Incident: China Merchants Securities announced its 2024 quarterly report, which was in line with expectations (forecasted profit of -3% YoY).

1Q24 achieved net profit of 2.16 billion yuan/yoy -4.5%, and revenue of 4.30 billion yuan/yoy -9.7%. The weighted average ROE (non-annualized) was 1.87% /yoy-0.22pct.

The performance is expected to lead the leading industry; the investment and brokerage business contributes nearly 90% of the performance, and investment income is growing steadily. Revenue split: 1Q24 brokerage, investment banking, asset management, net interest, and net investment income were 13.2 billion yuan, 0.9, 1.6, 1.2, and 2.07 billion yuan, respectively, accounting for 31.1%, 2.1%, 3.7%, 2.8%, and 48.8%, year-on-year, -7%, -43%, -14%, -76%, and +20%, respectively. The company's investment business performance is stable, and the share of the investment banking business, which is highly affected by the market, is relatively low. The company's 1Q performance is expected to lead the leading peers. (For details, see the previous report “Brokerage Sector 1Q24E Performance Forecast: Last year's base was high and low, and profit for the first quarter is expected to drop 20% year on year”)

Investment leverage contracted slightly month-on-month, and yield remained stable year-on-year. The operating leverage at the end of the period was 4.41x/yoy+0.26x/qoq -0.32x, investment leverage (investment assets/net assets) 2.97x/yoy+0.33x/qoq-0.11x, of which the financial investment scale was 368.7 billion yuan/yoy +19% /qoq -2%, and the investment leverage contracted slightly month-on-month; the return on investment remained steady, and it was estimated that the 1Q24 annual return on investment was 2.23% /qoq-0.05pct.

The brokerage business was launched along with the market to promote the transformation of wealth management. The company's brokerage revenue is 1.32 billion/yoy -7%, which is expected to be similar to the overall performance of the industry (1Q24 market share base ADT +3.9% year-on-year, considering the decline in commission rates, negative growth in industry brokerage business revenue is expected). The company accelerated the transformation of wealth management and vigorously built a professional and leading wealth advisory team. At the end of '23, the holdings of non-cargo and equity public funds were 94.9 billion yuan and 79.3 billion yuan respectively, ranking 5th in the securities industry.

The investment banking business accounts for only 2%. The year-on-year pressure was limited, but the profit impact was limited. The tightening of equity financing led to a year-on-year ratio of the company's 1Q investment banking business revenue. In terms of project reserves, the IPO at the end of March ranked 9th in the industry with 25 reviews, and refinancing ranked 7th in the industry. In terms of bond underwriting, 1Q24 underwrote an amount of 76.7 billion yuan/yoy +53%.

Investment analysis opinion: Maintain a “recommended” rating. The estimated net profit of 2024-2026E China Merchants Securities will be 9.12 billion yuan, 9.91 billion yuan, and 10.92 billion yuan, respectively, +4%, +9%, and +10% compared with the same period last year. The 4/26 closing price corresponds to the company's 24-26E dynamic PB of 1.16, 1.09, and 1.02 times, and dynamic PE of 15.9, 14.5, and 13.1 times, respectively.

Risk warning: The downward pressure on the economy is increasing; the activity of stock transactions in the market has declined sharply; the process of residents' capital entering the market has slowed down.