Matters:
Nanhua Futures released its 2023 annual report. In Q4, operating income was 347 million yuan (+25.11% YoY, -1.15% YoY) and net profit to mother was 103 million yuan (-9.38% YoY, -20.50% YoY).
Total for the year: Net income of 1,278 million yuan (+34.69%), net profit to mother of 402 million yuan (+63.31% year over year), ROE increased to 11.45% (+3.70pct year over year).
Commentary:
In an environment of high interest rates, overseas business contributed mainly to the increase. The company relies on its wholly-owned subsidiary Henghua International and its subsidiaries to carry out overseas business, and has formed a complete futures brokerage business service system and clearing system. Subtracting the parent company's statement caliber from consolidated statements, Q4 net income from overseas interest was 87 million yuan (+7.32% YoY, -20.80% month-on-month/accounting for 66.89% of total net interest income), totaling 394 million yuan for the whole year (+211.59% YoY/accounting for 72.30% of total net interest income). The expansion of overseas business has benefited from a sharp rise in volume and price: the increase in overseas customer rights has led to an increase in margin interest income, compounded by the Federal Reserve's interest rate hike to raise interest rates. Net interest income slowed month-on-month, probably because the Federal Reserve's interest rate hike slowed in the second half of the year. After suspending interest rate hikes for the first time in the current rate hike cycle in June, interest rate hikes were suspended for three consecutive rounds in September, October, and December in the second half of the year. Q4 The effective federal funds rate is 5.33% (YoY +1.67pct/month-on-month +0.07pct), and the annual average is 5.02% (YoY +3.33pct).
The main domestic business performance is divided. The bilateral turnover of the futures market in '23 was 113.702 billion yuan (+6.28% year over year), and the parent company's net revenue from caliber futures brokerage fees was 404 million yuan (+15.40% year over year), and the parent company's net income from caliber interest was 151 million yuan (-24.47% year over year), and domestic customer equity of 21.248 billion yuan (+11.32% compared to the beginning of the period). The decrease in net interest income may be due to lower margin deposit interest rates.
Investment advice: The moat for the company's overseas business lies in business qualifications such as licenses and the first-mover advantage of early layout. In an environment of high interest rates, the 23-year results achieved high growth as expected. Although the current interest rate hike cycle may have come to an end, it is expected that the 24-year interest rate level will remain high overall, contributing to an important profit growth point.
Consider the pace of the Federal Reserve's interest rate hike and lower the profit forecast. 2024/2025/2026 EPS Expectations:
0.80/0.94/1.06 yuan (pre-2024/2025 value of 1.02/1.17 yuan), BPS expectations: 6.80/7.66/8.62 yuan, ROE: 11.7%/12.3%/12.2%. The current stock price corresponds to PE 13.4/11.3/10.1 times, respectively. Looking ahead to the company's annual performance and overseas, give the company a PE valuation of 17 times its 2024 performance, corresponding to a target price of 13.5 yuan, maintaining a “recommended” rating.
Risk warning: The Fed has exceeded expectations and entered a cycle of interest rate cuts, and corporate interest rate expectations are uncertain; there is uncertainty about exchange fees reduced; risk of changes in regulatory policies; risk of fluctuations in futures market turnover.