Key investment points

The results of the 2024 three-quarter report showed steady growth: in the third quarter of 2024, Guotai Junan's performance grew steadily, achieving a 7% year-on-year increase in operating income to 29 billion yuan, net profit to mother increased 10% to 9.5 billion yuan year-on-year, and net assets to mother increased 0.34% to 166.4 billion yuan from the beginning of the year. 1) In the asset-light business, brokerage revenue and asset management revenue decreased by 12.73% and 8.40%, respectively, and investment banking business revenue decreased by 32.33% year on year, but remained at the forefront of the industry. 2) In the asset-heavy business, the self-operated business performed well, with a sharp increase of 39% over the previous year. The revenue from the capital intermediary business was stable, and the net income from interest increased 2.53% year on year. Overall, the company's business performance was steady against the backdrop of market recovery at the end of the third quarter.

The major asset restructuring is progressing smoothly: On October 9, 2024, the board of directors of Guotai Junan held a meeting and agreed that the company would exchange shares to absorb and merge Haitong Securities and raise supporting capital. 1) The early stages are progressing smoothly, and there are still a series of processes to be completed in the later stages: Guotai Junan issued an announcement on October 9 announcing that the share exchange and merger will adopt the method of Guotai Junan's share exchange, absorption and merger with Haitong Securities. The share exchange ratio is 1:0.62. 2) Total assets increased dramatically, and the ranking in many indicators jumped to first place in the industry. According to the 2024 semi-annual report data, after the merger of the two companies, the operating income/net profit/total assets/net assets industries ranked second, second, first, and first, respectively. 3) Business advantages complement each other, and various business levels are expected to improve rapidly. Haitong Securities has an advantage in the IPO business, and Cathay Pacific Junan has an advantage in the field of bond underwriting. The two are combined to form a large-scale effect by connecting online and offline advantages, and the customer service capability boundary. The brokerage and finance business will give full play to their respective comparative advantages, and the scale will be the first in the industry.

Profit forecasting and investment ratings: Capital market reforms continue to be optimized, the macroeconomy is gradually recovering, leading brokerage firms are more able to control risks and enjoy policy dividends to a greater extent; as a leading brokerage firm, Guotai Junan is expected to seize strong market opportunities. We expect the company's 2024-2026 net profit to be 10.8/13.7/16.3 billion yuan, corresponding to the 2024-2026 PB of 1.01/0.96/0.91 times, covered for the first time, and given a “buy” rating.

Risk warning: Competition in the industry market intensifies risks, and the recovery of the securities market falls short of expectations.