Matters:

GF Securities released its report for the first quarter of 2023, with operating income of 6.48 billion yuan (+35.7% year-on-year), net profit of 2.16 billion yuan (+65.5% year-on-year), net assets of 122.85 billion yuan (+14.2% compared to the beginning of the year, +2.25% from the beginning of the year), and ROE of 1.78% for a single quarter (+0.56 pct year-on-year).

Commentary:

The return rate and leverage of the heavy capital business have all increased markedly. The net revenue of the heavy capital business was 2.41 billion yuan (loss of 150 million yuan in the same period last year), and the net yield of the heavy capital business was 0.56% (+0.60 pct year on year). Excluding clients' funds, the company's leverage was 4.37 times (+0.33 times year over year).

(1) Proprietary income has increased markedly. Proprietary business revenue was 1.47 billion yuan (loss of 1.14 billion yuan in the same period last year).

Proprietary profit margin 0.45% (+0.90pct year over year). Financial investment was 352.26 billion yuan (+33.5% year-on-year, +16.33% from the beginning of the year), an increase of 49.4 billion yuan over the beginning of the year, mainly through self-operated leverage in the fixed income category. The amount of financial assets sold and repurchased, mainly bond-pledged repurchases, increased by 41.04 billion yuan, and transactional financial liabilities such as income certificates increased by 10.77 billion yuan.

(2) There has been a decline in the scale of credit business. Net interest income was $940 million (-5.35% YoY), of which interest income was $3.46 billion (+6.7% YoY) and interest expenditure was $2.52 billion (+12.0% YoY). There has been an increase in interest expenses due to an increase in market interest rates and increased leverage. The business scale of the two banks was 86.13 billion yuan (-2.7% year-on-year), with a market share of 5.36% (-0.15pct year-on-year). The stock quality business scale was 15.51 billion yuan (-15.6% year on year), and the risk of stock quality business continued to decline.

Net income from fees was $3.72 billion (-12.6% YoY), of which:

(1) The revenue growth rate of brokerage business is slightly higher than that of peers. Net revenue from brokerage fees was 1.45 billion yuan (-12.5% year-on-year). Market comparison: The average daily stock trading volume in the 23Q1 market was 878.75 billion yuan (-12.8% year-on-year). Trading activity has not been restored year-on-year, leading to a year-on-year decline in revenue. The company's revenue growth rate was slightly higher than the year-on-year change in the market.

(2) The investment banking business continues to recover. Net income from transaction fees of investment banks was 100 million yuan (-32.7% year-on-year). GF Securities did not issue an IPO project in the first quarter, compared to 1.13 billion yuan in the same period last year. Currently, the number of projects queued for IPO review is 227.22 billion yuan, of which 13.39 billion yuan has been inquired, is being issued and registered by the Securities Regulatory Commission (SFC), and the size of the projects submitted to the Securities Regulatory Commission and received feedback and accepted is 8.42 billion yuan. If estimated at a 5% rate, potential IPO underwriting revenue is 1.14 billion yuan. The overall underwriting project cycle for investment bank projects is long, because the repair progress has not yet been reflected in the profit statement, and it is expected that investment bank business revenue will increase significantly in the future.

(3) Revenue from asset management business still needs to be repaired. Net income from asset management fees was 2.09 billion yuan (-10.8% year-on-year).

Market conditions have yet to recover. The average size of the mixed stock base in the first quarter was 7.6 trillion yuan (-6.0% year on year). The market was damaged last year, and the size of the mixed stock base gradually recovered.

Investment advice: The company's investment banking business has now been clearly restored. With the implementation of the full registration system, it is expected that it will gradually be reflected in the income statement within the year. The company has strong asset equity capabilities and excellent asset management business capabilities. When market conditions are rising, the company's performance growth elasticity is clearly higher. Currently, economic expectations are recovering, risk appetite is picking up, and the brokerage sector is expected to usher in a new round of market activity. I am optimistic about the market performance of GF Securities. We maintain the 2023/2024/2025 EPS forecast at 1.57/1.84/2.28, BPS at 15.50/16.73/18.27, corresponding PB of 0.99/0.92/0.84 times, respectively, and ROE of 10.14%/10.99%/12.49% respectively.

We maintain 1.3 times the 2023 PB valuation, with a target price of 20.1 yuan. Maintain a “Recommended” rating.

Risk warning: market trading volume has declined; risk appetite has declined; capital market innovation falls short of expectations; domestic and global epidemics have repeated and worsened; and the recovery of the real economy has fallen short of expectations.