Incident: Zheshang Securities announced 1Q24 results, which were in line with expectations: achieved revenue of 3.88 billion yuan/yoy -21% /qoq -23%, profit to mother of 450 million yuan/yoy -8% /qoq +5%, weighted average ROE of 1.64% (unannualized) /yoy-0.21pct.

1Q24 brokerage and asset management bucked the trend with double-digit year-on-year growth, and individual brokerage businesses contributed nearly 40% to main revenue. 1Q24 Zheshang Securities achieved main revenue of 1.42 billion yuan/yoy -14% /qoq +12%, specific business line revenue/yoy: brokerage 530,000/ +24%, investment banks 150 million/ -35%, asset management 110 million/ +59%, net interest 150 million/yoy -7%, and net investment of 460 million/yoy -23%.

Revenue share: brokerage 38%, investment income 33%, investment banking 11%, asset management 8%, net interest 11% (excluding other fees and long-term stock investment). Investment revenue positively drove the main revenue of 25.5 pct month-on-month, which was the biggest factor driving the month-on-month performance growth.

The brokerage business performed better than the industry, and the accelerated transformation of wealth management can be expected. 1Q24's brokerage business revenue was 530 million/yoy +24%, which was significantly better than the 1Q24 market share base turnover (average daily turnover of the 1Q24 Shanghai, Shenzhen and Beijing stock base was 1,031.4 billion/ yoy +4%). The new “National Nine Rules” proposes to promote wealth management capacity building. The profit driver of the industry is shifting from heavy capital business to light capital business. Considering that the company's wealth management business contributes 38% of the main revenue (the company's core business), according to the company's 2023 annual report, “the company will seek new breakthroughs in business models, boost business momentum, explore new paths in transformation initiatives, and take the lead in gaining new momentum for the high-quality development of the wealth management business”, we expect the wealth management transformation of Zheshang Securities to accelerate in the future.

The investment banking business accounts for about 10%. It is expected that due to the tightening of equity financing, the company's investment performance will be limited in the short term. The 1Q24 company achieved a net income of 150 million yuan/yoy -35% from the investment business. In terms of equity underwriting business, according to statistics from the date of issue, the 1Q24 Zheshang Securities IPO had no underwriting projects under strict supervision (VS1q232.08 billion yuan/4Q23.119 billion yuan); in terms of refinancing, 1Q24 underwriting scale was 242 million yuan/yoy -36% (industry yoy -75%). In terms of bond underwriting, the 1Q24 debt underwriting scale was 31.5 billion yuan/yoy -17% (industry yoy +1%), of which the corporate bond underwriting scale was 30.3 billion yuan/top 10 in the industry.

Project reserves: As of 2024/4/29, there are 5 ongoing equity financing projects in line for Zheshang Securities (4 IPO+1 additional issuance), and another additional one has already been issued. Considering that the investment banking business accounts for 11% of the main revenue of Zheshang Securities, we expect that the tightening of equity financing will put limited pressure on the company's investment performance in the short term.

Expanded mergers and acquisitions: Follow the progress of Zhejiang Merchants's acquisition of Guodu shares (about 19.15%). On 2024/3/29, the board of directors of Zheshang Securities announced that it passed the “Bill on the Transfer of Some Shares of Guodu Securities”. It plans to transfer a total of 19.1454% of Guodu Securities shares held by Chongqing Trust and other parties, with a transfer price of 2.673 yuan/share. If the transaction goes well, Zheshang will become the largest shareholder of Guodu Securities (the largest shareholder of Guodu Securities at the end of 1H23 is Zhongcheng Trust/13.3%). Considering that regulatory policies guide the intensive development of brokerage firms, support advantages and disadvantages, and encourage mergers and acquisitions, we believe that Zheshang Securities's acquisition of about 19.15% of Guodu Securities's shares is expected to accelerate. Concerned about the possibility that Zhejiang Merchants will transfer about 7.69% of Guodu shares (15.10%) held by 3 other parties: According to the Beijing Property Exchange Network, Tongfang Innovation (holding 5.9517% of Guodu shares, reserve price of 911 million yuan) and Jialong Investment (holding 1.4642% of Guodu, reserve price 224 million yuan) bundled and transferred about 7.4% of Guodu Securities; according to the Shanghai Joint Property Exchange Network, Guohua Energy transferred about 7.69% of Guodu Securities (reserve price of 1.09 billion yuan). If Zheshang Securities completes the acquisition at the same time, it will hold a total of about 34.25% of the shares, calculated using 1H23 data. If the shares in Guodu held by the above three parties are successfully recovered, it can contribute about 16% to the net profit of Zheshang Securities.

Investment analysis opinion: Maintain profit forecasts and maintain the company's buying rating. The wealth management business of Zheshang Securities is a core advantage business, which is in line with the new “National Nine Rules” to promote the wealth management capacity of industry institutions. At the same time, the integration of Zheshang Securities and Guodu Securities (in progress) can effectively achieve a significant increase in core competitiveness. We maintain the purchase rating of Zheshang Securities. The company's 24-26E net profit is estimated at 18.7, 21.4, and 2.23 billion yuan, or +6%, +15%, and +4% year-on-year.

Risk warning: Zheshang Securities transferred 19.1454% of Guodu Securities's equity transaction yet to be approved by the Securities Regulatory Commission and confirmed compliance with the national SME share transfer system. There is some uncertainty about whether it can be finally completed; on 2024/3/29, Zheshang Securities failed to fulfill its responsibilities in sponsoring the Star Cold Chain Project, and the Shanghai Stock Exchange issued a regulatory warning.