Industry pattern: the pattern of "big market, small industry" needs to be broken, and the competition is becoming increasingly fierce: 1) the trading volume of the futures market is high, but the profitability of the futures industry still needs to be improved: China's futures industry has significant characteristics of "big market, small industry". In terms of trading scale, the trading volume of China's futures market was 534.9 trillion yuan in 2022, of which the international market share of commodity futures and options reached 72.3%, ranking first in the world. However, at present, the profitability of China's futures industry is insufficient. In 2022, the net profit of the industry is only 10.989 billion yuan, and the net profit is less than 8% of the securities industry. 2) the industry concentration is increasing year by year, and the industry commission rate is declining as a whole: at present, the leading position of China's futures industry is mostly occupied by securities futures companies, and the trend of differentiation is gradually intensified. From 2015 to 2022, futures market turnover CR5 and CR10 increased from 25.70% and 42.14% to 48.52% and 66.06%, respectively. At the same time, as the income of the futures industry is more dependent on brokerage business, the profit model is single, the current industry homogenization competition is becoming increasingly fierce, and the brokerage commission rate shows a downward trend as a whole.

Company profile: domestic established futures companies, business layout globalization: 1) the company has a long history of development, international diversified characteristics of development: South China Futures has been established for 27 years, maintaining the CSRC classification AA rating for many years, outstanding business performance. The ownership structure is stable and concentrated, and Hengdian Group, the largest shareholder, has strong capital strength, with a shareholding ratio of 69.68%, which contributes to the long-term and steady development of the company. 2) wide scope of business layout, positioning of global financial derivatives service platform: the company's business sector has a clear positioning, through its three wholly-owned subsidiaries to carry out different financial business, domestic and foreign coordinated efforts. 3) the financial situation is stable and the brokerage business is outstanding: the net profit of South China Futures increased from 80 million yuan to 250 million yuan from 2019 to 2022, with a slight increase against the trend, leading the industry in terms of revenue, far exceeding the average level of the industry, and the leading position. 2023H1 achieved a net profit of 168 million yuan, an increase of 122.55% over the same period last year. South China futures revenue is mainly contributed by brokerage business, accounting for about 60%; overseas financial business is developing rapidly and is expected to continue to grow high in the future.

Business overview: the momentum of overseas business is improving, and the ability of wealth management continues to strengthen: 1) the international layout advantage is outstanding, and the overseas business performance is outstanding: the company has the financial license of most of the mainstream overseas exchanges, which forms a leading advantage over the same industry. As of 2023H1, the total customer rights and interests of the company's overseas brokerage business was HK $14.094 billion, an increase of 33.24% over the same period last year. It is expected that overseas financial services business will become the main focus of South China Futures in the future. 2) the company's futures brokerage business is growing steadily: the company insists on providing differentiated services to customers, and its competitiveness continues to improve. From 2020 to 2022, the total income of the company's futures brokerage business at home and abroad was RMB 478 million. 3) the demand for risk management business has increased, and the scale of over-the-counter derivatives business continues to grow: in the first half of 2023, the nominal principal of over-the-counter derivatives business increased by 42.551 billion yuan, an increase of 6.56% over the same period last year. 4) Wealth management capacity continues to improve: the company's public offering fund and asset management business go hand in hand. As of 23H1, the asset management scale of South China Fund / Company has respectively increased by 129% compared with 22H1, showing a good momentum of development.

Profit forecast and investment rating: the domestic business of South China Futures is developing steadily, and the overseas business has outstanding advantages. Under the background of the acceleration of China's futures market in line with international standards, profitability is expected to be further improved. We estimate that the company's homing net profit from 2023 to 2025 will be 380,506 and 575 million yuan respectively, compared with the same period last year, + 54.37% plus 33.21% and 13.55% respectively. It is estimated that the earnings per share from 2023 to 2025 will be 0.62 pound 0.83 cents 0.94 yuan respectively, and the corresponding valuation PE will be 20.86 pounds 15.66 pounds 13.79 times respectively. Coverage for the first time, giving a "overweight" rating.

Risk tips: 1) stricter supervision of the industry; 2) the development of the domestic futures market is not as expected.