Incident: Hongta Securities released its semi-annual report for 2023, which fell short of expectations. 1H23 achieved net profit of 300 million/yoy -10%, 2Q quarterly profit of 0.7 million/yoy -93% /qoq-69%; 1H23 had revenue of 780 million/yoy -12%, and 2Q quarterly revenue of 290 million/yoy -81%. The 1H23 weighted average ROE was 1.28% /yoy-0.12pct.
Hongta Securities's net interest income is increasing, and all other business lines are under pressure. The main revenue of 1H23 corporate securities is 690 million/yoy -2%. 1) Main revenue split: brokerage, investment banking, asset management, net interest, and net investment achieved revenue of 0.9, 0.1, 0.2, 220, and 350 million, respectively, with a year-on-year ratio of -17%, -64%, -23%, +3610%, and -34%; 2) Looking at the main revenue composition: brokers accounted for 13.1%, investment banks accounted for 1.1%, asset management accounted for 3.0%, net interest accounted for 31.3%, net investment accounted for 50.3%.
Net income from 2Q investment declined, which is expected to be mainly due to pressure on the company's equity investment. The 2Q23 company's net investment income was 0.3 million/yoy -98% /qoq -90%, and the estimated return on 1H23 net investment was 2.25% (3.32% and 4.27% for 1H22 and 1Q23). Due to increased fluctuations in the 2Q equity market, mainstream indices fell sharply (Shanghai and Shenzhen 300 to -5.1%, China Securities 500 to -5.4%), and the company's income from changes in the fair value of its transactional financial assets decreased; at the end of 2Q23, Hongta Securities traded financial assets of 15 billion dollars/-18% compared to the end of '22, of which 1.04 billion/+3% compared to the end of '22, and the size of public funds was 890 million/-46% compared to the end of '22.
The brokerage business declined with the market, and the fundamentals of the two finance business were stable. In terms of brokerage business: The company continues to promote wealth management transformation, upgrading and iterating customer service systems such as quick order systems and CRM systems; 1H23's brokerage business hosts total customer assets of 169.8 billion yuan/ -6%, achieving revenue of 18.928 million yuan/yoy -15%, and consignment business revenue of 1,253,700 yuan/yoy +43%. In terms of financial services, 1H23's financing business scale was 1,277 billion yuan/the same as at the end of '22, with an average performance guarantee ratio of 283.24% /higher than the market average. In terms of stock pledge business: 1H23's stock pledge balance is 3.42 billion dollars/-11% compared to the end of '22; the margin of safety for business contracts is high, and the average performance guarantee ratio for continuing contracts is 299.04%.
The investment banking business accounts for a low share of revenue, 1H23 equity underwriting has not been billed, and the scale of bond underwriting has increased. 1H23's net investment bank revenue was 108 million/yoy -64% /qoq +16%, accounting for only 1.1% of main revenue. According to statistics on the date of issuance, 1H23 Hongta completed 0 equity underwriting business orders; in terms of debt acceptance, the corporate debt underwriting scale was 2.89 billion/yoy +18%. In terms of project reserves, as of 8/30, Hongta Securities had 4 equity financing reserve projects, ranking 55th in the industry, including 1 IPO and 3 refinancing projects.
The asset management business is under pressure, mainly due to Hongta Red Earth Fund's 1H23 losses and a recovery in dividend profit performance. Hongta Securities mainly conducts asset management business through Shanghai Branch, Hongta Futures, Hongta Red Earth Fund and its subsidiary Hongta Asset, and holding subsidiary Hongzheng Lide; 1H23's asset management business revenue is 20 million yuan/yoy -23%. Looking at the scale of asset management, the year-end management scale of 1H23 Shanghai Branch was 54.72 billion yuan/-1.1% compared to the end of '22; Hongta Red Earth Fund and its subsidiary Hongta Asset had an asset management scale of 24.18 billion yuan/+26.9% compared to the end of '22. Judging from the performance, 1H23 Hongta Red Earth Fund had a net loss of 14.334 million yuan, Hongta Asset's net profit of 4.74 million yuan/yoy -11.3%, and a net profit of 4.64 million yuan/loss of 13.54 million yuan for the same period last year.
Investment analysis: Give Hongta Securities a “recommended” rating. The net profit of Hongta Securities is estimated to be 590 million yuan, 900 million yuan, and 1.01 billion yuan respectively from 2023-2025E, +1443%, +52%, and +12% year-on-year.
The 8/31 closing price corresponds to the company's 23-25E dynamic PB of 1.61 times, 1.56 times, and 1.52 times, and dynamic PE of 63.4 times, 41.7 times, and 37.2 times.
Risk warning: capital market reforms fell short of expectations; market liquidity fell short of expectations; the stock market fell sharply.