Key points of investment
Incident: Huatai Securities released its 2024 quarterly report. The company achieved total operating revenue of 6.105 billion yuan in 24Q1, -32.11% year-on-year, and realized net profit of 2,291 billion yuan, or -29.39% year-on-year.
Asset-heavy business: The decline in self-employment poses a major drag. 1) The high base is compounded by a sluggish equity market, and revenue from proprietary businesses has shrunk sharply. The company's own business revenue in the first quarter of 2024 (investment income - income from investment in joint ventures plus net income from changes in fair value) was 1,881 billion yuan, a year-on-year decrease of 58.91%, which was the main reason for the decline in the company's performance in the first quarter. We expect that in a situation where the 24Q1 equity market fluctuates greatly, the company's equity and derivatives proprietary business will suffer a strong negative impact, and the scale of the company's own investment has shrunk (24Q1 company's transactional financial assets decreased by 3% compared to 23Q1), compounded by a high annual base (23Q1 company's proprietary business revenue +149% YoY to 4.577 billion yuan), leading to a significant decline in the company's 24Q1 self-operated business revenue. 2) Net interest income declined due to an increase in interest expenses. The 24Q1 company raised 104.9 billion yuan, down 1% from 23Q1.
The company's net interest income was -23% year-on-year to $230 million, mainly due to a 3% year-on-year increase in the company's interest expenses to $3.342 billion.
Asset-light business: The brokerage and investment banking business is sluggish, and the asset management business is relatively strong. 1) The brokerage business declined year over year. The average daily share base turnover of the 2024Q1 market was 1,029.2 billion yuan, +4%/+8% year-on-month, respectively. Net revenue from the company's brokerage business was -11% year-on-year to 1,358 billion yuan, which is expected to put pressure on the consignment financial products business. 2) Equity financing is being suppressed by policies, and investment banking business is under pressure. Affected by the phased tightening of IPOs and refinancing, 2024Q1's IPO/refinancing issuance scale was -10%/-81% year-on-year to 50/4.5 billion yuan, respectively, resulting in net revenue from the company's investment banking business -26% to 576 million yuan year-on-year. 3) Asset management business revenue continues to grow. In 24Q1, the company's asset management business revenue was +10% year-on-year to 1,106 billion yuan. The management scale of the company's participating public funds has expanded rapidly (at the end of 24Q1, the management scale of China Southern Fund/Huatai Berry was +9%/+45% compared to 11.593/445.7 billion yuan, respectively).
The proposed sale of all of AssetMark's shares is expected to boost the company's performance: On April 25, 2024, Huatai Securities announced that the company plans to sell all of AssetMark's shares through a direct agreement to sell all of AssetMark's shares, accounting for about 68.4% of AssetMark's issued common shares. After the transaction is completed, the company will receive approximately $1,793 million in cash, which will be used to supplement the company's working capital and other general corporate purposes. From June 30, 2023 to April 30, 2024, AssetMark's stock price increased 15.88% and reached an all-time high on April 9, 2024. The company's current sale of shares is expected to maximize investment returns and provide good support for the company's performance.
Profit forecast and investment rating: We maintain our previous profit forecast. We expect the company's net profit to be 131.10/141.82 /15.102 billion yuan in 2024-2026, with corresponding growth rates of 2.82%/8.18%/6.49%, respectively, corresponding EPS of 1.45 /1.57 /1.67 yuan, respectively. The current market value corresponds to the 2024-2026 PB valuation 0.76 /0.71 /0.67 times, respectively. I am optimistic that after the trading sentiment recovers, the company will continue to consolidate the competitive barriers of leading brokerage firms, and at the same time continue the growth trend by relying on the core competitiveness of technology to maintain a “buy” rating.
Risk warning: 1) Decrease in market transaction activity; 2) Stock market fluctuations impact proprietary investment returns.