Deeply involved in Zhejiang, the location advantage supports the long-term development of broker+investment banking business. Zheshang Securities is the first state-owned listed brokerage firm in Zhejiang Province. As of 2024/5/6, the company's 74 branches (accounting for 57%) were located in Zhejiang Province, second only to CaiTong Securities in number. By the end of 23, the company's corporate debt+corporate bond underwriting amount had the highest market share in Zhejiang Province for 5 consecutive years, and the localization characteristics of the debt underwriting business were outstanding. The company is dominated by asset-light business and is driven by brokers+investment banks on two wheels. From 2020 to 2023, corporate brokering+investment banking business revenue contributed an average of 53.6% to revenue (industry average of 43.4%), of which brokerage business accounted for an average of 35% (industry average 29.5%), and investment banking business accounted for an average of 18.6% of revenue (industry average 13.9%). Zhejiang Province has a well-developed economy, active private capital, and rich customer resources, which is conducive to supporting the long-term development of the company's wealth management and investment banking business.

The increase in affiliate marketing+institutions is impressive, the transformation of wealth management business is accelerating, and the downward trend in commission rates is slowing down.

From 2018 to 2023, the market share of the company's net brokerage fee revenue increased by 1.36pct to 2.27%. By dividing the brokerage business revenue structure, from 2018 to 2023, the share of consignment revenue increased +6.46pct to 14.51%; the share of seat rental revenue increased +18.36pct to 23.17%, and the 2018 to 2023 revenue industry ranking (based on listed brokerage firms) rose from 25th place to 16th place. As the transformation of the wealth management business accelerates, the downward trend in corporate fees has slowed compared to the industry. In 2014, the company's handling rate was about one-tenth lower than the industry (6.05 for Zhejiang business/industry, respectively? /7.11?) The gap gradually closed between 2014 and 2018. By 2023, the company's handling rate was slightly higher than that of the industry (2.37 for Zhejiang business/ industry, respectively? /2.32?).

The layout of the financial industry is diversified, and the performance of participating holding companies is divided. (1) Through the subsidiary Zheshang Asset Management and the establishment of Zheshang Fund to carry out asset management business, the net profit contribution rates from 2018 to 2023 were 5.15%/0.03%, respectively.

Zheshang Fund turned a loss into a profit in 2021. Considering that Minsheng Life Insurance is the controlling shareholder of Zheshang Fund (50% shareholding ratio), and that Zheshang Asset Management has obtained a public offering license, the importance of the Zhejiang Fund layout to the company may no longer be prominent. It is expected that the asset management business will focus on asset management subsidiaries. (2) The futures business was carried out through the holding subsidiary Zheshang Futures, and the net profit contribution rate from 2018 to 2023 was 10.68%. The net profit market share of Zheshang Futures was about 2.2%, and the commission rate level was higher than that of the industry for 10 consecutive years (the company/industry brokerage commission rate levels in 2023 were 0.626, respectively? /0.206?) (3) Self-operated investment business is carried out through the alternative investment subsidiary Zheshang Investment and PE fund management subsidiary Zheshang Capital, with a total net profit contribution rate of about 1%. Proprietary returns bottomed out in '23.

The capital to be transferred is expected to complement businesses and enhance comprehensive strength. In March '23, Zheshang Securities's bid for shares in Minsheng Securities failed. In December of the same year, it tried epitaxial expansion again, targeting Guodu with the intention of becoming a major shareholder of Guodu Securities. It is expected that making up for regional shortcomings and indirectly obtaining shares from public equity giants China Europe Fund to make up for asset management shortcomings is the main gain. Zhejiang merchants are deeply involved in Zhejiang, and Guodu branches are mainly distributed in Beijing, Henan, and Shandong. If the two are combined, the resources of each region can be integrated. After the merger, the strength of Zheshang Capital will be enhanced, which will help achieve the company's long-term goal of “moving towards medium and large brokerage firms” by 2030.

Investment advice: On March 15, the Securities Regulatory Commission once again proposed supporting high-quality leading institutions, and expectations for industry mergers, acquisitions and restructuring were strengthened. Under the auspices of the securities industry's policy of encouraging interbank mergers and acquisitions, the company plans to acquire shares in Guodu Securities, which is expected to promote business collaboration and enhance comprehensive strength. We expect the company's 2024/2025/2026 EPS to be 0.52/0.59/0.69 yuan, BPS is 7.45/7.87/8.36 yuan respectively, the PB corresponding to the current stock price is 1.49/1.41/1.33 times, respectively, and the ROE is 7.28%/7.70%/8.45%, respectively. Refer to comparable company valuations. Considering the company's location advantage in Zhejiang Province and the acceleration of high-quality business transformation such as institutional+consignment sales, it is expected that the company will further enhance its brokerage and asset management business strength through epitaxial mergers and acquisitions. We are optimistic about the company's future profitability growth potential, and give the 2024 performance a 1.9 times PB valuation, with a target price of 14.1 yuan. Covered for the first time, giving it a “Recommended” rating.

Risk warning: Acquisitions are uncertain, share-based turnover is declining, and wealth management transformation falls short of expectations.