Incident: Zheshang Securities announced its 2023 annual report, and the results were in line with expectations. The company achieved revenue of 17.64 billion yuan/yoy +5% in 2023; net profit of 1.75 billion yuan/yoy +6% to mother. 4Q23 single-quarter revenue of 5.02 billion yuan/yoy -4% /qoq +20%; single-quarter net profit of 424 million yuan/yoy -15% /qoq +1%. ROE 6.61% /yoy+0.06pct at the end of the period

Revenue split: The brokerage and investment banking business grew in double digits year over year, and investment turned losses into profits in a single quarter in 4Q23. In 2023, Zheshang Securities achieved main revenue of 5.64 billion yuan, with specific business line revenues/yoy: brokerage 2.47 billion/+32%, investment bank 880 million/ +13%, asset management 420 million/ -3%; net interest of 750 million/yoy -4%, and net investment of 1.03 billion yuan/yoy +49%. Revenue share: Investment income 18%, brokerage 44%, investment banking 16%, asset management 7%, net interest 13% (excluding other fees and long-term stock investment, 2%). The net profit growth rate of 4Q23 in a single quarter fell short of revenue, mainly due to 1) the brokerage business increased 1.15 billion yuan/yoy by 1.8 times/qoq increased by about 15 times in a single quarter. We expect the futures business to contribute more revenue, while the futures business profit margin is low (2.7% operating margin according to the division report); 2) the increase in management fees exceeds revenue, and the management fee for each quarter is +50% /qoq +10%.

Focus on epitaxial mergers and acquisitions: The 19.5% shares of the transferee Guodu Securities have made new progress and are cost-effective. Review: On 2023/12/8, Zheshang Securities announced that it intends to transfer 19.1454% of Guodu Securities held by 5 companies including Chongqing International Trust; on the same day, Tongfang Co., Ltd. announced that its wholly-owned subsidiary Tongfang Venture Capital listed the transfer of 5.95% of its shares (assessed value of 890 million yuan) in Guodu Securities. The bill was passed by the board of directors. Let's assume that Zhejiang merchants transfer 5.95% of Guodu shares held by Tongfang Venture Capital when they transfer 19.1454% of the shares in Guodu, then the share ratio of Zhejiang merchants holding Guodu Securities will exceed 25%. Progress: Zheshang Securities postponed the signing of the final transaction documents twice (delayed from 2023/12/31 to 2024/3/31); on 2024/3/29, the board of directors of Zheshang Securities passed the “Proposal to Transfer Part of Guodu Securities” to transfer a total of 19.1454% of Guodu Securities shares held by Chongqing Trust and other parties. The transfer price was 2.673 yuan/share, and the total transfer price was 2,468 billion yuan. It is estimated that the acquisition valuation was 1.24 times PB, which is relatively cost-effective (previously, Tongfang Venture Capital listed the transfer of Guodu Securities 5.95 (% equity valuation is 890 million/transfer valuation is 1.44 times PB, and 1.95 times PB when the League of Nations Group acquired 30.3% of Minsheng Securities's shares).

Follow up on Guodu Securities's collaborative expectations for Zheshang Securities: According to Wind, the largest shareholder of Guodu Securities at the end of 1H23 was Zhongcheng Trust/Shareholding Ratio of 13.33%. If the transaction goes smoothly (transfer of 19.1454% of shares), Zheshang Securities will become the largest shareholder of Guodu Securities. Attention: 1) Regional coverage of wealth management is complementary. The customer base of Zheshang Securities is concentrated in Zhejiang Province, while Guodu Securities has 60 business outlets in 17 provinces and cities (official website data), of which Beijing-Tianjin-Hebei accounts for 25%, which can effectively supplement the wealth management business coverage of Zhejiang merchants in Beijing-Tianjin, Henan and other regions. 2) Guodu holds 20% of the shares in the China-Europe Fund (the 2nd largest shareholder). According to Wind, the China-Europe Fund's 1H23 profit was 490 million, contributing 23% of Guodu Securities's net profit for the same period in terms of equity; at the end of '23, the China-Europe Fund's non-goods AUM was 283.1 billion/ 19th in the industry. After the transaction is successful, Zhejiang merchants are expected to participate indirectly in the China-Europe fund to make up for their shortcomings in public funds.

Investment assets expanded by double digits, and the 4Q23 return on investment reversed losses. At the end of 2023, Zheshang Securities had net assets of 27 billion yuan/+3% from the beginning of the year, with financial investment assets of 51.4 billion yuan/+12% compared to the beginning of the year, of which other debt investment was 8.16 billion yuan/+894% compared to the beginning of the year, and 41.9 billion dollars/-5% compared to the beginning of the year; the investment leverage at the end of the period was 1.90 times /0.15 times higher than at the beginning of the year; it is estimated that the return on investment in 2023 was 2.11%/an improvement over 2022. Looking at the single-quarter situation, the annualized investment returns of Zheshang Securities in a single quarter were: 5.09%, 2.36%, -0.02%, and 1.11%, respectively. The 4Q23 single-quarter annualized investment returns turned positive month-on-month, and the annual return on investment was mainly dragged down by 3Q23 and 4Q23.

IPOs performed better than the industry, there were breakthroughs in refinancing, and debt commitments increased year-on-year. According to Wind data, equity financing: 3 underwriting orders for Zheshang Securities IPOs in 2023, with an underwriting scale of 3.1 billion dollars/yoy -3% (industry yoy -3%); 6 refinancing underwriting orders of Zhejiang Securities in '23, with an underwriting scale of 3.25 billion yuan (no refinancing underwriting projects in 2022). Debt financing: In 2023, Zhejiang commercial bonds underwrite 144 billion yuan/yoy +65% (industry yoy +26%), of which corporate bonds underwrite 13.5 billion yuan/industry rank 7th, and the total underwriting scale and singular of corporate bonds and corporate bonds in Zhejiang Province (according to the company's annual report).

Investment analysis opinion: Lower profit forecasts and maintain buying ratings. Strict regulations imposed IPO admission and lowered the market's A-share IPO size assumption, thereby lowering the 24E-25E profit forecast and adding a 26E profit forecast. The company's 24-26E net profit to mother is estimated to be 18.7, 21.4, and 2.23 billion yuan (the original forecast was 24-25E 22.6 billion, 2.69 billion yuan), +6%, +15%, and +4% compared to the same period last year.

On 2024/3/19, according to the company's announcement, Zheshang Securities's fixed increase automatically expires at the end of its validity period. Under strict industry supervision, it is in line with market expectations. Considering new developments in the company's transfer of shares in Guodu Securities, we maintained our purchase rating.

Risk warning: Zheshang Securities transferred 19.1454% of Guodu Securities's equity transaction yet to be approved by the Securities Regulatory Commission and compliance confirmation of the national SME share transfer system. There is some uncertainty about whether it can be finalized.