The proprietary investment business is the core characteristic of Hongta Securities. Relying on the resources of industry shareholders, Hongta Securities has a deep presence in the field of equity investment, leading the industry in terms of investment business revenue. Relying on investment ability, Hongta Securities is expected to create differentiated competitive characteristics in the future. In the short term, Hongta Securities is benefiting from the recovery in investment business under the restorative market and is expected to maintain the current valuation level; in the long run, it is expected that PB valuation will be close to the industry average.
Characterized by proprietary investment businesses, Q2 single-quarter net profit hit a new high since listing. Currently, the comprehensive strength of Hongta Securities is around 32 in the industry. Relying on shareholders' resources, Hongta Securities actively deployed in the field of equity investment. The sum of Hongta Securities's net investment income and fair value change profit and loss in 2021 was 2,276 billion yuan, accounting for 80% of total revenue (other business income calculated on a net basis), and its proprietary investment business has distinct characteristics. At the profit level, the ROE of Hongta Securities in the past three years from 2019 to 2022H1 was 6.78%, 10.21%, 9.03%, and 1.40%, respectively. The ROE during the year fell short of the industry average. 2022Q2, benefiting from a recovery in investment business, Hongta Securities achieved net profit of 1,045 million yuan in a single quarter, the highest net profit in a single quarter since listing.
Proprietary business: Equity self-employment is leading comparable brokerage firms, and fixed income self-employment scale is expanding rapidly. Investment income is the company's core revenue source, and its revenue share has remained above 70% in the past three years. At the structural level, at the end of 202H1, Hongta Securities's proprietary equity securities and securities derivatives/net capital and proprietary fixed income securities/net capital were 25.05% and 140.01% respectively, up 1.24 and 51.63 percentage points respectively from the end of 2021, and the scale of its fixed income self-operated business expanded rapidly. In terms of equity ownership, its share of net capital (25.05%) is significantly ahead of comparable brokerage firms such as West China (19.35%), Huaan (10.73%), Guojin (10.91%), and Guohai (13.12%).
Brokerage business: The revenue share is relatively stable, with a deep presence in the Yunnan region. In 2021 and 202H1, Hongta Securities's net brokerage fee revenue was $264 million and 109 million, respectively. Brokerage revenue has remained around 10-15% of operating income in the past five years. Among them, stock brokers and futures brokers are the main revenue earners in the brokerage business. 2022H1 stock agent trading revenue (91 million yuan) and futures agent trading revenue (17 million yuan) together account for 98.6% of the total brokerage business revenue. In terms of channels, Yunnan is the focus of Hongta Securities's layout.
By the end of 2021, out of 62 sales departments of Hongta Securities, 30 were located in Yunnan Province, accounting for 48%.
Asset management business: The share of revenue is gradually declining, and Hongta Red Earth Fund is wholly owned. The share of revenue from the asset management business of Hongta Securities continued to decline from 9% in 2017 to 4% in 202H1. In terms of brokerage asset management, the asset management scale of Hongta Securities Asset Management Branch in 2022 H1 was 56.132 billion yuan, down 4.20% from the beginning of the year. Among them, the scale of pooled, targeted, and special asset management was 50, 54371, and 1,711 billion yuan, respectively. In terms of public placement business, Hongta Red Earth Fund, a wholly-owned subsidiary, managed 7.110 billion yuan of public placement in 202H1, down 23.44% from the beginning of the year; the net profit of 2022H1 was 212,300 yuan, and the profit contribution of the public equity subsidiary was relatively limited.
Investment business: Attention is paid to regional layout, and the development of the bond business is lagging behind. Hongta Securities proposed a development strategy that actively reserves sponsorship business, strives to expand the bond business, focuses on increasing investment in the Yunnan region, and attaches great importance to the regional layout. In 2021, Hongta Securities ranked 33 and 73 respectively in the equity and bond underwriting scale industries. The strength of the bond business clearly lagged behind the company's overall ranking. 2022H1, Hongta Securities completed 1 targeted issuance and 1 exchangeable bond project, with an equity underwriting scale of 961 million yuan; achieving a bond underwriting amount of 1.90 billion yuan.
Credit business: Pledge business dominates, and credit risk is manageable. Interest income from 2022H1's securities lending and equity pledge businesses was $40 million and $137 million, respectively. At the end of 2022H1, the balance of the securities financing and securities lending business of Hongta Securities was 1,329 billion yuan, down 5.74% from the end of 2021; the stock pledge balance was 4.845 billion yuan, up 0.87% from the end of 2021. The scale of the pledge business remained stable in the environment of the overall contraction of the industry. At the risk level, as of the end of 202H1, Hongta Securities maintained an average guarantee ratio of 295.45% and the stock pledge performance guarantee ratio was 315.10%, all leading the industry average, and credit risk was relatively stable and manageable.
Risk factors: risk of loss in investment business, decline in agency turnover, lower than expected development of the wealth management market, exposure of credit business risks, risk of declining industry ratings
Investment advice: With capital market reforms and business innovation in the securities industry, the concentration of the securities industry is expected to increase.
Relying on the resources of industry shareholders, Hongta Securities is deeply deployed in the investment business field, and the investment business accounts for the leading share of revenue in the industry. Relying on investment ability, Hongta Securities is expected to create differentiated competitive characteristics in the future. In the short term, Hongta Securities is benefiting from the recovery in investment business under the restorative market and is expected to maintain the current valuation level; in the long run, it is expected that PB valuation will be close to the industry average. Its BVPS is expected to be 5.03/5.25/5.45 yuan in 2022/23/24, respectively.