2023 results are largely in line with market expectations
Dongcai's revenue in 2023 was -11.2% YoY to RMB 11.08 billion, net profit -3.7% YoY to RMB8.19 billion, net profit -4.2% YoY to 7.86 billion yuan, in line with market expectations; 4Q23 revenue was -11.3% YoY/-5.3% YoY to RMB2.59 billion, and net profit remained flat at 1.98 billion yuan YoY.
Development trends
The market share of brokerage and finance has been rising steadily. The company's securities business revenue in '23 was -8% to 7.2 billion yuan, and revenue contributed 65%, of which: 1) Net income from handling fees and commissions was -8% to 5 billion yuan, of which net income from securities brokerage business was -10% to 4.3 billion yuan, share base transaction volume increased 19.27 trillion yuan, estimated market share increased from < 3.9% to ~ 4.0% in '22, and the corresponding commission rate decreased to 10,000 yuan; 2) Net interest revenue was -9% to 2.2 billion yuan, of which interest income from financing capital was +3% year-on-year, and the company's financing capital ratio was +26% to 463 billion yuan. The market share ratio increased from ~ 2.5% in '22 to ~ 2.8%. The decline in net interest income was mainly due to total interest expenses such as sales and buybacks, bonds payable, and capital divestment +26%.
Fund sales are being pressured by the market and fee cuts. The company's 23 year fund sales revenue was -16% to 3.6 billion yuan, and revenue contributed 33%. We estimate that the share of commission revenue increased further, driving the overall revenue decline of the fund lower than front-end sales. The company's total fund and non-cargo base sales in '23 were -23%/-24% year over year, respectively, to 15,479/908.5 billion yuan (-32% of newly developed equity funds in the entire market); equity fund holdings (including Tiantian & Dongcai Securities) remained stable at 6.6%, and the gap with Top 2 continued to narrow.
Higher investment income contributes to performance resilience. The company's total investment income and fair value change income for 23 years were +100% to 2.2 billion yuan (not included in revenue), accounting for 24% of operating profit, mainly benefiting from a significant increase in securities self-operated fixed income business income (+1.9%); the size of the company's transactional financial assets at the end of 23 was +8% YoY to 68.3 billion yuan (bonds/funds/bank financial management/stocks and the New Third Board accounted for 66%/11%/8%/13%, respectively), and the estimated return on investment was ~ 3.4%; considering that the bond market has improved since 1Q24, We anticipate or lay the foundation for a steady increase in investment income throughout the year.
Contrary to the market, increase research and development of large AI models. In 23 years, the company focused on strengthening AI capacity building and establishing an artificial intelligence division. The R&D cost was +15% to 1.1 billion yuan, and the cost rate was raised to 9.8%; in January '24, the self-developed “Wonderful Vision” financial model officially began closed testing. We expect subsequent companies to increase their application in various business scenarios, empower products to enhance user experience, increase massive high-quality C-side traffic conversion, and further optimize the comprehensive service model for institutional customers, including Choice, etc.
Buybacks and a new round of equity incentives show confidence in growth. The company has now completed a share repurchase of nearly 1 billion yuan, and plans to adjust all of the repurchased shares to be used to cancel and reduce registered capital to return investors; at the same time, the company launched a 24-year equity incentive plan to grant 871 incentive recipients 40 million shares/0.25% of the total share capital (based on 23 years, profit growth of no less than 10%/20%/30% in 24/25/26, respectively), showing confidence in future development.
Profit forecasting and valuation
A profit forecast of $93/111 billion was introduced; considering the increase in the share of investment income, market fluctuations and concerns about potential fee cuts, the target price was lowered by 42% to 20 yuan, corresponding to 34x/29x 24/25e P/E and 43% upward space; maintaining the outperforming industry rating.
risks
Market activity has declined, financial regulations have become stricter, and competition in the industry has intensified.