Matters:
Fangzheng Securities released its 2023 annual report, with annual revenue of 7.119 billion yuan (-8.46%), net profit to mother of 2.152 billion yuan (+0.21% year over year), and net assets to mother of 45.239 billion yuan (+5.12% compared to the beginning of the period). Q4 revenue was 1,451 million yuan (-22.49% YoY, -10.12% YoY), and net profit to mother was 216 million yuan (+4.33% YoY, -56.40% YoY).
Commentary:
Asset structure and profit indicators have improved markedly. As of the end of '23, the company's total assets after excluding customer capital were RMB 18.2 billion (+40 billion yuan), and the financial leverage ratio was 3.98 times (+0.73 times year over year).
The 23H1 industry average leverage ratio is 3.87 times, and the company's current leverage ratio may be higher than the industry average. Benefiting from declining market interest rates, the company's debt cost ratio fell to 2.6% (-0.5pct year over year).
Regulatory indicators have improved markedly. The liquidity coverage rate increased to 223% (+84pct year over year), and 22.8 billion yuan of capital was invested (+16.8 billion yuan). The new short-term finance regulations require securities companies to have a liquidity coverage rate higher than the industry average in the past six months. The net stable capital ratio is 162% (+23pct year over year). The improved regulatory indicators are clearly superior to the warning line, and debt-side financing tools are expected to be further unlocked.
Credit impairment for the year returned 281 million yuan (accounting for 13.04% of net profit attributable to mother), mainly due to the recovery of adjudicated assets. At the end of December 2023, the Dalian Intermediate Court decided to transfer the Jinquan Port Cinema (cinema book value of 340 million yuan) to cover the unreturned 330 million yuan of funds, so it was transferred back to the 300 million yuan bad debt preparation previously calculated.
Affected by the downturn in the market, asset-light businesses are under pressure. The average daily turnover of A-shares in '23 was 887.2 billion yuan (-5.23% YoY), and the net revenue change from the company's brokerage fees was consistent with the industry, -9.06% YoY to $3.274 billion.
Q4 The market share of the company's net income from securities brokerage trading rebounded to about 2.90%, the highest in the past three years. Net income from investment bank fees for the year was RMB 211 million (-60.38% YoY), IPO underwriting scale was RMB 342 million (-91.27% YoY), and corporate bond+corporate bond underwriting scale was RMB 14.268 billion (-54.77% YoY).
The capital-heavy business is steady, and the self-operated business is growing at an impressive rate. The annual revenue from heavy capital operations was 3.125 billion yuan (8.62% YoY), and the return on heavy capital fell slightly by 0.29pct to 2.49%. Among them: (1) Proprietary business revenue increased sharply by +53.54% to 1.705 billion yuan, and annualized self-employment return +0.45pct to 1.92%. (2) The market share of the two finance loans increased slightly, and net interest income was dragged down by interest expenses. As of the end of '23, the balance of the two loans in the market was 1650.9 billion yuan (+7.17% compared to the end of the previous year). The company raised capital of 32.48 billion yuan (+18.50% compared to the end of the previous year), driving the company's share of the two financing markets +0.19pct to 1.97% compared to the end of the previous year. Net interest income for the year was -19.61% YoY to $1,421 million, mainly due to interest expenses +26.27% to $2,971 million (of which interest expenses payable on bonds were +64.37% YoY to $615 million).
Investment advice: The company's overall performance is steady. Currently, the leverage ratio may be higher than the industry average. After ROA recovery, it can be expected to drive ROE up. The profit forecast was lowered considering that the recovery in market sentiment fell short of expectations. We expect the company's 2024/2025/2026 EPS to be 0.31/0.35/0.39 yuan (pre-2024/2025 value is 0.41/0.49 yuan), BPS is 5.78/6.11/6.48 yuan, respectively. The corresponding PB is 1.38/1.31/1.23 times, respectively, and the ROE is 5.49%/5.81%/6.13%, respectively. Since October 2023, the scale of the company's bond issuance has continued to increase. We are optimistic about the ROE core growth brought about by the increase in the leverage ratio. The company's 2024 PB valuation was raised to 1.6 times (the previous value was 1.5 times), corresponding to the target price of 9.3 yuan, and maintained the “recommended” rating.
Risk warning: Risk of shareholder changes, increased downward pressure on the economy, reduction of capital holdings in the north, etc.