Investment suggestion
We downgraded Baoshuo shares to neutral and lowered the target price by 51% to 9.24 yuan, corresponding to 18e 1.4x Pamp B (excluding goodwill). The reasons are as follows:
The company's profitability continues to be under pressure. The main results are as follows: 1) the profit level of securities business lags behind that of the same industry. The 17-year net profit of Huachuang Securities, a subsidiary, was-53% to 200 million, ROAE1.8% (vs. Industry net profit-8%, ROAE 6.5%; performance is significantly weaker than the industry). After the company completed the capital increase in December 16, the company had a net asset of 10.5 billion by the end of 17th. Compared with securities companies with similar capital size, Huachuang's profitability obviously lags behind: Huaxi, Xiangcai, Donghai and Zhongyuan Securities, with net assets in the range of 80-13 billion, have an average 17-year net profit of 630 million and an average ROE of 6.6%. 2) the business of traditional building materials continues to shrink. In 17 years, building materials revenue was-42% to 190 million compared with the same period last year, and CAGR-23% in the past three years. There is no sign of improvement at present. In total, 1Q18's net profit is 65 million, and the single-quarter ROAE is only 0.44%. Profitability is under pressure.
It relies heavily on the proprietary business of bonds, which increases the uncertainty of performance. The company's 17-year available-for-sale financial assets + transactional financial assets increased by 37 per cent to 14.2 billion compared with the same period last year, of which bonds accounted for 82 per cent (of which 10.2 billion of tradable financial assets were almost all bond investments). The company relies heavily on the proprietary business of bonds, so that its performance is obviously dragged down under the sharp fluctuations in the bond market. For example, the 4Q17 bond market fell unilaterally (the total debt of China Securities Exchange was-0.69%), so that the company made a net loss of 96 million yuan in a single quarter.
Small and medium-sized securities firms that lack competitive advantage are facing downward pressure from the valuation center. We believe that:
1) under the trend of higher concentration of the securities market and the stronger the stronger, the performance and valuation of small and medium-sized securities firms lacking competitive advantage will face continuous downward pressure; 2) the industry β attribute is weaker, and the performance-to-price ratio of small securities firms becomes lower. On the one hand, the proportion of industry brokerage business has declined significantly over the past 16 years (15 years brokerage income contributed 46.8% vs. 17 years 26.4%), the plate endogenous beta attribute weakened; on the other hand, under the current market expectations and overall stability maintenance tone, it is difficult to soar in the short term, and the external conditions of the plate beta attribute are weakened.
What is the biggest difference between us and the market? We believe that the company's over-reliance on the bond proprietary business has significantly increased the performance uncertainty and will bring a discount to the valuation.
Potential catalyst: the performance differentiation between large comprehensive securities firms and small and medium-sized securities firms continues to expand.
Profit forecast and valuation
We reduced 18-year EPS by 25.4% to 0.17 yuan, and introduced 19-year EPS by 0.19 yuan. We downgraded Baoshuo shares to neutral and lowered the target price by 51% to 9.24 yuan, corresponding to 18e1.4x pram B (excluding goodwill).
Risk
The stock and debt markets fluctuated sharply.
