Incident: Haitong Securities released its 2023 three-quarter report. Net profit fell short of expectations. The company's 9M23 achieved revenue of 22.57 billion yuan/yoy +19%; net profit of 4.36 billion yuan/yoy -28%; 3Q23 achieved revenue of 5.61 billion yuan/yoy -18% /qoq -4% in a single quarter, net profit of 530 million yuan/yoy -60% /qoq -62%; 9M23 weighted ROE (unannualized) 2.62% /yoy-1.08pct.

The main reasons why 3Q23 net profit fell short of expectations: 1) equity market fluctuations, single-quarter investment income (including exchange) q-70%, dragged down main revenue by 16.4pct; 2) rising debt costs led to a year-on-year increase in interest expenses, 3Q23 annualized debt cost 4.05 pct/ yoy+0.57pct, and 3Q23 net interest expenditure of 3.96 billion/ yoy +20%. 3) The quarterly management fee rate is as high as 74.8% /yoy+8.9pct/ qq+20.3pct. The 9M23 profit growth rate (yoy -28%) was lower than the revenue growth rate (yoy +19%), mainly because impairment losses dragged down profits. 9M23 calculated asset impairment losses of 1.49 billion yuan (9M22 calculated 490 million yuan).

Investment returns are positively driving performance, and the rest of the business is under pressure in the short term. The main revenue from 9M23's securities was 14.58 billion yuan, the same as the previous year. 1) Main revenue split: brokerage, investment banks, asset management, net interest, net investment (including exchange), and long-term stock investment achieved revenue/yoy growth rates as follows: 2.87 billion/ yoy -21%, 3.01 billion/ yoy -20%, 1.43 billion/ yoy -15%, 3.27 billion/ yoy -15%, 3.47 billion/ yoy -31%, 3.46 billion/9M22 loss of 380 million, 4.2 million/ yoy - 51%; 2) Looking at the main revenue composition: brokerage share 19.7%, investment bank share 20.6%, asset management ratio, 9.8% Net Interest accounts for 22.4%, net investment (including foreign exchange) accounts for 23.7%, and long-term stock investment accounts for 3% (other fees account for 0.8%). Net investment (including foreign exchange) positively boosted performance by 26.4pct.

The brokerage business followed the market, and the transformation of wealth management deepened. Affected by the downturn in equity trading, 9M23's securities business net revenue was 2.87 billion yuan/yoy -21% (the decline was larger than 1H23, 1H23 securities brokerage revenue yoy -20%); in terms of wealth management business, the company relied on the “e-Sea Express” and “e-Sea Ark” brands to deepen wealth management transformation. According to the latest data from Yi Guanqian, “e-Sea Express” had a monthly activity of 5.759 million people, ranking 4th compared to securities services (excluding Dongcai, “Monthly Wealth Growth”) The gap narrowed to 3.3649 million , the gap at the end of '22 was 3.9683 million); Referring to 1H23, the number of newly opened customers was +29%, and the assets of newly opened customers were +193% (1H23 report data), we believe that Haitong Securities's wealth management transformation continues to deepen.

The equity financing business increased year over year in a single quarter, and the IPO market share increased to 14%. In terms of equity underwriting, the IPO underwriting scale of 9M23 is 460.2 billion/yoy +32%, with a market share of 14.0% /yoy+6.1pct; among them, the 3Q23 single-quarter IPO underwrites 19.5 billion/yoy +219%, and the IPO market share is as high as 17.9% /yoy+10.5pct, ranking 2nd in the industry (after CITIC Securities); in terms of refinancing business, 9M23 has a refinancing underwriting scale of 17.6 billion/yoy +80%, ranking 5th in the industry (9M22 industry ranking) 11th place); The underwriting scale of single-quarter refinancing was 13.89 billion/YOY +144%, and the market share of single-quarter refinancing was 12.3%. In terms of bond underwriting, the underwriting scale of 9M23 Haitong bonds is 345.2 billion/yoy +30%, with a market share ratio of 3.5% /yoy+0.3 pct. In terms of project reserves, at the end of 9M23, the company's equity financing queued 151 projects, ranking 3rd in the industry, with 52 ongoing projects, including 24 ongoing IPO projects.

The holding stock of public non-goods AUM has improved compared to the beginning of the year, and the Wells Fargo fund industry ranking is stable. In terms of contribution performance, the net profit of 1H23 Haitong Asset Management (a wholly-owned subsidiary), Haifutong Fund (holding 51%), and Wells Fargo Fund (holding 27.78%) was yoy -75%, yoy -8%, and yoy -5%, respectively. It is expected that due to the decline in equity fund size, 1H23 collectively contributed 11.9% to Haitong Securities's net profit. In terms of management scale, 1) According to Wind, at the end of 9M23, the non-commodity scale of Futong Fund was 103.49 billion yuan/yoy +4%/+12% from the beginning of the year, ranking 4th in the industry; Wells Fargo Fund's non-commodity base scale was 595 billion yuan/yoy -6%/+2% from the beginning of the year, ranking 4/197 in the industry.

Investment analysis opinion: Lower the profit forecast and maintain the company's holdings growth rating. We selected listed brokerage firms with similar net assets to Haitong Securities as comparable companies: Guotai Junan, Guoxin Securities, China Merchants Securities, and GF Securities. According to Wind's unanimous forecast, the average 2023E BVPS is 13.93 yuan/share, and the average 2023E PB of comparable brokers is 0.98 times. Considering that Haitong Securities's 9M23 business, with the exception of investment income, all other businesses were under pressure, and that impairment losses increased sharply year over year, dragging down profits.

Haitong was given a 10% discount (0.88 times) on the average PB of 23E to the benchmark brokerage firm 23E. The corresponding target stock price was 11.35 yuan/share, leaving room for 16% increase from the current closing price of 9.77 yuan, maintaining an increase in holdings rating. The company's 23-25E net profit is estimated at 66.4, 89.7, and 10.76 billion yuan (the original forecast was 93.108.12.5 billion yuan), +1.4%, +35%, and +20% over the same period last year.

Risk warning: The downward pressure on the economy has increased; market stock trading activity has declined sharply; the company announced a regulatory work letter on relevant matters on March 17, 2023, covering listed companies, directors, supervisors, and senior managers; on June 15, 2023, the Shanghai Stock Exchange issued a regulatory warning to Haitong Securities, mainly because the company was the initial sponsor of Huiqiang New Materials (IPO terminated), Mingfeng Healthcare (IPO terminated), and Zhizhen Co., Ltd. (IPO terminated) and Zhizhen Co., Ltd. (IPO terminated) and continued lack of supervision.