Matters:

Guolian Securities released its 2023 annual report, achieving full year operating income of 2,955 billion yuan (+12.66%), net profit to mother of 671 million yuan (-12.52% YoY), and net assets to mother of 17.769 billion yuan (+6.01% compared to the beginning of the period).

Q4 achieved operating income of 448 million yuan (-21.13% YoY, -36.00% YoY) and net profit of 55 million yuan (YoY -144.35%, YoY -143.65%).

Commentary:

Financial leverage has increased significantly, or is already higher than the industry average: the increase in leverage may benefit from an increase in the scale of the derivatives business and an increase in debt quality. The company's financial leverage ratio increased to 4.53 times (+0.57 times year on year), or is significantly higher than the industry average (the average industry/company leverage in 2022 was 3.7/4 times, respectively), and the total asset size (excluding customer capital) increased by 14.06 billion yuan. Structurally:

1) Asset side: The acquisition of the League of Nations funds generated 1.14 billion yuan in goodwill. Proprietary assets amounted to 46.11 billion yuan (YoY +5.3 billion yuan), including 3.3 billion yuan (YoY +2.3 billion yuan) in stocks and 22.3 billion yuan (YoY +3.4 billion yuan) in bonds. The scale of the bond pledge repurchase business was 3.98 billion yuan (year-on-year +2.88 billion yuan), and the scale of the stock pledge business was 1.33 billion yuan (year-on-year - 8.4 billion yuan).

2) Debt side: $25.06 billion in bonds payable (+5.57 billion yuan year on year); consolidated capital of 5.31 billion yuan (+4.41 billion yuan year on year); other liabilities of $11.03 billion (+3.61 billion yuan year over year, mainly due to the increase in margin size for derivative contracts).

Wealth management transformation is progressing steadily. Net income from securities brokerage business fees for the whole year was $515 million (-6.30% YoY), of which: (1) Securities brokerage business: net revenue of 380 million yuan (-10.77% YoY), mainly driven by the average daily turnover of the Shanghai and Shenzhen markets -5.23% YoY. (2) Transaction unit seat leasing: net revenue of 102 million yuan (+25.25% year-on-year). (3) Consignment financial products business: net revenue of RMB 0.3 billion (YoY -22.35%), consignment sales volume of RMB 18.403 billion (YoY -14.76%), financial product holdings at the end of the period amounting to RMB 19.330 billion (+8.16% YoY). Fund investment was steady. The number of signed clients for the whole year was 3020,000 (+24.93% YoY), and the authorized account asset size was 6.594 billion yuan, which was basically the same as the previous year.

Thanks to the Beijing Stock Exchange, debt underwriting has been growing steadily. The company carried out investment business through its wholly-owned subsidiary Huaying Securities, and achieved net revenue of 489 million yuan (+2.52% year over year) for the whole year. (1) Equity financing: The annual equity financing scale was 3,956 billion yuan (-40.93% YoY), including 4 IPO projects, with an underwriting scale of 2,368 billion yuan (-1.34% YoY). The number of the company's IPO sponsors rose to 21st place in the industry, and the number of underwriters and underwriting amount on the Beijing Stock Exchange ranked 12/15 in the industry, respectively. (2) Debt financing: The annual debt financing scale was 35.456 billion yuan (YoY +32.18%), of which the corporate bond+corporate bond underwriting scale was 34.656 billion yuan (+32.41% YoY).

It also shows that the League of Nations Fund's asset management revenue has increased dramatically. The company's net revenue from asset management fees for the year was significantly +128.35% year-on-year to 443 million yuan. (1) Public funds: If the operating income of 239 million yuan achieved by the League of Nations Funds from the acquisition date to the end of the reporting period is excluded, the net income from asset management fees for the whole year is 204 million yuan (+5.22% year over year).

(2) Brokerage asset management: AUM of $117.293 billion at the end of the period (YoY +14.94%), including AUM of 8.773 billion yuan (+21.75% YoY).

The capital-heavy business is stable. (1) Proprietary business revenue for the year was +7.31% year-on-year to 1.243 billion yuan. Proprietary assets continued to expand, and +13.02% year-on-year to 46.11 billion yuan at the end of the reporting period. (2) Net interest income for the year was 81 million yuan (-32.51% YoY). At the end of the reporting period, the average daily balance of the company's two loans was 10.231 billion yuan (+10.72% year over year), and the average daily market share of the business scale was 6.384％ (YoY +11.79%). During the year, both the balance of the two financings and market share at the time of the business scale reached record highs in the company's history.

Investment advice: The company plans to pay a dividend of 1.42 yuan for every 10 shares, with a dividend rate of 59.9% and a dividend rate of 1.2%. It shows that the company values investor returns and continues to generate profits for investors. 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 0.26/0.32/0.36 (0.47/0.61 yuan before 2024/2025), 6.35/6.54/6.76 yuan for BPS, respectively. The current stock price corresponds to PB of 1.81/1.76/1.70 times, and ROE of 4.08%/4.83%/5.36%, respectively. Considering the rapid increase in the company's leverage, which is already significantly higher than the industry average, the high-quality management team brought about a rapid improvement in the quality of the business asset structure, giving the company a 2024 PB valuation of 2.2 times, corresponding to a target price of 14.0 yuan, and maintaining a “recommended” rating.

Risk warning: Market trading volume declined; risk appetite declined; capital market innovation fell short of expectations; real economy recovery fell short of expectations.