In 2022, Fangzheng Securities achieved net profit of 2,148 billion yuan, an increase of 17.88% over the previous year, and maintained positive profit growth against the backdrop of a 25.5% decline in overall industry profits. The wealth management business is the core driving engine of the company. The share of new brokerage and credit account openings reached 6.7% and 8.4% respectively during the year. At the shareholder level, Fangzheng Securities completed a major asset restructuring, China Ping An indirectly controlled the company, and the Social Security Foundation became the second largest shareholder, which is expected to provide strong support for the company's development. The company was given a target price of 7.13 yuan, corresponding to 1.3 times PB in 2023. Maintain a “hold” rating.

It ranks in the middle and upper reaches of the industry, and management reforms are expected to drive continuous improvement in operating efficiency. The overall performance of Fangzheng Securities ranked between 17-20 in the industry in the past three years; in the context of the overall decline in industry profits in 2022, Fangzheng Securities maintained a positive growth of 17.88% in net profit. Since 2020, the company has continued to improve management efficiency.

In terms of organizational structure, on the one hand, the number of headquarters departments was reduced, and on the other hand, the headquarters reached 386 outlets directly. In terms of process optimization, through measures such as node streamlining, the average time required for office processes in the past three years has been reduced by 46%.

As management reforms continue to advance, the company is expected to continue to improve operating efficiency and profitability.

Brokerage & Credit Business: The share of new brokerage and credit accounts has increased significantly, with contracted assets exceeding 100 billion yuan.

In terms of brokerage business, net revenue of 3.60 billion yuan was achieved in 2022, accounting for 46.3% of revenue, which is the company's main source of revenue; the share of new accounts opened in 2022 increased significantly. The share of new accounts opened in the three years of 2020/21/22 was 2.83%, 4.01%, and 6.66%, respectively. In terms of investment business, the number of contracted investment clients and the scale of contracted assets have steadily increased; at the end of 2022, the number of signed customers was 970,000, and the number of contracted assets reached 101.4 billion yuan. In terms of credit business, 27,800 credit accounts were added in 2022, with a market share of 8.35%, an increase of 3.76 times over 2021, a record high; the risks of the two finance and stock pledge repurchase businesses are manageable.

Investment trading business: The return on fixed income investment reached 13%, and the derivatives business developed rapidly. With the improvement of Fangzheng's debt financing environment, the investment transaction business improved markedly. Total investment income was 1,020 billion yuan in 2022, an increase of 34.4% over the previous year. The fixed income investment business is prominent, achieving revenue of 1,099 million yuan in 2022; the yield reached 13%, corresponding to the 98% yield of medium- to long-term pure bond funds, mainly due to a leverage ratio of about 4 times and stable interest spread income. In terms of derivatives business, the company's income exchange business added 7.739 billion yuan in nominal principal, an increase of 192.4% over the previous year. The OTC options business increased nominal principal by 3.156 billion yuan, an increase of 211.9% over the previous year.

Investment Banking & Asset Management: Equity projects drove a year-on-year increase in investment bank revenue, and the decline in scale led to a decline in asset management revenue. In terms of investment banking business, net revenue of 533 million yuan was achieved in 2022, an increase of 21.5% over the previous year. The revenue share rebounded from 5% in 2021 to 7% in 2022, mainly due to significant improvements in the quality of equity projects, which achieved revenue of 199 million yuan in the face of a decline in scale, a year-on-year increase of more than three times. In terms of asset management business, net revenue of 235 million yuan was achieved in 2022, a year-on-year decline of 8.9%, mainly due to the decline in the scale of targeted asset management and special asset management. In terms of fund business, net income of 295 million yuan was achieved in 2022, an increase of 42.4% over the previous year, mainly due to the expansion of the management scale of Fangzheng Fubon Fund.

Risk factors: A share turnover declined sharply; the company's credit business risks were exposed; the company's investment losses occurred; the company's investment banking business was lagging behind in development; changes in the company's shareholders and board of directors.

Profit forecasting and valuation: Based on the influence of factors such as current market trading conditions and implementation of the full registration system, we forecast that the 2023/24/25 operating income will be 8.709 billion/9.159 billion/9.639 billion yuan (the previous forecast value of 2023/24 operating income was 9.170 billion/10.017 billion yuan), and the net profit attributable to the parent company was 2,001 billion/2,338 billion yuan/2,487 billion yuan (the previous forecast value of net profit attributable to the parent company in 2023/24 was 2.31 billion yuan/2,417 billion yuan). With capital market reforms and business innovation in the securities industry, the securities industry is expected to concentrate its leadership.

At the same time, stock market fluctuations will inevitably have a beta effect, which will cause large fluctuations in brokers' valuations. Since November 2022, as the economy gradually recovers, steady growth policies continue to gain strength, and capital market reforms continue to advance, industry valuations are expected to enter an upward cycle, and Fangzheng Securities is also expected to benefit from it. We refer to the 25% quantile valuations of comparable companies Everbright Securities, Zheshang Securities, Dongwu Securities, and Societe Generale Securities since 2019, using ± 7.5% as a reasonable range for Fangzheng Securities's PB valuation. Based on this, we estimate that the reasonable PB of Fang Zheng Securities is about 1.2-1.4 times. Referring comprehensively to the reasonable valuation range of the PB-ROE method and the comparable company law, the company was given a target price of 7.13 yuan, corresponding to 1.3 times PB in 2023. Maintain a “hold” rating.