With the reform of the capital market and the business innovation of the securities industry, the profitability of head brokerages has been improved. Relying on deep customer accumulation and comprehensive service chain, Shen Wanhongyuan has created its own characteristics at the institutional service level.

Investment banking business takes the establishment of the Beijing Stock Exchange as an opportunity and is expected to move towards differential competition. However, at present, the transformation of Shen Wanhongyuan wealth management is still in the initial stage, the proportion of performance protection of pledge business is relatively low, and there is still room for improvement as a whole. It covers for the first time, giving A & B H shares a "hold" rating.

A comprehensive securities firm that specializes in institutional business. Shenwan Hongyuan currently ranks 7th-9th in the industry in terms of comprehensive strength. The company has a long history and has been integrated many times by Shenyin, Wanguo, Hongyuan and other securities companies. Institutional services are its main source of income. In the first half of 2021, the contribution income of Shenwan Hongyuan institutional services and trading plate was 9.928 billion yuan, accounting for about 62% of the total income of each division. Its heavy asset business accounts for a relatively high proportion of income, accounting for about 56.5% in the first three quarters of 2021 (net income from the commodity business).

Brokerage business: the customer base is solid, and the transformation of wealth management is still in its infancy. By the end of the first half of 2021, Shen Wanhongyuan had 306 securities business departments; the total market capitalization of escrow securities was 4.31 trillion yuan, with a market share of 6.41% and a solid customer base. In terms of wealth management, Shen Wanhong Yuan earned 170 million yuan in consignment sales of financial products in the first half of 2021, ranking 16th in the industry. At the end of the fourth quarter of 2021, the holding scale of Shen Wanhongyuan non-goods-based public offering consignment was 32.3 billion yuan, ranking 11th in the securities industry, and the relevant indicators of wealth management lagged behind the company's comprehensive ranking.

Institutional business: the cornerstone of the company's revenue, customer demand business rapid development. Shen Wanhongyuan has a comprehensive business layout, covering PB business, research services, derivatives business, FICC and equity sales and trading business. In the first half of 2021, Shen Wanhong Yuan's investment income + fair value change profit and loss accounted for 31.3% of the income, which is the most important source of income for the company. From 2018 to 2021H1, Shenwan Hongyuan's financial assets expanded rapidly at the same time as investment income, up 86 per cent and 161 per cent respectively. In the same period, the Var value only rose from 138 million to 140 million, indicating that the growth of investment income may be mainly driven by customer demand business with low risk exposure, and institutional business income is expected to achieve stable development.

Investment banking business: develop the market of the Beijing Stock Exchange to achieve differential competition. Shen Wanhongyuan continues to improve the service mechanism of the Beijing Stock Exchange and the new third board industry chain, forming an enterprise lifecycle service system covering listing, supervision, issuance, research, investment and market-making. In 2021, Shen Wanhongyuan ranked second in the industry with the number of continuous supervisors in the new third board (including 122in the innovation layer and 474 in the basic layer). It participated in 46 targeted offerings and raised 1.961 billion yuan, ranking first in the industry. Among the 89 companies listed on the Beijing Stock Exchange, 7 are recommended by Shenwan Hongyuan, ranking third in the market. It is worth paying attention to whether Shenwan Hongyuan can build differential competitive advantage by sinking the market based on the Beijing Stock Exchange and the new third board market.

Credit business: the stock quality continues to shrink, but the risk of closing positions is still worth paying attention to. By the end of the first half of 2021, the stock pledge scale of Shenwan Hongyuan was 8.182 billion yuan, down 28.85% from the end of 2020. The proportion of stock pledge performance guarantee was 179.50%, far lower than the industry average level (271.56%) and close to the equity pledge warning line. The purchase and resale of financial assets has been prepared for impairment of 883 million yuan, with an impairment coverage rate of 10.79%, which is at a high level among head brokerages. Since 2022, there has been a large correction in the Shanghai Composite Index, and the proportion of financial and pledge guarantees in the market has declined. The risk of Shenwan Hongyuan pledged assets is worthy of attention.

Risk factors: a-share turnover dropped sharply; the fluctuation of the company's investment business income increased; the company's equity pledge risk was exposed.

Investment suggestion: with the reform of the capital market and the business innovation of the securities industry, the profitability of the head brokerage has been improved, which will be conducive to the improvement of valuation. However, the fluctuation of the stock market will inevitably bring the beta effect, which will have a two-way impact on the valuation of securities firms. The low performance guarantee ratio of Shen Wanhongyuan pledge business and the relative deficiency of wealth management development may affect its valuation. We believe that the current price already reflects the reasonable valuation of Shenwan Hongyuan, and the company's share price is expected to keep pace with the changes in the industry as a whole in the future. The net profit of Shenwan Hongyuan is expected to increase by 12% in 2021. It is estimated that the annual BVPS of 2021-22-23 will be 3.84, 4.32 and 4.88 yuan respectively. The list price of Abig H shares is 4.61 yuan / 1.89 Hong Kong dollars. Cover for the first time, giving a "hold" rating.