Incident: Orient Securities announced its 2024 quarterly report, and the results were in line with expectations. Achieved total revenue of 3.61 billion yuan/yoy -19% /qoq +6%, realized net profit of 890 million yuan/yoy -38% /qoq +960% (turning loss into profit), weighted ROE 1.11% /yoy-0.76pct.

Under the 1Q23 high base, Orient Securities's performance was under year-on-year pressure. Improvements in impairment accrual plus a sharp shift in investment to profit drove performance growth of more than 9 times month-on-month. Year-on-year pressure: Orient Securities achieved net profit of 1.43 billion yuan in 1Q23, the highest value in the same period in the past 8 years; under a high base, 1Q24 net profit yoy -38% met market expectations. The main reasons for the significant month-on-month improvement: 1) 1Q24 net investment income (including exchange gains and losses) of $81 billion (vs 4Q23 loss of 0.1 billion yuan in a single quarter), a significant month-on-month improvement of about 1.66% (VS4q23 was -0.02%); 2) 1Q24 impairment (including credit impairment plus asset impairment) slightly recovered (vs 4Q23 accrued impairment of 250 million yuan); 3) 1Q24 management expenses of 1.6 billion yuan/qoq -20%, driving quarterly management fees (management fee/cost of 20%) (Main revenue) qoq -34.1pct to 65.1%. Concern: It is proposed to adjust some of the company's headquarters settings and focus on the subsequent strategic response policies of the company. On 2024/4/17, Orient Securities held a board meeting to review and pass the “Proposal on Adjusting the Establishment of Part of the Company's Headquarters”. Focus on subsequent companies to promote the company's excellence and strength through management and reform and development initiatives, and respond to brokers' calls for high-quality development policies.

The combined income from brokerage and investment contributed more than 50% to main revenue, and investment was the biggest driver for month-on-month improvement. 1Q24 main revenue split: 1Q24 achieved main securities revenue of 2.46 billion yuan/yoy-29% /qoq+21%; of these, brokerage, investment banking, asset management, net interest, net investment, and long-term stock investment revenue/year-on-year growth rates were as follows: 490,000/yoy -30%, 270 million/ -1.4%, 360 million/ -39%, 300 million/ -28%, 81 million/ -31%, 1.0 million/ -49%. The revenue share is as follows: 33% net investment, 20% brokerage, 15% asset management, 12% net interest, 11% investment banks, and 4% for long-term stock investment (mainly Huitianfu Fund) (excluding other fees). Judging from performance contributions, investment income positively drove main revenue of 40.2 pct month-on-month, which was the biggest driver for the month-on-month improvement in performance. The year-on-year decline in asset management revenue was mainly due to TSE Asset Management's active equity AUM1Q22 high last year; the increase in net interest income was mainly due to an increase in interest income from other debt investments, and a year-on-year decrease in interest expenses after the allotment of shares was completed in '22.

The revenue performance of the brokerage business is not as good as that of the industry, and the fund investment business is developing steadily. Market performance: According to Wind, the average daily share base turnover of the 1Q24 industry was 1,331.4 billion yuan/yoy +3.9%; the average daily balance of two loans was 1.55 trillion yuan/yoy -1.5%. Orient Securities's 1Q24 brokerage business net revenue yoy -30%. It is expected that the decline in commission rates and proxy sales revenue after the reform of public offering fees will lead to a year-on-year decline in brokerage business revenue. Fund investment business: According to the company's 2023 annual report, the company's total fund investment service scale at the end of 2023 was 14.36 billion yuan, achieving a customer reinvestment rate of 76%. The new “National Nine Rules” proposed promoting wealth management capacity building, and follow-up attention was paid to the positive effects of the good development of Orient Securities's fund investment business on wealth management performance.

Stock business risks have been greatly cleared, and we look forward to a recovery in performance after going to battle lightly. Orient Securities's 2023 performance was dragged down by asset impairment losses. The annual impairment losses increased 50% year-on-year, mainly due to increased impairment preparations calculated in the stock pledge business. According to the company's financial report, as of the end of 2023, Orient Securities's net stock pledge value (stock pledge balance deduction and impairment reserve) was about 1.58 billion yuan/yoy -69%, and the risk was completely cleared. At the end of 1Q24, the company bought and resold assets of 2.87 billion yuan, down 47% from the beginning of the year. It is expected that the stock size will continue to decline. We expect the company to go light in 2024.

Public asset management AUM did not perform as well as the industry, and asset management revenue was pressured by the impact of public fund reform in the short term. 1Q24 Huitianfu (holding 35.41% of shares) non-commodity AUM 461.9 billion yuan/yoy -7% at the end of 1Q24 (vs overall industry yoy +6%); Eastern Securities Asset Management's public offering of non-commodity AUM 148 billion yuan/yoy -21%. In terms of profit contribution, Orient Securities Asset Management and Huitianfu's product structures are mainly active equity funds: 1Q24 active equity accounts for 33% of the non-cargo base: Huitianfu 33% and Dongfang Asset Management 57%. Influenced by the public offering fee reform policy, Orient Securities's public asset management performance contribution is expected to be pressured in the short term.

Investment analysis: Maintain profit forecasts and maintain buying ratings. Benefiting from the uninterrupted catalyzation of policies, it is expected that the brokerage and fund investment business of Orient Securities will be repaired; deepening capital market reforms are expected to drive strength on both sides. It is expected that new funds in the market will continue to improve (the scale of new public offerings exceeded 150 billion dollars in March, and the scale of new issuance exceeded 120 billion dollars since April). It is expected that Orient Securities's asset management business will be repaired and maintained. Considering that the company currently has many pending lawsuits (total costs of 4.82 billion yuan), we conservatively maintain our profit forecast. Orient Securities's 24-26E net profit is expected to be 30.7/38.05/4.56 billion, +11.5%/+20% year-on-year, respectively.

Risk warning: The downward pressure on the economy increased; the company's main lawsuits and arbitration at the end of 2023 totaled 4.821 billion yuan in principal, interest, liquidated damages, and other expenses related to the fulfillment of claims. Concerned about credit impairment losses caused by stock pledge business and the erosion of the company's profits by pending lawsuits.