Incident: Orient Securities announced its 2023 annual report. Net profit and ROE due to mother were slightly better than the quick performance report. Orient Securities achieved revenue of 17.09 billion yuan/yoy -9% in 2023; realized net profit of 2.754 billion yuan/yoy -8.5%, of which 4Q23 had quarterly revenue of 3.39 billion yuan/yoy -49% /qoq -32%, 4Q23 had a net loss of 103 million yuan (4Q22 net profit to mother of 1.01 billion yuan); 2023 weighted ROE 3.45% /yoy-0.71 pct.

Revenue splitting: Investment and credit businesses bucked the trend, and fee businesses followed suit. In 2023, corporate brokerage, investment banking, asset management, net interest, net investment income, and long-term stock investment revenue/yoy were 2.78 billion/ -10%, 1.23 billion/ -23%, 1.76 billion/ +8%, 2.33 billion/ +35%, and 580 million/ -12%, respectively. The revenue share was as follows: brokerage 24%, investment banking 13%, asset management 17%, net interest 15%, net investment income 20%, and long-term stock investment 5% (excluding other handling fee income).

Performance attribution: The 4Q23 loss was mainly due to equity market fluctuations and quarterly investment income losses. 4Q23 lost money (1.01 billion yuan in the same period last year), mainly due to 1) 4Q23's net investment income (including foreign exchange) loss of 0.1 billion yuan in a single quarter, which negatively contributed to 4q23's main revenue of 29.7 pct (4Q22 investment profit of 61 million yuan/3Q23 investment profit of 950 million yuan). 2) The decline in main revenue in a single quarter was significantly higher than the decrease in management fees, resulting in a management fee rate (management fee/main revenue) of up to 99.2% /yoy+35.8pct/qoq+10.8pct. 3) Asset depreciation of 250 million dollars was accrued in a single quarter due to long-term stock investment, an increase of 4.6 times over the previous quarter.

The brokerage business went on the market, and sales of financial products showed resilience. The company's share of securities brokerage business revenue in '23 was 1.63%, and the industry ranking remained 20th. The number of the company's customers continued to grow. The total number of customer fund accounts at the end of the period was 2.69 million, yoy +10.3%; total assets under escrow were 737.8 billion yuan. Financial product sales remained resilient, and wealth management transformation achieved results: in '23, the sales scale of the company's equity products was 10.3 billion yuan, yoy 2.3%; the holding scale of equity products at the end of the period was 45.7 billion yuan, -5.0% compared to the beginning of the period. In terms of credit business, the company's balance of two loans at the end of the period was 20.8 billion yuan, +7.3% compared to the end of the previous year, with a market share of 1.26%; the share pledge business was 5.8 billion yuan to be repurchased, all funded by own capital, and the scale continued to decline.

Public asset management AUM did not perform as well as the industry, and participating holders' public offerings were affected by fee reduction policies and their profit contributions were pressured. According to the annual report, judging from the performance, due to the public offering fee reduction policy, the company's public offering profit contribution is under pressure: 1) Eastern Securities Asset Management (wholly-owned public equity subsidiary): achieved net profit of 490 million/yoy -41% in 2023, contributing 18% in profit; 2) Huitianfu (holding 35.41% of shares):

In 2023, we achieved net profit of 1.42 billion yuan/yoy -32%, contributing 18% of profit, and the total public offering business contributed 36% /yoy-16pct of the company's profit. In terms of size, according to Wind, the non-cargo AUM yoy of the 2023 market was +4.5% to 15.99 trillion yuan, and the non-commodity volume of the same node was 447.6 billion yuan/-13% compared to the beginning of the year, of which the active equity fund size was 155.1 billion yuan/-27% compared to the beginning of the year; at the end of 2023, TSE's asset management was 166.5 billion yuan/-13% compared to the beginning of the year, accounting for 54%.

Operating leverage has been increased, and self-employment is the main direction for table expansion. According to the annual report, the company's total assets at the end of '23 billion were 383.7 billion/ +4.2% compared to the beginning of the year, maintaining the trend of table expansion, with operating leverage of 3.46 times/yoy +0.29 times at the end of the period. Proprietary investment is the main direction of the company's inventory expansion. At the end of the period, the company's proprietary transactions and institutional sales transactions business balance was 154.7 billion yuan/yoy +20.4%. From a structural point of view, the company's fixed income increased from 110.6 billion dollars in '22 to 133 billion dollars. Although the scale of equity investment has increased, the company strategically chose to “operate the trading stock business with low positions; the high dividend strategy adheres to moderate timing and selection of individual stocks.”

Investment analysis opinion: Lower profit forecasts and maintain buying ratings. We selected listed brokerage firms with net assets similar to Orient Securities as comparable companies: CITIC Construction Investment, Guoxin Securities, China Merchants Securities, and Everbright Securities. According to Wind's unanimous forecast, the average 2024E BPS is 12.47 yuan/share, and the average 2024E PB of comparable brokerage firms is 1.23 times higher. Considering that Orient Securities's young asset business in 2023 was under pressure (the asset-light business accounted for 60% of revenue), and impairment losses dragged down profits; however, at the same time, the impact of the Guoxiang incident gradually eased, compounded by the accelerated introduction of high-quality capital market development policies, and the popularity of A-share trading picked up. The company will benefit from a recovery in trading and favorable policies. After comprehensive consideration, we gave Orient Securities a 5% discount (1.17 times) on the 24E average PB of the securities firm. The corresponding target price was 10.37 yuan/share, up from 2024/3/27 Space is 26%, maintaining a buy rating. Orient Securities's 24-26E net profit is expected to be 30.7/38.05/4.56 billion (originally forecast 24-25E, 5.9 billion), +11.5%/+24%/+20% year-on-year, respectively.

Risk warning: The economy is declining; liquidity is being tightened; the process of entering the market for residents' capital is slowing down; Orient Securities issued an announcement in July that company directors are subject to disciplinary review and supervision investigation, focusing on corporate governance risks.