Matters:

Fangzheng Securities announced that it plans to sell 49% of the company's shares in Credit Suisse Securities in Beijing at a price of 890 million yuan, which is expected to bring in a net investment income of 370 million yuan.

Commentary:

Expected return on investment of 370 million yuan (16.4% of net profit in 2023). As of the end of 2023, Credit Suisse Securities had a book value of $520 million in the balance sheet. The sale is expected to generate an investment income of 370 million yuan, which is expected to increase the company's investment income and increase current ROE.

Reduce the impact of subsidiaries on the company's profits and focus on main business operations. Affected by Credit Suisse Securities's continued losses, the company calculated net investment losses of -0.9/-140 million yuan in 2022 and 2023, respectively, causing a long-term drag on the company's profits. The company's sale of Credit Suisse Securities will help boost long-term earnings.

The sale price was lower than the September 2022 transaction, which is expected. In September 2022, the company announced plans to sell the company's shares in Credit Suisse Securities. However, affected by the restructuring of overseas Credit Suisse in recent years, the decline in market sentiment in the brokerage sector, and increased operating pressure on Credit Suisse Securities, the current sale price was lower than the previously announced price, which was within expectations, and the change in the sale price was lower than the change in the net assets of the subject of the transaction, and the terms of the transaction were more ideal.

Investment advice: Continue to be optimistic about the company's leverage increase expectations during the year, and be optimistic about the increase in leverage brought about by the company's ROE when market sentiment recovers × the excess ROE growth brought about by the increase in ROA. The company's 2024/2025/2026 EPS forecast is 0.31/0.35/0.39 yuan, BPS is 5.78/6.11/6.48 yuan, respectively. The current stock price corresponds to PB 1.39/1.32/1.24 times, respectively, and the ROE is 5.49%/5.81%/6.13%, respectively. The company was given a PB valuation of 1.6 times 2024, corresponding to a target price of 9.3 yuan, maintaining a “recommended” rating.

Risk warning: There is uncertainty about whether the transaction can be approved or filed by the competent authority, risk of shareholder changes, increasing downward pressure on the economy, reduction in capital holdings in the North, etc.