 shares, corresponding to 82.515 million shares of A shares, accounting for 9 of the company’s total share capital.

09%.
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According to the GDR cross-border conversion arrangement, the GDR cross-border conversion will not cause the company to change the number of newly issued A shares or outstanding A shares, nor will it affect the company’s capital.

  Cross-border conversion mechanism: convert A shares to GDR (generating) and GDR to A shares (cashing).

  Generation: The UK cross-border conversion agency may, according to the instructions of the investor, entrust Shanghai Stock Exchange members to purchase shares and deposit the depositary, and instruct the depositary to issue the corresponding GDR and deliver it to the investor.

The resulting GDR can be traded on the main board of the London Stock Exchange.

Cashing: The UK cross-border conversion agency can instruct the depositary to convert GDR according to the instruction of the investor, and the A-shares represented by GDR, such as the depositary conversion, are delivered to the UK cross-border conversion agency.

The UK cross-border conversion agency can entrust members of the Shanghai Stock Exchange to sell these A-share stocks and the proceeds will be delivered to investors.

  GDR’s liquidity is comparable to that of H shares, and there is limited room for arbitrage across markets.

  As of October 8, the average daily turnover of Huatai Securities GDR reached US $ 15.5 million (including main board and over-the-counter transactions), and the exchange rate at the time of issue reached 74.

22%, and the average daily turnover has reached 7 in the same period.

26%, which is close to the turnover of Huatai Securities’ H shares (accounting for 9%).

  From the perspective of cross-market arbitrage, with the closing price of A shares on October 9 (18.

66 yuan / share), GDR at the latest closing price (24 US dollars / GDR) to obtain GDR conversion into A shares is expected to obtain a yield of about 9% -12%.

After the expiry of the repurchase restriction, the spread and exchange rate costs in the two markets of Shanghai and London will determine the direction of capital arbitrage.

Since the listing of GDR, the price difference between A shares and GDR has gradually narrowed. We believe that the existing arbitrage space is limited, and the probability of cross-border conversion after the expiration of the repurchase restriction period is fulfilled.

  Investment suggestion: Huatai Securities has obvious capital advantages after a series of capital operations. The issuance of GDR and international business development will create conditions for Huatai Securities’ internationalization. The science and technology board project reserves will be higher and will contribute to performance gains.

We expect 2019E-2020E Huatai Securities’ net profit to be 81.

23/94.

92/113.

71 ppm, 2019E’s PB estimate is 1.

41 times, maintaining the “overweight” rating.

  Risk Warning: The policy implementation is less than expected, internationalization progress is less than expected, and business transformation is less than expected.