2021 results are in line with earnings forecasts
Huaxing's revenue in 2021 was -8% year-on-year to 2.50 billion yuan, profit was +57% to 1.62 billion yuan compared to the same period last year. After excluding non-operating influences such as changes in the fair value of Huaxing Securities's share options (840 million yuan), profit was -25% year-on-year to 780 million yuan, and the corresponding ROE was -6.1ppt to 12.3% year-on-year, in line with the profit forecast. The investment bank and Huaxing Securities segments continued to grow, while the asset management division was affected by the sharp pullback in Science and Technology Network's stock market, and investment income declined year-on-year.
Development trends
Investment management sector: Management fees have remained stable, and market pullbacks have dragged down investment income performance. In 2021, the revenue of the investment management division reached 34% year-on-year to 910,000 yuan/36% of revenue, and operating profit -43% year-on-year to 540 million yuan/62%. The total asset management scale reached 48.9 billion yuan -15% compared to the beginning of the year, mainly due to changes in allocation and value exceeding new capital raised in the current period. Among them, 1) investment income was -49% year-on-year to 4.7 billion yuan, accounting for 52% of segment revenue, mainly due to the year-on-year decline in earnings value of private funds and third party funds during the period; 2) management fees were -3% to 4.1 billion yuan, accounting for 45% of segment revenue, mainly due to the reduction in FEAUM due to 1H21 fund allocation, and FEAUM at the end of the second half of the year was +9% to 23.8 billion yuan from the beginning of the year. The company's four-phase dollar fund raised a total of 800 million US dollars, which we believe is expected to provide support for the subsequent steady increase in management fees; the company further launched new fund types such as private equity debt funds and hedge parent funds during the reporting period. 3) The company's unrealized net incidental equity repayment in the current period was 260 million yuan (vs. 2020 +1.09 billion yuan), mainly affected by market valuation pullbacks. At the end of the period, the company's cumulative net ancillary equity reached 1.3 billion yuan, and about 50% came from Phase I/II funds. We expect it to be gradually released in 2022-25.
Investment banking sector: Stock underwriting and sales transactions are jointly driven. In 2021, investment bank revenue was +10% year-on-year to 1.1 billion yuan/44% of revenue, and operating profit was +7% year-on-year to 3.1 billion yuan/35%. Among them, 1) innovative economy companies were actively listed in the first half of the year, driving stock underwriting revenue +35% to 350 million yuan. The company has established underwriting licenses and capabilities for A shares/Hong Kong/US stocks to cope with changes in the external environment; 2) used underwriting and research investment to drive sales, transactions and brokerage revenue in the secondary market +47% to 190 million yuan over the same period last year, and formed synergies with underwriting through distribution capacity in the secondary market; 3) consultancy service revenue was -10% to 540 million yuan year on year, and segment revenue accounted for -10ppt YoY to 50%. Overall, the revenue structure of the investment banking sector has gradually evolved from mainly advisory services in the past to consulting, underwriting, and the secondary market all in tandem.
Huaxing Securities and Wealth Management: In 2021, Huaxing Securities's revenue was +61% year-on-year to 40,000,000/8% of revenue, and operating profit was reversed to 91 million yuan, mainly due to the growth of the Science and Technology Innovation Board's floating investment and A-share underwriting business. The scale of wealth management increased by +144% to 9.4 billion yuan over the same period last year, with alternative assets as the core, targeting newly wealthy people.
Profit forecasting and valuation
Considering that market fluctuations are dragging down investment income, we lowered our 2022 profit by 44% to 970 million yuan, and introduced the 2023 profit of 1.27 billion yuan. The company is currently trading at 4.7x/3.6x 2022/23e P/E. Maintain an outperforming industry rating. Combining declining profits and falling sector valuations under market risk appetite, we lowered our target price by 41% to HK$16.1, corresponding to 7.8x/5.9x 2022/23e P/E and 66% upward space.
risks
Stock prices in the innovative economy sector have been drastically adjusted, industry competition has exceeded expectations, and the regulatory environment is uncertain.