Matters:

Fangzheng Securities Quarterly Report: Total revenue of 1.98 billion yuan (+12% year over year), net profit to mother of 780 million yuan (+41% year over year), ROE 1.7% in a single quarter (+0.4 pct year over year).

Commentary:

The increase in performance was mainly due to a significant increase in leverage+an increase in return on self-employment. The company's total revenue increased by 210 million yuan, of which there was no significant year-on-year increase in light capital business revenue. The increase was mainly due to net revenue from heavy capital business of 220 million yuan year-on-year.

Looking at the revenue growth structure of heavy capital businesses:

1) Net interest income of 240 million yuan (year-on-year - 150 million yuan), mainly due to a significant increase in leverage and an increase in the scale of interest expenses due to the increase in the size of interest-bearing debt. Interest expenses were $8.2 billion (+170 million yuan year over year), but benefiting from a significant decline in market interest rates and fundamental improvements brought about by changes in the company's equity, the interest cost rate was reduced from 0.6% to 0.5%.

2) Interest income+proprietary business revenue totaled 1.79 billion yuan (year-on-year +380 million yuan). The company's own assets are mainly fixed income self-employment, and equity self-employment accounts for a small proportion. Benefiting from the significant year-on-year increase in the Q1 bond market sentiment, the yield from self-employment in a single quarter reached 0.7% (+0.2pct year over year).

3) Currently, the company's financial leverage ratio has risen to 4.1 times (+0.58 times year on year), and I am optimistic that the company's leverage will increase further in the future.

In terms of light capital business revenue, brokerage business revenue was 850 million yuan (year-on-year - 100 million yuan); investment banking revenue was 0.4 billion yuan (year-on-year - 0.2 billion yuan), and asset management revenue was 60 million yuan (year-on-year +0.2 billion yuan). Q1 The investment banking business market sentiment declined markedly, but the company's investment banking business revenue share was relatively low, and the overall damage was not obvious.

Investment advice: The company's current performance clearly exceeded our overall profit expectations for the industry, and the quarterly report fulfilled the logic of increasing leverage to high performance growth. The high increase in revenue from the heavy capital business is due to a significant increase in leverage brought about by continuous bond issuance over the past year and the increase in self-employment yield under the share of high-fixed income self-employment. On the capital-light business side, although the market sentiment has declined, the company's investment banking business accounts for a low share of revenue, and the revenue side has not been significantly affected. In the future, we are still optimistic about the continued increase in leverage and the potential for ROE growth. We maintain the company's 2024/2025/2026 EPS forecast of 0.31/0.35/0.39 yuan, BPS of 5.78/6.11/6.48 yuan, respectively. The corresponding PB of the current stock price is 1.33/1.26/1.18 times, respectively, and the ROE is 5.49%/5.81%/6.13%, respectively.

Maintain the company's 2024 PB valuation of 1.6 times, corresponding to the target price of 9.3 yuan, and maintain the “recommended” rating.

Risk warning: Risk of shareholder changes, increased downward pressure on the economy, reduction of capital holdings in the north, etc.