1H24 results are in line with our expectations

Dongcai 1H24's revenue -14% YoY to 4.94 billion yuan, net profit to mother -4% YoY to 4.06 billion yuan, and net profit after deducting -5% YoY to 3.88 billion yuan (mainly excluding other revenue mainly from government subsidies), in line with our expectations; corresponding to 2Q revenue -15% YoY/+1% month-on-month to 2.49 billion yuan, net profit -4% YoY +8% YoY to 2.1 billion yuan, showing resilience in a volatile market environment.

Development trends

The securities business performed better than its peers, and its market share increased steadily. The company's 1H24 securities business revenue was -5% to 3.42 billion yuan, and revenue contributed 69%, of which: 1) Net income from handling fees and commissions was -4% to 2.4 billion yuan, of which net income from securities brokerage business was -10% to 2 billion yuan (-3% to 1.85 billion yuan), and share-based transaction volume was -6% yoy to 9.21 trillion yuan (vs. market -8%). We estimate that the market share increased from 1H23 to 3.95% 4.0%. Market share increased steadily due to market fluctuations. At the same time, the futures brokerage business was also gaining strength, with 1H24 revenue +51% year-on-year to 0.36 billion yuan. 2) Net interest income was -8% to 1.03 billion yuan, of which interest income from financing capital was +6%, and the estimated market share increased from 1H23 to 2.7% to ~ 2.9%. The decline in net interest income was mainly due to an increase in interest expenses payable to bonds/sale and repurchase/divestment funds.

Fund sales are still under pressure due to market and fee cuts, waiting for 2H24 channel side fee reduction supervision to be implemented. The company's 1H24 fund sales revenue was -30% to 1.41 billion yuan, revenue contribution 29%, and 1H24's total fund and non-cargo base sales were +4%/-1% year over year to 851.4/499.7 billion yuan, respectively. We estimate that equity funds were greatly affected by the market (1H24 market-wide new equity fund share -35%, equity fund share in open-ended funds -9% YoY /2% compared to the beginning of the year).

Higher investment income contributes to performance resilience. The company's total 1H24 investment income and fair value change income was +42% to 1.64 billion yuan (not included in revenue), accounting for +11.3ppt to 35% year-on-year operating profit, mainly benefiting from a significant increase in securities self-operated fixed income business income (1H24) (+2.8%); the size of the company's transactional financial assets at the end of the year of 1H24 was +18% YoY /21% to 82.9 billion yuan at the beginning of the year, of which bonds/funds/bank financial management/stocks and the new three markets accounted for 65, respectively %/ 11%/18%/4%, we estimate the annualized return on investment ~ 4.3%.

The market is reversing the market and increasing R&D, and AI models continue to be iteratively upgraded. The company's 1H24 R&D expenses were +10% to 0.56 billion yuan, and the cost ratio was +2.4ppt to 11.2% year-on-year. The company's big model is being integrated into the company's product ecosystem in an orderly manner. After being upgraded in June, Choice Smart Financial Terminal joined hands with Dongcai's “Wonderful” Big Model to launch a next-generation smart financial terminal, covering seven major scenarios, including AI search/AI Q&A, AI research report summary/AI document assistant/AI information summary/AI bond trading assistant.

Profit forecasting and valuation

Due to a reduction in the assumption of average daily stock turnover in the market and taking into account the impact of fund fee cuts, the profit forecast for 24/25 was lowered by 6%/12% to 8.7/9.8 billion yuan. The company is currently trading at 19x/17x 24/25e P/E; the target price was lowered by 12% to 16.66 yuan, corresponding to 30x/27x 24/25e P/E and 59% upward space; maintaining the industry's outperforming rating.

risks

Market activity has declined, financial regulations have become stricter, and competition in the industry has intensified.