Incident: On October 30, Guotai Junan disclosed its 2024 three-quarter report. The performance growth rate slightly exceeded expectations. The company 9M24 achieved revenue of 29 billion yuan, +7.3% year over year, net profit of 9.52 billion yuan, or +10.4% year over year; of these, 3Q24 net profit to mother was 4.51 billion yuan, +56.2% year over year, +78.4% month on month; 9M24 weighted ROE (unannualised) of 5.97%, +0.35pct year on year.

Proprietary investment business achieved a high increase in revenue. 9M24 Cathay Pacific Junan achieved 22.62 billion in securities revenue (excluding other business revenue) +3.2% year-on-year. By category, 9M24's business revenue (year-on-year growth rate) is as follows: brokerage 4.45 billion (-12.7%), investment banking 1.8 billion (-32.3%), asset management 2.86 billion (-8.4%); net interest 1.57 billion (-2.5%), and net investment of 10.71 billion yuan (+38.5%). 9M24's revenue structure is as follows: brokerage 19.7%, investment banking 7.9%, asset management 12.7%, net interest 6.9%, investment 47.4% (excluding other business income and long-term stock investment).

Overall revenue from the handling fee business is under pressure, mainly due to a decline in trading activity. The company's net revenue from handling fees and commissions in the first three quarters was 9.44 billion yuan, a year-on-year decrease of 15.6%. Among them, brokerage revenue in a single quarter was 1.38 billion yuan, down 12.9% month-on-month and 14.1% year-on-year; from the perspective of marginal changes, the company's customer capital deposits at the end of the period reached 176.4 billion yuan, an increase of 34.5% over the beginning of the year, and an increase of 23.4% over the half year. Investment banking revenue improved marginally. Revenue in a single quarter was 0.63 billion yuan, +20.6% month-on-month. In the face of a year-on-year decline in stock underwriting revenue, it is expected that mainly bond underwriting will support annual performance. The asset management business declined slightly in a single quarter, with revenue of 0.94 billion yuan, -9.2% year-on-year and -6.2% month-on-month.

The scale of financial investment has shrunk slightly, while the return on investment has improved markedly. At the end of the period, the company's financial investment was 439.2 billion yuan, up 1.2% from the semi-annual report and down 7% from the beginning of the year. Among them, the size of transactional financial assets was 361.2 billion yuan, up 3.1% from the semi-annual report and down 3.1% from the beginning of the year. We estimate the return on investment from the beginning of the year to date is 3.0% (unannualized), an increase of about 0.9 percentage points over the same period last year. At the end of the period, the company's leverage ratio (excluding customer funds) was 4.29 times, down slightly from the beginning of the year.

The company plans to absorb and merge Haitong Securities to monitor the progress of subsequent projects. On October 9, the board of directors of the company deliberated and passed the relevant bill, agreeing that the company would exchange shares to absorb and merge Haitong Securities and raise supporting capital (10 billion yuan). The company will issue Guotai Junan A shares to all A-share shareholders of Haitong Securities and Guotai Junan H shares to all H-share exchange shareholders of Haitong Securities. The share exchange ratio is 1:0.62, that is, 0.62 shares of Guotai Junan A shares can be exchanged for every 1 share of Haitong Securities A shares, the same for H shares.

Investment analysis opinion: Raise profit forecast and raise to buy rating. The company's performance growth in the first three quarters slightly exceeded expectations. It is recommended to focus on the impact of the subsequent absorption and merger of Haitong Securities on the company's valuation. Based on a marked improvement in market trading activity and a marked recovery in the company's return on investment since the end of September, we raised our share base transaction volume and return on investment assumptions to raise the profit forecast. We expect the company's net profit to be 12.1, 14.3, and 17 billion yuan for 24-26 (the original forecast was 9.1, 10.5, 12.3 billion yuan), +29%, and +19% year-on-year, respectively, and raised to a “buy” rating.

Risk warning: There is uncertainty about mergers, acquisitions and restructuring; stock transactions fluctuate abnormally.