In 2022, the net profit of GF Securities to its mother fell 26.95% year-on-year, in line with the overall performance of the industry. The public equity subsidiary of GF Securities has strong alpha attributes, and the profit contribution rate is expected to continue to increase. Looking ahead, with the gradual recovery of the investment banking business and investment business, the company's overall performance is expected to pick up, and asset management capabilities will bring alpha attributes to the company. A/H shares were given 1.20/0.75 times PB in 2023, and the corresponding target price of HK$18.58/HK$13.27 was maintained.

Guimu's net profit fell 26.95% year-on-year, in line with the overall performance of the industry. Affected by the decline in investment income due to capital market fluctuations, in 2022, GF Securities achieved operating income of 25.132 billion yuan, down 26.62% from the previous year; achieved net profit of 7.929 billion yuan, down 26.95% from the previous year; the year-on-year decline in revenue and net profit was basically the same as that of the industry; the basic EPS for the period was 1.02 yuan/share, down 28.17% from the previous year; the weighted average ROE was 7.23%, down 3.44 percentage points from the previous year.

Wealth management and investment management underpin core performance, and trading and institutional business dragged down the company's overall profits. In 2022, the four major sectors of investment banking, wealth management, trading and institutional business and investment management contributed to operating income of 602 million/11.102 billion/2,866 million/9,943 million yuan, and operating profit of -246 million/6.696 million/1,263 billion dollar/3,970 million yuan respectively. The wealth management business and investment management business are the company's core business segments. Together, they contribute 84% of operating income and 102% of operating profit. Affected by capital market fluctuations, the operating profit of trading and institutional business fell 76% year on year, which is the key reason for the decline in the company's overall profit.

Investment management: The public fund business contributed 25.64% of net profit, and the stabilizer role was prominent. In terms of public funds, as of the end of 2022, the management scale of Guangfa Fund was 1.25 trillion yuan, an increase of 10.63% over the previous year; the management scale of eFangda Fund was 1.57 trillion yuan, a slight decrease of 7.83% over the previous year. The Guangfa Fund and E-Fangda Fund achieved net profit of 2,134 billion/3.837 billion yuan respectively in 2022, down 18.1%/15.4% from the previous year; the two funds contributed 25.64% of net profit in total, up 3.08 percentage points from the previous year, and the stabilizer effect was prominent. In terms of asset management, the AUM of Guangfa Asset Management at the end of 2022 was 271,183 billion yuan, a sharp drop of 45.02% over the previous year.

Wealth management: Sales of financial products declined, and the market share of funds traded by agents increased effectively. The net revenue of the company's brokerage business in 2022 was 6.387 billion yuan, a year-on-year decrease of 19.9%. Among them, net revenue from consignment financial products was 778 million yuan, a year-on-year decrease of 28.9%, mainly due to an 18.3% year-on-year decline in financial product sales. The performance of the securities brokerage business was relatively stable. The company's share of stock trading volume in 2022 was 3.78%, which is basically the same as in 2021. Benefiting from its advantages in asset management and the construction of the Easy Taojin platform, GF Securities's agent fund trading volume share in 2022 was 6.29%, an increase of 2.8 percentage points over the previous year, effectively improving competitiveness.

Investment banks: The investment banking business has clearly recovered, and the decline in comprehensive rates has suppressed the elasticity of revenue growth. The equity underwriting scale ranking rose from 68th in 2021 to 15th in 2022. The share underwriting scale was 18.407 billion yuan, an increase of 1192% over the previous year. Among them, the principal underwriting amount for the 2022 IPO was 2,943 million yuan; the principal underwriting amount for refinancing was 15.464 billion yuan. As of March 31, 2023, there were 18 projects queued for IPOs in stock, ranking 12th in the industry. The ranking of bond underwriting scale rose from 34th in 2021 to 17th. The total amount of bond underwriting was $142,076 billion, an increase of 358.38% over the previous year. In 2022, the company's investment bank's net revenue was 610 million yuan, an increase of 41.08% over the previous year, lower than the increase in scale. It is mainly related to the relatively low rates of refinancing and financial bond services, which account for most of the incremental business.

Trading and institutional business: Total investment income fell 69.55% year-on-year, with proprietary equity securities and securities derivatives accounting for a high share. Affected by the market environment, the company's net investment income plus fair value change income in 2022 was 2210 billion yuan, -69.55% year-on-year. In 2018-2022, the financial investment scale of GF Securities increased from 185.5 billion yuan to 302.8 billion yuan, placing higher demands on the company's investment capacity. In terms of risk, the company's overall VaR value at the end of 2022 was 211 million yuan, down from 280 million yuan at the end of 2021. The size of proprietary equity securities and their derivatives/net capital is 47.87%, which is significantly higher than the average of comparable brokerage firms such as China Merchants Securities (28.11%).

Risk factors: A-share turnover fell sharply, credit business risks were exposed, investment trading business performance fell short of expectations, investment banking business recovery fell short of expectations, and wealth management business development fell short of expectations.

Profit forecasting, valuation and ratings: Considering the impact of the continued development of the wealth management business and the steady recovery of the capital market, we forecast that the 2023/2024/2025 EPS of GF Securities will be 1.51/1.67/1.86 yuan, and the BVPS will be 15.49/16.78/18.26 yuan (the original forecast was 2023/24 EPS 1.45/1.75 yuan, BVPS 15.76/17.12 yuan). The public equity subsidiary of GF Securities has strong alpha attributes, and the profit contribution rate is expected to continue to increase.

Looking ahead, with the gradual recovery of the investment banking business and investment business, the company's overall performance is expected to pick up, and asset management capabilities will bring alpha attributes to the company. According to the valuation quantile of 20% since 2020, A/H shares were given 1.20/0.75 times PB in 2023, corresponding to the target price of 18.58 yuan/HK$13.27, all maintaining the “increase in holdings” rating.