招商证券(06099) 　　We initiate coverage of China Merchant Securities (CMS) with an OW ratingand a Dec-17 PT of HK$15.5. We believe the business strategy of prioritizingprofit margins over volume growth and noted emphasis on risk management willposition it for superior growth and stronger/more stable margin vs peers. 　　Emphasis on margins: CMS is differentiated from peers by focusing more onhigher margin segments such as institutional customers, where it ranks first for trading volume with mutual funds and prime brokerage services with PE funds in China, and HNW individuals via its Zhiyuan WM plans for equity brokerage,SME/NEEQ/ABS for equity/debt underwriting, and collective asset management schemes on AM businesses. CMS thus is able to enjoy superior commission rates on average and deliver the highest ROA among H-share listed brokers. 　　Stronger risk management: CMS is one of the few brokers to maintain an AAregulatory rating in 2016, while other leading H-share listed peers weredowngraded. The regulatory rating is beneficial to earnings, as it helps limitcontributions to investors’ protection funds and benefit funding costs. It also supports higher capital efficiency and facilitates new business development that is crucial for institutional businesses 　　Investment risks: 1) Risks related to contributions to the governmentstabilization fund (the CSFC) and ban on hedging; 2) tighter regulatorysupervision on the rapidly emerging domestic asset management businesses;3) long-term pressure on brokerage commission rates due to the development ofonline/mobile industry platforms and fragmented market conditions, combinedwith uncertainties from potential deregulation of brokerage fee structure 　　Valuation: We expect CMS to deliver superior ROA through the cycle on theback of its more stable commission rates, focuses on higher margin segments,and better capital efficiency. Based on our DDM model, our Dec-17 PT ofHK$15.5 implies 1.5x and 1.4x FY16/17E P/B and 15x and 11x FY16/17E P/E.