3Q24 results were slightly lower than our expectations

Dongfang Wealth 1-3Q24 revenue -14.0% to 7.3 billion yuan, net profit -2.7% to 6 billion yuan, net profit -3.5% to 5.7 billion yuan after deduction; corresponding to 3Q24 single-quarter revenue -13.9% YoY -5.2% YoY to 2.36 billion yuan, net profit +0.1% /month-on-month -5.5% to 1.99 billion yuan, slightly lower than our expectations, mainly due to weak markets dragging down revenue while reversing the market and increasing R&D Relevant inputs.

Development trends

The 3Q market downturn dragged down securities business revenue, and the weak market did not change the logic of increasing market share. In terms of brokerage business, the company's net revenue from 3Q24 fees and commissions (mainly brokerage business) was -8% YoY/-4.4% month-on-month to 1.16 billion yuan, and the average daily turnover of A-shares in the entire market during the same period was -15%/-18% month-on-month to 677.6 billion yuan (only 610.1 billion yuan without taking into account the last week of September). We estimate that the market share of the company's stock trading volume increased further to over 4.5%; on the user side, QM monitors the 3Q average MAU YoY +7% /month-on-month It remained flat at 23.38 million people (average of 21.93 million people in July-August). Net interest income in 3Q24 was -13.3% YoY /-5.1% month-on-month to 0.48 billion yuan, and Dongcai Finance's fund balance was +1% YoY /-5% to 43.8 billion yuan at the beginning of the year (vs. -5% YoY /-9% compared to the beginning of the year). We estimate that Dongcai's capital market share further increased to over ~ 3%.

Fund sales are affected by the market and fee cuts. Follow the progress of the implementation of the 4Q24 channel-side fee reduction rules. The company's 3Q24 revenue (mainly fund sales) was -22.2% /-6.7% month-on-month to 0.72 billion yuan, and the share of new equity funds in the entire 3Q market was -25% /-16% month-on-month. Currently, the channel-side fee reduction in the third phase of the public fund fee reform is about to be implemented. We believe that the direction or promotion of equity products and TOC fund sales will have less impact on leading Internet fund sales channels such as Dongcai.

Investment income contributed in part to performance resilience. The company's 3Q24 investment income and fair value change income totaled +67% YoY/-7.2% to 0.77 billion yuan (not included in revenue), accounting for 34% of operating profit, mainly benefiting from securities self-operated fixed income business income. At the same time, the stock market also picked up at the end of 3Q, corresponding to the size of the company's transactional financial assets at the end of 3Q24 +2% YoY to 84.5 billion yuan.

The cost side bucked the market and increased investment in R&D. 3Q R&D expenses were +3% YoY/+8% month-on-month to 0.29 billion yuan, and the cost ratio was +2ppt/month-on-month +1.5ppt to 12%, which is an increase in AI investment; management expenses also increased. After adjusting investment income, the profit margin was +1.5ppt/month-on-month +0.1ppt to 63.5%.

Focus on the company's performance and high valuation flexibility under active market activity. Since 4Q24, the average daily ADT for A-shares has risen to 2.01 trillion yuan. We expect that market activity will greatly support the company (after the Dongcai Stock App reached a record high of 26.26 million people per month in September, the App Weekly Activity reached a record high of 19 million people since October vs. an average weekly activity of 12.74 million people in July-August); we believe that targets such as Dongcai are highly “resilient” and can easily be revised by investors in terms of market activity, and is expected to welcome Davis Double click.

Profit forecasting and valuation

Maintain the 24-year profit forecast; increase the 25-year profit by 4% to 11.5 billion yuan, taking into account increased market volume. The company currently trades at 40x/31x 2024e/25e P/E; keeps the target price of 30 yuan unchanged, corresponding to 53x/41x 2024e/25e P/E and 32% upward space; maintains an industry performance rating.

risks

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