With capital market reforms and business innovation in the securities industry, the profitability of leading brokerage firms has improved. Relying on Everbright Group's platform advantages, Everbright Securities has shown strong competitive strength in the retail business field. As the MPS risk incident is gradually cleared, Everbright Securities is expected to achieve steady development in the future. First coverage, A and H shares were given a “hold” rating.
A middle and upstream brokerage firm that specializes in retail business. The overall strength of Everbright Securities currently ranks around 15th in the industry.
The retail business is the core engine of its performance growth. In 2021, the wealth management sector contributed 10.2 billion yuan in operating income, accounting for 61% of total revenue, and 3.357 billion yuan of operating profit, accounting for 62% of total operating profit. At the profit level, from 2019 to 2021, Everbright Securities's ROE was 1.20%, 4.74%, and 6.43% respectively. ROE has grown rapidly in the past two years, but it is still below the industry average. Low leverage ratios are an important factor impeding ROE growth.
Retail business: The transformation of wealth management is progressing steadily, and the overall risk of impairment is manageable. By the end of 2021, Everbright Securities had a total of 4.81 million customers, with total customer assets of 1.43 trillion yuan; it had 244 sales departments and a deep channel layout in the Zhejiang region centered around Ningbo. The wealth management transformation progressed steadily, and the brokerage business's dependence on traditional agent trading revenue fell to 66% from 72% in 2017. In terms of credit business, at the end of 2021, the company's two loans maintained a guarantee ratio of 276.25%, and the overall credit risk of the two loans was manageable. The coverage rate of third-stage asset impairment in the pledge business reached 84.4%, and there is limited room for subsequent impairment calculation.
Investment trading business: Steady and proactive, and the risk of MPS incidents has basically been clarified. The investment and trading business of Everbright Securities is relatively cautious, and the overall scale of trading assets is manageable. As of the end of 2021, Everbright Securities's proprietary equity securities and their derivatives/net capital and proprietary non-equity securities and their derivatives/net capital were 8.22% and 149.17% respectively, which is at a low level among leading and middle and upstream brokerage firms. On a risk level, by the end of 2021, Everbright Securities had confirmed an estimated debt of 5.284 billion yuan on MPS matters. At present, the relevant risks have been gradually clarified, and Everbright Securities plans to recover some losses through litigation. The related lawsuit involved an amount of 5.08 billion yuan. There is a possibility that future impairment will be recovered.
Investment business: The bond business has outstanding strength. In terms of equity financing, in 2021, Everbright Securities completed equity underwriting business of 17.777 billion yuan, an increase of 2.96% over the previous year. Among them, the IPO financing scale was 11.645 billion yuan, an increase of 7.17% over the previous year. In terms of bond financing, Everbright Securities underwrote bonds worth 363.133 billion yuan in 2021, with a market share of 3.21%, ranking 9th in the industry. Among them, the asset securitization business underwriting amount was 86.6 billion yuan, ranking 9th in the industry; the underwriting amount of local bonds was 78.661 billion yuan, ranking 8th in the industry. In 2021, corporate bond principal underwriting revenue ranked 4th in the industry, up 1 place from the previous year.
Asset management business: Broker asset management ranks among the highest in the industry and has invested in two public placement companies. At the brokerage asset management level, as of the end of 2021, the total assets managed by Guangzheng Asset Management were 374.7 billion yuan, accounting for 90.3% of the assets actively managed. According to data from the Fund Industry Association, Guangzheng Asset Management ranked 6th in the industry in terms of the average monthly asset management scale. At the public fund level, Everbright Securities currently holds 55% of Everbright Prudential Fund's shares and 25% of Dacheng Fund's shares. In 2021, Everbright Prudential and Dacheng Fund achieved net profits of 389 million and 163 million yuan respectively, with a total profit contribution rate of around 5%.
Risk factors: loss in investment business; sharp decline in A-share turnover; exposure to credit business risks.
Investment advice: With capital market reforms and business innovation in the securities industry, the profitability of leading brokerage firms has improved, which will help improve valuations. However, stock market fluctuations will inevitably have a beta effect, which will have a two-way impact on brokers' valuations. Relying on Everbright Group's platform advantages, Everbright Securities has shown strong competitive strength in the retail business field. We believe that the current price already reflects the reasonable valuation of Everbright Securities, and it is expected that the company's stock price will keep pace with overall changes in the industry in the future. Everbright Securities' net profit is expected to drop 22% in 2022.
Its BVPS is expected to be 12.03/12.69 yuan in 2022/23, respectively. According to the estimate at the lower end of the reasonable valuation range, a target price of $12.03/HK$5.15 for A/H shares was given, corresponding to 1/0.35 times PB in 2022, respectively. The first coverage gave a “hold” rating.