The comprehensive strength of Zhongyuan Securities is around 50 in the securities industry. As the only provincial corporate listed brokerage firm in Henan Province, Zhongyuan Securities is the main driver for the development of Henan's capital market. The “Henan Province's Five-Year Action Implementation Plan to Promote the Multiplication of Enterprise Listings” introduced in June 2022 clearly proposed giving full play to the main role of the local brokerage firms of Zhongyuan Securities, and the company is expected to build core competitiveness by deepening the Henan regional market.
It ranks around 50 in the industry, and its strategic position in regional development is prominent. The overall strength of Zhongyuan Securities ranks around 50 in the industry. As the only provincial corporate listed brokerage firm in Henan Province, Zhongyuan Securities is the main driver for the development of Henan's capital market. In the “Henan Province's Five-Year Action Implementation Plan to Promote the Multiplication of Enterprise Listings” issued by the government in June 2022, it is clearly proposed to give full play to the main role of the local brokerage firms of Zhongyuan Securities, and the company is expected to build core competitiveness by deepening the Henan regional market. At the profit level, 2022H1 achieved net profit of -125 million yuan, profit to loss, which was 229 million yuan in the same period last year; the diluted ROE for 202H1 was -0.93%, compared to 1.69% for the same period last year.
Brokerage business: The 2022H1 brokerage business accounts for the highest revenue share, and the channel side is deeply involved in the Henan regional market. At the revenue level, the net revenue from 2022H1 brokerage fees was 329 million yuan, down 14.7% from the previous year; in 2017-2021, the share of brokerage fee revenue showed a downward trend, and the share of 2022H1 revenue rose to 41.8%, accounting for the highest share, stemming from the fact that the decline in brokerage revenue in 202H1 was smaller than that of other businesses. At the channel layout level, by the end of 202H1, the company had set up 111 branches across the country. Among them, there were 85 branches in Henan Province, accounting for 77%. It was deeply involved in the Henan regional market and accumulated rich marketing channels and customer resources.
Investment Banking & Investment Management: The net income of 2022H1 investment banks fell 55% year-on-year, and the scale of asset management continued to decline.
In terms of investment banking business, looking at the trend, the investment banking business maintained a rapid growth trend in 2017-2021. Net revenue increased from 117 million yuan to 636 million yuan, CAGR reached 53%, and the revenue share increased from 5% to 15%.
However, due to the sharp decline in the total size of stock and bond underwriting, the net income of 2022H1 investment banks was 120 million yuan, a year-on-year decrease of 55.1%. In terms of asset management business, 2022H1 achieved net income from fees of 19 million yuan, an increase of 8.3% over the previous year; the scale of 2017-2022H1 asset management showed a downward trend. In terms of private equity fund management and alternative investments, the final management scale of 2022H1 was 4.6 billion yuan (-8.0% YoY) and 2.9 billion yuan (+7.4% YoY), respectively.
Asset-heavy business: Market fluctuations have led to a sharp decline in investment income, and the scale of two financings and stock quality declined year-on-year. In terms of investment business, 2022H1 achieved net investment income (including joint ventures) +net income from changes in fair value of 176 million yuan (-63.0% year-on-year). The scale of proprietary investment increased year-on-year, causing the company to bear large losses amid market fluctuations. In terms of credit business, 2022H1 achieved interest income from two loans of 250 million yuan, the same as the same period last year; the maintenance guarantee ratio was 278.0%, which is basically the same as the average guarantee ratio in the market during the same period (284.3%). The scale of the stock quality business continued to decline. The scale of 2022H1 was 1.6 billion yuan at the end of the previous year, compared to 2.3 billion yuan in the same period last year; the performance guarantee ratio at the end of 2022/H1 was 186.0%, down 27 percentage points from the end of the previous year, and the risk increased.
Risk factors: A share turnover has declined sharply; credit business risks have been exposed; investment losses have occurred; overseas business continues to lose money; the increase in issuance has fallen short of expectations.
Profit forecast and valuation: We forecast the company's total revenue for 2022/23/24 to be 37/40/4.4 billion yuan, and net profit attributable to the parent company to be 14/24/30 billion yuan. We selected Guolian Securities, First Venture, Guosheng Financial Holdings, and Huaxin Co., Ltd. as comparable companies to Zhongyuan Securities. The average valuation is about 1.59 times PB. The current PB of Zhongyuan Securities is 1.27 times. The valuation is lower than the average value of comparable companies, and it is in the 3% quartile of the company's PB valuation since the beginning of 2018, mainly due to loss in the company's net profit in 202H1, which suppressed stock prices to a certain extent. With capital market reforms and business innovation in the securities industry, the securities industry will concentrate its lead, which may adversely affect the valuations of small and medium-sized brokerage firms. At the same time, fluctuations in the stock market will inevitably bring about a beta effect, which will cause large fluctuations in brokers' valuations. In the short term, market fluctuations caused a decline in investment returns to put pressure on the company's profit level. Looking at the medium to long term, as the phased downside is digested, it is expected that the company's profit level will gradually recover, leading to a gradual recovery in valuation levels.
