Core views
The company announced a pre-increase in its 2023 results. It is expected to achieve net profit of 21.26 billion yuan to 2,356 billion yuan in 2023, an increase of 40% to 55% over the previous year. Net profit not attributable to mother is expected to be 2.205 billion yuan to 2,276 billion yuan in 2023; it exceeds our previous expectations, mainly due to high growth in investment banking+ investment, and wealth+ asset management is more stable than the same industry; at the same time, considering that recent policy catalysts are expected to fully benefit the company, we have raised the company's profit forecast accordingly and maintained a “buy” rating.
occurrences
The company announced a pre-increase in its 2023 results, and the net profit expected to be realized for the whole year exceeded our expectations (previously forecast net profit to mother of 1.97 billion yuan for 23).
Brief review
High growth in investment banking and investment business, steady performance in the wealth business, and continued growth in the asset management business were the reasons for the advance increase in performance. In the first three quarters of 2023, the company's revenue grew at a year-on-year rate of 39.
At 8%, the growth rate ranked 3rd among 43 listed brokerage firms, and the net profit growth rate to mother was 39.1%, ranking 14th. By business, the company's net income from investment bank fees was +62.1% year over year, ranking 3rd among listed brokerage firms, and the size of transactional financial assets was +23.3% to 46.38 billion yuan, ranking 8th; net revenue from brokerage business fell -1.3% year on year, the decline was the lowest among listed brokerage firms, and net revenue from asset management business was +11.8% year-on-year, ranking 12th in terms of increase.
Investment business: Benefiting from corporate strategies such as focusing on the Beijing Stock Exchange, introducing excellent teams, and leveraging location advantages, it has achieved contrarian growth. From January to August 2023, the company completed the issuance of 5 equity projects, with a debt commitment scale of 95.37 billion yuan, with a year-on-year increase. As of the end of August, there were 13 IPOs under review and 29 mentors. The estimated financing amount for approved bond projects was 79.9 billion yuan, and the amount of equity and bond projects issued reached a record high.
Investment business: Benefiting from the bond market, annual earnings increased sharply year-on-year, and it is expected that there is a high probability that it will remain steady. According to the research notes announced on November 3, 2023, the company's proprietary investment strategy is to reduce the credit risk and liquidity risk of the fixed income business and improve asset quality by effectively controlling equity positions and improving asset quality. At the same time, the current derivatives business is mainly OTC options, and the company will also vigorously develop income swaps in the future to improve the balance of the investment business.
Convertible bonds are not revised downward, demonstrating management's confidence in the company's long-term development. Since 2022, the company has issued a notice of no downward revision of convertible bonds four times. The most recent one was 2024/1/23. Since issuing convertible bonds, the company has never voluntarily lowered its stock price. The current share conversion price is 11.34 yuan/share, with an untransferred balance of about 3.79 billion yuan, accounting for 99%. We believe that the reason we chose not to lower the balance is that, on the one hand, the conversion is still far from reaching the expiration date of 6 years, and on the other hand, the management's confidence in the intrinsic value of the company's long-term development.
Facing policy catalysis:
1) The State Assets Administration Commission publicly emphasizes market value management assessments, which is expected to lead the central government to reassess the market value of state-owned enterprises. On January 25, 2024, the State Council's State-owned Assets Administration Commission stated that it will further study the inclusion of market value management in the performance assessment of central enterprise heads.
Regarding Caitong Securities: Strengthening market capitalization assessments by central enterprises is expected to promote the optimization of modern corporate governance of state-owned enterprises with Chinese characteristics. Caitong Securities originated from Zhejiang Finance Securities and is a central departmental unit directly under Zhejiang Province. It is also expected to benefit from a new round of state-owned enterprise reform and revaluation.
