1H22 earnings slightly beat our expectation

Everbright Securities announced 1H22 results: The company’s revenue fell 33% YoY to Rmb5.37bn and its revenue from major businesses (excluding “other revenue” which mainly comes from commodities) declined 15% YoY. Its net profit attributable to shareholders fell 6.8% YoY to Rmb2.11bn; the company’s ROAE declined 0.68ppt YoY to 3.6%. The firm’s 1H22 earnings slightly beat our expectation, due to a smaller-than-industry-average YoY decline in its investment income and writing-back of Rmb104mn asset impairment loss provisions (vs. making about Rmb166mn of impairment loss provisions in 1H21). In 2Q22, the company’s net profit attributable to shareholders fell 8% YoY but rose 116% QoQ to Rmb1.44bn. The company’s adjusted G&A expense ratio rose 1ppt YoY to 50% in 1H22 and the leverage ratio of its own assets fell 0.4x YoY and remained roughly flat QoQ at 2.8x at the end of 2Q22.

Trends to watch

Retail business declined YoY and underperformed industry average. Everbright Securities’ revenue from its wealth management businesses fell 41% YoY to Rmb2.6bn in 1H22 with the retail business underperforming those of its peers and other revenue falling 93% YoY. Revenue from the brokerage business declined 15% YoY (vs. industry average of 0.5% YoY growth) to Rmb1.7bn in 1H22 and fell 11% YoY and 6% QoQ in 2Q22. In 1H22, ADT of A-shares grew 9.5% YoY but that of H-shares fell 27% YoY. Everbright Securities’ revenue generated by selling financial products as an agent declined 45% YoY, and its share of total revenue of the brokerage business fell 8ppt YoY to 14%. Net revenue generated by buying and selling securities as an agent dropped by 11% YoY due to a decline in the overseas brokerage business.

The company’s net interest income fell 3% YoY to Rmb1.24bn in 1H22, and declined 1% YoY but rose 5% QoQ in 2Q22. The company’s interest income from the margin trading and short-selling business declined 13% YoY in 1H22, with the balance of margin trading and short-selling falling 27% YoY to Rmb40.1bn and market share for margin trading and short-selling declining 0.6ppt YoY to 2.5% at end-2Q22. The company’s interest income from its stock pledge business grew 54% YoY.

Revenue from corporate and institutional business fell 14% YoY; leading positions of industry leaders’ investment banking businesses strengthened. The company’s revenue from the investment banking business fell 24% YoY (vs. industry average of flat YoY) to Rmb0.8bn in 1H22, but grew 3% YoY and 55% QoQ in 2Q22. The company's equity underwriting grew 55% YoY in value terms, with market share rising 0.8ppt YoY to 2% and its IPO underwriting grew 14% YoY in value terms (vs. industry average of 46% YoY growth). The company’s market share for bond underwriting rose 0.4ppt YoY to 2.6%. In 1H22, the company’s revenue from the institutional business fell 8% YoY, with market share for net commission income from seats on securities exchanges falling 0.5ppt YoY to 2.5%.

Decline in investment business smaller than industry average; asset management revenue falls slightly. The company’s revenue from the investment business fell 25% YoY (vs. industry average of 38% YoY decline) to Rmb0.65bn in 1H22, and declined 28% YoY in 2Q22, though the business turned profitable on a QoQ basis. We attribute the decline in revenue from the business to fluctuations in equity-oriented proprietary trading investment. At the end of 1H22, the company’s held-for-trading financial assets grew 38% YoY to Rmb81.7bn, with the portion of stocks, bonds, investment funds, and other financial assets at 5%, 22%, 53%, and 19%, and annualized rate of return on investment falling 1ppt YoY to 1.5%. The company’s revenue from the asset management business declined 2% YoY (vs. industry average of an 8% YoY decline) to Rmb0.66bn in 1H22 and fell 31% YoY but rose 2% QoQ in 2Q22. At the end of 2Q22, assets under management of the company’s asset management services grew 15% compared with the beginning of 2022 to Rmb432bn, with the share of active asset management rising 10ppt YoY to 93.5%.

As for the fund management business, non-money-market funds managed by Everbright PGIM (Everbright Securities holds a 55% stake) declined 12% YoY to Rmb64.9bn, with net profit falling 14% YoY to Rmb74mn, but non-money-market funds managed by Dacheng Fund (Everbright Securities holds a 25% stake) grew 15% YoY to Rmb155.7bn, with net profit rising 53% YoY to Rmb0.27bn.

Financials and valuation

As the company’s investment income outperformed peers in 1H22, we raise our 2022 and 2023 earnings forecasts by 14% and 7% to Rmb4.2bn and Rmb4.6bn. The company’s A-shares are trading at 1.3x 2022e and 1.2x 2023e P/B (excluding perpetual bonds). We maintain an OUTPERFORM rating. As we revise up earnings forecasts, we lift our target price by 21% to Rmb17.50 (1.44x 2022e and 1.36x 2023e P/B), offering 10% upside.

Risks

Market fluctuations; uncertainties in regulatory policies; disappointing business transformation.