Huachuang Yunxin's main business is securities services. It relies on its wholly-owned subsidiary Huachuang Securities to carry out exhibitions, and also relies on the location advantages of the Guizhou Digital Economy Innovation Zone to carry out digital economy ecological operation services. Huacheng Securities uses brokerage fees and investment income as its two core revenue sources. The research business is the core advantage of the brokerage business. The share of seat rental income is significantly higher than that of peers; the investment asset structure is relatively stable, and risk exposure is small. As active capital market policies are implemented one after another, the market trading situation is expected to pick up, and the performance of Huacheng Securities is expected to grow steadily. Referring to the reasonable valuation range of the PB-ROE law and comparable company law, A-shares were given a target price of 10 yuan, corresponding to 1.1 times PB in 2023, covered for the first time, and given a “increase in holdings” rating.

The subsidiary Huacheng Securities is deeply involved in the Guizhou regional market, and the strength of the research team is significantly superior to that of brokerage firms of the same level. The company's main securities business is carried out by Huacheng Securities, a wholly-owned subsidiary. Huacheng Securities has ranked around 35 in the industry overall in the past two years. Huacheng Securities uses brokerage business and proprietary investment business as core revenue sources. 2023H1 accounts for 97% of total revenue. The brokerage business of Huacheng Securities firmly grasps the location advantages in Guizhou Province, and the strength of the research team is significantly superior to that of brokerage firms of the same level; the self-operated investment structure is stable, and risk exposure has shrunk markedly in the past two years in a volatile market environment.

Asset-heavy business: The investment asset structure is stable, and risk control is strict. In terms of self-operated securities, in 2023H1, the company achieved total investment income of 952 million yuan, +175.54%; in 2022, the company achieved total investment income of 790 million yuan, -50.80% year-on-year. In 2018-2021, the company's self-operated investment income increased steadily. Although earnings declined in 2022 due to market influence, investment income rebounded strongly in 2023H1 as the market picked up. Huacheng Securities has taken the initiative to reduce investment risk exposure in an environment of market volatility. As of the end of 2023H1, the ratio of self-operated equity securities and proprietary fixed income securities to net capital was 7.19% and 154.35%, up 0.1 percentage points and down 2.91 percentage points respectively from the beginning of the year, which is at a low level among its peers.

In terms of credit business, in 2023H1, Huacheng Securities achieved net interest income of -153 million yuan, year-on-year -91 million yuan. The decline in credit business revenue was partly due to a decline in scale pressure. As of the end of 2023H1, the financing scale was 3,261 billion yuan, down 1.18% from the beginning of the year; the balance of securities financing and pledged repurchase business at the end of 2022 was 4,477 billion yuan and 1,337 billion yuan respectively, down 16.82% and 42.17% from the previous year. In terms of risk level, the risk level of Huacheng Securities's credit business is low. At the end of 2022, the financing and securities maintenance guarantee ratio was 287%, +13pcts; the pledged repurchase performance guarantee ratio was 257%, +7pcts over the same period last year.

Brokerage and wealth management business: Remarkable regional advantages and outstanding institutional brokerage capabilities. The business network coverage of Huacheng Securities in Guizhou Province is clearly superior to that of its peers. As of the end of 2023H1, there were 123 brokerage branches in Guizhou Province, and Huacheng Securities had 48 of them, which had a clear regional competitive advantage. In 2019-2022, the share of Huacheng Securities brokerage business revenue continued to rise, becoming the company's core revenue channel. Looking at the structure of brokerage revenue in a segmented manner: 1) Huacheng Securities's net seat leasing revenue in 2022 accounted for 38% of securities brokerage revenue, and rose to 43% in 2023H1. This ratio was significantly higher than most peers, mainly due to the company's excellent institutional brokerage and research business capabilities. In 2023H1, Huacheng Securities has a total commission of 186 million yuan, ranking 21st in the industry; 2) The revenue from the consignment of financial products business is flat or higher than that of brokerage securities trading, and the ability to sell securities lays a solid foundation for the development of wealth management business.

