Key points of investment

Incident: Nanhua Futures released its 2023 annual report. The company achieved total operating revenue of 6.247 billion yuan in 2023, a year-on-year decrease of 8.45%, and achieved net profit of 402 million yuan, an increase of 63.32% over the previous year. The performance was in line with expectations.

Actively grasping the trend of two-way opening up of the futures market, net income from overseas interest is growing rapidly: 1) Net income from overseas interest has performed well. In 2023, the revenue of Nanhua Futures was -8.45% to $6.247 billion, with revenue of $1,277 billion after excluding other business costs, of which net income from handling fees and commissions, net income from interest/other business revenue (net method) was $6.12/5.45/ 0.68 billion yuan, respectively, +23%/+67%/+134%, respectively, accounting for 48%/43%/5% of revenue (net amount method), respectively. Of the net interest income, the net interest income of Nanhua Futures in 2023, mainly from overseas subsidiaries, was 394 million yuan through consolidated caliber and calculation of the parent company's caliber difference, which is +212% over the same period last year, which is the main reason for the high increase in the company's 2023 performance. 2) High overseas interest rates compounded the growth of overseas customer equity, which together led to an increase in net income from overseas interest. ① In terms of overseas interest rates, the Federal Reserve continued to raise interest rates sharply in 2023. As of the end of 2023, the US effective federal funds rate was 5.33%, +1pct at the end of 2022, and the average effective federal funds rate during the year was 5.02%, an increase of 3.33 pct over 2022. ② In terms of the scale of overseas business, based on the background of a high level of openness in the futures industry, the overseas business scale of Nanhua Futures continues to grow, supported by the advantages of overseas licenses. As of the end of 2023, the equity value of overseas clients of the South China Fund was HK$14.094 billion, +19% compared with the end of 2022.

Futures brokerage and wealth management business remains steady: 1) Against the backdrop of the expansion of the domestic futures market, the company's futures brokerage business revenue has increased steadily. In 2023, the size of China's futures market expanded steadily, and the quality and efficiency of futures services for the real economy gradually improved. The total futures trading volume of the entire market was +6.43% year-on-year to 56.815 billion yuan. Driven by this, the company's futures brokerage business increased 7% year over year to 571 million yuan. 2) Revenue from the wealth management business achieved contrarian growth. In 2023, the scale of Nanhua Futures' public funding/asset management business was +39%/+75% year-on-year to RMB 21.13 billion, driving the company's fund management revenue/asset management business revenue +63%/+59% year-on-year to RMB 0.63/34 billion, respectively.

Profit forecast and investment rating: Nanhua Futures's domestic business is developing steadily and has outstanding overseas business advantages. In particular, it has significant advantages in overseas clearing. Along with the acceleration of the two-way opening up of China's futures market, it is expected that it will continue to fulfill its potential for development. Based on the market situation in the first quarter of 2024, we slightly raised our previous profit forecast. We expect the net profit of Nanhua Futures to mother in 2024-2025 to be $511/578 million yuan (previous value was 506/575 million yuan), respectively, corresponding to a growth rate of 27.16%/13.05%. The company's net profit to mother is expected to reach 627 million yuan in 2026, corresponding to a growth rate of 8.59%. The current market value corresponding to 2024-2026 PE is 12.76/11.29/10.40 times, respectively. The company has considerable room for medium- to long-term growth and maintains an “gain” rating.

Risk warning: 1) Industry regulations are getting stricter; 2) the Federal Reserve cut interest rates beyond expectations; 3) The development of the domestic futures market falls short of expectations.