2) After the central bank downgraded, the capital market's expectations of reducing LPR strengthened again, and trading sentiment in the stock market heated up. On January 24, the People's Bank of China announced that it will lower the deposit reserve ratio by 0.5 percentage points to provide the market with long-term liquidity of about 1 trillion yuan. At the same time, on January 25, it will lower agricultural support small reloans and rediscount interest rates by 0.25 percentage points. The central bank's current reduction has exceeded market expectations, releasing a strong positive signal. At the press conference, the central bank stated that lowering deposit interest rates and reloan rediscount interest rates will help drive down LPR, or mean an increase in the probability of further LPR cuts in the future. Regarding Caitong Securities: We found that in most periods of history, the elasticity of Caitong Securities's operating income and net profit return to mother was higher than the elasticity of the average daily turnover of stock funds in the Shanghai and Shenzhen markets. The reason is that the company's overall profitability is superior to that of peers. It is expected that under the trend of recovering capital market transaction activity, the company's profit elasticity is better than that of the sector.
Profit forecast and investment advice: According to the latest situation, the company's profit forecast was raised. The company's net profit for 2023-2025 is estimated to be 22.4/25.9/3.17 billion yuan, respectively. As of 2024/1/25, the corresponding PE valuation is about 15.9x/13.7x/11.2x, maintaining the “buy” rating.
Risk analysis
Macroeconomic fluctuations are intense. In recent years, China's economy has gradually entered a new normal of steady growth, structural adjustment, and deleveraging, and the economic growth rate has slowed down. The slowdown in economic growth may have an important impact on the financing needs, solvency, and market capital costs of enterprises, which in turn affects the prosperity of the securities industry. Currently, the domestic and international environment facing China's economic development is very complex. There are many unstable and uncertain factors, and the external economic environment in which issuers operate in the future is still facing many challenges. If macroeconomic trends continue to weaken in the future and financial risks cannot be effectively prevented and mitigated, they may make it more difficult for issuers to operate, leading to a decline in profitability.
Risk of securities market fluctuations. There is a strong correlation between the operating conditions of securities companies and long-term trends and short-term fluctuations in the securities market, and the performance of the securities market is affected by many factors such as macroeconomic cycles, macroeconomic policies, the degree of market development, the international economic situation, fluctuations in overseas financial markets, and investor behavior, and is highly cyclical and volatile. Fluctuations in the securities market have a direct impact on the operation and earnings of securities companies' securities brokerage business, securities credit business, investment banking business, asset management business, and other businesses, and this impact may also have superimposed effects, thereby amplifying the operating risks of securities companies. Sensitivity analysis: The company's revenue and profit are highly correlated with fluctuations in the securities market, and it is difficult to predict the future prosperity of the securities market. Therefore, the company is at risk of fluctuations in revenue and profit due to the cyclicality and volatility of the securities market. If the securities market remains in a recession cycle for a long period of time or extreme situations such as sharp fluctuations, it is not ruled out that it will have a major adverse impact on the company's future business operations and performance, which in turn will cause the company's operating profit in the year of the current allotment to drop by more than 50% (or even loss) compared to the previous year.
There has been a major change in policy. Changes in laws, regulations and regulatory policies will have an impact on the operating environment and competitive pattern of the securities industry, bringing some uncertainty to the company's business development, financial status and operating performance. If a company fails to adapt to changes in laws, regulations, and regulatory policies in a timely manner, it may limit the company's business development, increase operating costs, and reduce profitability. Furthermore, if the relevant tax system, business license system, foreign exchange system, interest rate policy, etc. change, it may cause fluctuations in the securities market and changes in the development environment of the securities industry, which in turn poses certain risks to the company's business development, financial situation, and business performance.
Regulatory and compliance risks. In November 2023, the Zhejiang Securities Regulatory Bureau issued the “Decision on Ordering Corrective Measures against Caitong Securities Co., Ltd.” because after investigation, it was discovered that the company was not diligent and conscientious in carrying out bond underwriting and fiduciary management business, failed to effectively manage the actions of business personnel, did not effectively control business risks, did not strictly fulfill its obligation to supervise capital raising, and violated relevant regulations. This regulatory measure requires the company to rectify within a limited period of time, improve business standards, strict internal accountability, and submit written rectification reports. Along with the normalization of strong capital market supervision, such risks may further affect the company's business development.