Investment Banking & Asset Management: The scale of equity financing is under pressure, and the scale of pooled asset management is growing rapidly. Since 2021, the scale of Huacheng Securities's equity financing business has declined continuously, from a historic high of 6.749 billion yuan in 2020 to 1,035 billion yuan in 2022, and the industry ranking has also dropped from 28th to 51st. From January to the end of September 2023, the scale of the company's equity financing business continued to decline by 51.69% compared to the same period last year. Affected by the contraction in the scale of equity business, Huacheng Securities's investment banking business revenue declined markedly. In 2023H1, the company achieved net income from investment banks of 103 million yuan, -9.54% year-on-year; in 2022, net income from investment banks was 196 million yuan, -48.42% year-on-year. The increase in bond underwriting scale partially offset the impact of the decline in equity business. In 2022, the corporate bond underwriting scale reached a record high of 57.479 billion yuan, +79.14% over the same period last year; the scale of bond underwriting business in January-September 2023 increased 5.03% over the same period last year. In addition, Huacheng Securities is committed to serving the development of Guizhou's real economy. Specific measures include: providing research and investment banking services for industrial integration, resource allocation, industrial layout, etc.; serving the reform and development of state-owned enterprises; and assisting relevant provincial government teams in designing debt optimization and liquidity support plans and providing advice.

In terms of asset management business, in 2023H1, the company achieved net asset management revenue of 42 million yuan, -9.88%; in 2022, the company achieved net asset management revenue of 86 million yuan, -42.47% year-on-year. As of the end of 2023H1, the management scale of Huacheng Securities's pooled asset management plan was 25.015 billion yuan, up 24.97% from the beginning of 2023; the scale of the pooled asset management plan increased rapidly in 2018-2022, with a CAGR of 43.8%. Affected by the channelization transformation, the scale of targeted and special asset management has shrunk markedly in the past two years. In 2022 and 2023H1, the company's pooled asset management scale increased significantly, but asset management revenue declined, or the overall fee rate declined due to market fluctuations, a decline in revenue sharing and changes in product structure.

Digital technology: Relying on the location advantages of Guizhou's digital economy, to create a digital economy ecosystem operation service. Huachuang Yunxin has formed a professional technical team of more than 3,600 people to carry out digital ecosystem operation services through its companies such as Yuncode Tong, Xinyuntong, and Stacky. It is committed to building a new public service Internet and providing comprehensive localized services, and is deeply involved in the digitization process of Guizhou's industry through the construction of a digital platform. Huachuang Yunxin has established a digital service system for social governance in Qiannan Prefecture, Guizhou Province, and built a digital market for local transaction settlement. It has connected with 447 service channels across the country, with a total market transaction volume of 13.9 billion yuan. In 2023, Huachuang Yunxin will continue to promote the promotion of digital platforms throughout the country. Looking forward to the future, as digital ecosystem operation services move from Guizhou to the whole country, Huachuang Yunxin is expected to open up a second growth curve other than the securities business.

Risk factors: A share turnover has declined sharply; the company's investment has lost money; the company's brokerage asset management business is lagging behind; equity financing business is dragging down investment bank revenue; and credit business risks are exposed.

Profit forecast and valuation: Based on the influence of factors such as the current market trading situation and the gradual implementation of active capital market policies, we forecast the operating income forecast for 2023/24/25 to be 3.116 billion/3,327 billion/35.57 billion yuan, and the predicted net profit attributable to the parent company is 688 million/784 million/890 million yuan. Since July 2023, with the gradual implementation of active capital market policies and continuous progress of capital market reforms, market trading activity is expected to rise steadily. Huacheng Securities, which accounts for a relatively high brokerage business, is expected to benefit from it, and valuations are expected to enter an upward cycle.

Referring to the PB valuations of comparable companies Southwest Securities, Huaxi Securities, CaiTong Securities, and Zhongyuan Securities with a 40% quantile since 2019, ± 7.5% is a reasonable range for Huacheng Securities's PB valuation. According to this estimate, the reasonable PB of Huacheng Securities is about 1.1-1.3 times. Referring to the reasonable valuation range between the PB-ROE method and the comparable company law, the company was given 1.1 times PB in 2023, corresponding to the target price of 10 yuan for A shares. It was covered for the first time, and a “increase in holdings” rating was given.