Event: Pacific Securities released its 2016 Annual report on the evening of February 28, 2016. The company achieved operating income of 1.804 billion yuan in 2016, down 34% from the same period last year, and its net profit was 668 million yuan, down 41% from the same period last year. The assets are 40.364 billion yuan, up 18% from the same period last year, while the net assets of the parent company are 11.817 billion yuan, up 60% from the same period last year. The weighted average return on equity is 5.87%, with a leverage ratio of 2.86 times.

Brokerage business: the share increased better than expected. According to the statistics of Oriental Fortune Choice, under the influence of the market as a whole, the stock-based trading volume of Pacific Securities reached 824.2 billion yuan in 2016, down 35% from the same period last year, in line with market expectations; the market share was 0.3%, up 6BP from the end of 2015, slightly better than our previous forecast of 0.28%; the commission rate was 0.043%, which was lower than the decline in 3.7BP in 2015, and the downward trend slowed down. The company has obvious advantages in brokerage business in Yunnan Province, ranking first, and the layout of light business department and Internet financial business is better than expected. We assume that the average daily trading volume in 2017 is 800 billion yuan, and it is expected that the market share of the company's stock-based trading volume is expected to rise to 0.33%, the commission rate is 0.04%, and the net income of acting securities trading is expected to be 513 million yuan.

Credit business: equity pledge business is developing rapidly. In 2016, credit business raised a total of 12.1 billion yuan, down 0.78% from the same period last year, and the scale remained basically stable. Among them, the balance of funds from the two financing businesses of the company was 2.2 billion yuan, down 26% from the same period last year, and the balance from stock pledge repurchase was 9.9 billion yuan, an increase of 7% over the same period last year. From an income point of view, the total interest income of Lianhe's buying and resale business reached 1.016 billion yuan in 2016, an increase of 26% over the same period last year, mainly due to the rapid development of equity pledge business (interest income increased by 71%). The business of financing and financing in the industry as a whole has stabilized, and the equity pledge business will be the main growth point of the credit business in the future. It is estimated that in 2017, the company's interest income on margin trading and stock pledge repurchase will be 127 million yuan and 1.112 billion yuan respectively.

Investment banking business: financial care business to support performance growth. In 2016, the company's securities underwriting and recommendation business achieved a total net income of 65 million yuan, and the financial consulting business achieved a net income of 130 million yuan, an increase of 229% and 48% respectively over the same period last year. In the whole year, we completed 1 IPO project, 1 fixed growth project, 20 bond issuance projects and more than 150 financial advisors and restructuring projects. The company's investment banking business has made breakthroughs in M & A, bonds, ABS and other fields, in which the income of financial advisers with M & An as the core is twice that of underwriting sponsors. In 2017, the company's new third board business and innovative business such as ABS are expected to benefit from the construction of multi-level capital markets and the trend of strengthening the real economy of services. It is estimated that in 2017, the company's securities underwriting and recommendation business will achieve a total net income of 80 million yuan, and financial consulting business will achieve a net income of 150 million yuan.

Self-management business: self-management is affected by the market, and asset management has the potential for growth. In 2016, the operating income of the company's securities investment business was 79 million yuan, down 92% from the same period last year, mainly due to market fluctuations. By the end of 2016, the company's asset management business had achieved operating income of 315 million yuan, an increase of 60% over the same period last year; the total amount of customer assets under management was 161.8 billion yuan, an increase of 138% over the same period last year, of which the size of collective products was 36.8 billion yuan, an increase of 781% over the same period last year. The company's asset management business focuses on "financial services of small and medium-sized banks + bond investment" and fixed income investment as the key development direction of asset management business, which has a differentiated competitive advantage. It is estimated that in 2017, the company will achieve an operating income of 100 million yuan for its own business and 430 million yuan for its asset management business.

The layout of different places is effective, and employee stock ownership shows the advantage of flexible mechanism. As a leading securities firm in Yunnan, the company deeply ploughs the local area of Yunnan and enjoys regional policies and development dividends; at the same time, the company's remote distribution has achieved results. The proportion of the number of business departments outside Yunnan Province to 54% of the company's total business department has risen to 54%. 83% of the business income comes from outside Yunnan Province, and the scope of business will gradually radiate to Southeast Asia with the "Belt and Road Initiative" policy. According to the announcement, Pacific launched an employee stock ownership plan in February 2017, with a subscription amount of not less than 30 million yuan, demonstrating the company's flexible market-oriented management mechanism and helping to enhance employees' enthusiasm and efficiency.

Investment advice: buy-An investment rating, 6-month target price of 7.2 yuan. We expect the company's EPS from 2017 to 2019 to be 0.11,0.13 and 0.18 yuan.

Risk hints: market downside risk, mismanagement risk, credit default risk