Incident: China Merchants Securities announced its 2024 quarterly report, and the results were in line with expectations. The 1Q24 company achieved revenue of 4.30 billion yuan/yoy -10%; net profit to mother of 2.16 billion yuan/yoy -5%. 1Q24 weighted ROE (unannualized) 1.87% /yoy-0.22pct.

Revenue split: Broker+net investment income accounted for about 80%, and the investment business increased 20% year over year. Revenue split: 1Q24 brokerage, investment banking, asset management, net interest, net investment, and long-term stock investment (mainly Bosch Fund and China Merchants Fund) revenue was 13.2, 0.9, 1.6, 1.2, and 2.07 billion yuan respectively, accounting for 31%, 2%, 4%, 3%, 49%, and 8%; year-on-year, -7%, -43%, -14%, -76%, +20%, and -10%, respectively. The investment business is the only positive growth business: the company mainly has fixed income investment assets, so the investment income performance was better in a market environment with a strong bond market. 1Q23-1Q24's net investment income for each quarter was 17.2, 21.8, 8.4, 20.4, and 2.07 billion (corresponding to each quarter, China Securities full debt (net) rose 0.2%, 1.2%, 0.03%, 0.65%, and 1.6%, respectively, while HS300 rose 4.6%, -4.9%, -3.5%, -7.0%, and +3.1%, respectively).

Operating leverage declined month-on-month, and the scale of financial investment assets contracted month-on-month. At the end of the period, the company's total assets were 642.6 billion dollars/qoq +7%, net assets were 124.3 billion /qoq +6%; operating leverage was 4.41 times /qoq -0.33 times. The equity market fluctuated during the reporting period, and the company was more cautious in expanding its financial investment assets at the end of the period: 368.7 billion dollars/yoy +19% /qoq-2%, including transactional financial assets+derivative financial assets of 268.1 billion yuan, a decrease of 17.3 billion dollars in a single quarter; other investment assets (mainly investments in other equity instruments plus other debt investments) increased by 24.4 billion yuan and 11.4 billion dollars respectively in the past 2 quarters. The estimated 1Q24 annualized return on investment was 2.23%, which was basically the same as the previous year.

Brokerage & finance business: Brokerage revenue declined faster than the market, and the market share of financing business increased. 1Q24's brokerage business fell 7% year on year (average daily stock transaction increased 1% year on year), while the company's share base transaction market share has been rising steadily in recent years: in 2023, the company's share base trading market share was 5.23% /yoy+0.01pct, which has been on an upward trend since 2019. We expect 1Q24's commission rate to decline. Dual finance business: At the end of the reporting period, the company raised capital of 80.4 billion dollars/-4% compared to the beginning of the year, with a market share of 5.4% /+0.8pct compared to the beginning of the year.

Public offering business: Participation in the two public debt companies ranked in the top 2 in the industry, and the public offering business contributed nearly 20% of the total profit. At the end of the reporting period, Bosch Fund had a non-monetary public offering of 550 billion yuan, ranking 7th, and ranked 2nd in the bond-type public offering scale. China Merchants Fund (holding 45% of shares) has a non-monetary public offering of 551.2 billion yuan, ranking 5th, and ranking 1st in bond-type public offering. In terms of equity ratio, the public offering business (reflected in long-term stock investment revenue) contributed 16% to the Group's profit in total. The China Merchants Asset Management public offering business qualification application was approved within 23 years, making it the first brokerage asset manager to be approved with this qualification after the implementation of the new “One Participation, One Control, One Card” regulations. The China Merchants Asset Management public offering business is expected to make breakthroughs in 24 years.

Investment analysis: Maintain an increase in holdings rating. Considering the intensification of market competition, we lowered the 24-26 commission rate assumption, thereby slightly lowering the 24-26 profit forecast. The net profit for 2024-2026E is expected to be 93%, 10.3,115 billion yuan (original forecast 24-26) of 96.10.0,108.11.9 billion yuan, respectively, or +6%, +12%, and +11% year-on-year, respectively. The current closing price corresponds to 24E dynamic PB of 1.16 times. Considering that the market share of the company's brokerage business is on the upward channel, regulations continue to release signals to strictly control listed companies, which is expected to boost market preferences. The brokerage and capital intermediation business will directly benefit, and still maintain an increase in holdings ratings.

Risk warning: The downward pressure on the economy increased; on 2/5-2/9, the Securities Regulatory Commission's centralized penalties on China Merchants Securities included five major aspects, imposing administrative penalties on 63 people; referring 1 person suspected of insider trading to the judicial authorities; taking administrative supervision measures ordering an increase in the number of compliance checks; issuing a warning letter against the chairman of the company; and 2 then-current compliance directors to take administrative supervision measures with regulatory conversations, and urged China Merchants Securities to initiate internal accountability, interview relevant violators, and implement full accountability coverage.