FIRST SHANGHAI: Maintaining a "buy" rating on China Galaxy (06881) with a target price of 12.66 Hong Kong dollars.

FIRST SHANGHAI released a research report stating that as a leading state-owned broker, China Galaxy (06881) has outstanding advantages in risk control, customer base, and policy dividends. It is expected to continue to release its growth potential in the industry recovery and optimization of its business structure, achieving both profit and valuation growth. The target price is 12.66 Hong Kong dollars, with a "buy" rating maintained. The main viewpoints of FIRST SHANGHAI are as follows: Better-than-expected performance, ROE surge demonstrates profit elasticity Company achieved revenue of 22.75 billion yuan in the first three quarters of 2025, a year-on-year increase of 44.4%; net profit attributable to shareholders was 10.97 billion yuan, up 57.5% year-on-year; weighted average ROE reached 8.77%, an increase of 2.97 percentage points year-on-year, significantly improving profitability. In the third quarter alone, net profit attributable to shareholders was 4.48 billion yuan, a year-on-year increase of 73.9% and a quarter-on-quarter increase of 29.0%, achieving the best quarterly performance in history, far exceeding market expectations. As of the end of the third quarter, the operating leverage, excluding client funds, was 4.23 times, a 4% increase from the beginning of the year, and improving seasonally throughout the year, with continuous optimization of capital utilization efficiency. Brokerage and margin financing drive growth, customer base advantage solidified Benefits from the market's average daily stock and fund trading volume increasing by 113% year-on-year to 1.81 trillion yuan, and active environment with margin financing balance reaching 2.39 trillion yuan at the end of the third quarter (a year-on-year increase of 66.2%), the company's brokerage business achieved net income of 6.31 billion yuan, a year-on-year increase of 70.7%, accounting for about 28% of revenue; in which the third quarter's single-quarter revenue was 2.66 billion yuan, a significant increase of 125% year-on-year and 54% quarter-on-quarter, outperforming market trading volume growth rate, highlighting strong customer base and efficient conversion capabilities. The APP's monthly active users have continued to increase, with the total number of customers surpassing 18 million by mid-2025, demonstrating advantages in traffic and stickiness in the industry cycle. Net interest income reached 3.21 billion yuan in the first three quarters, a year-on-year increase of 22.1%, with a single-quarter income of 1.27 billion yuan in the third quarter, a significant increase of 61.1%; margin lending increase by 62% year-on-year, a 31% increase from the beginning of the year, accelerating the release of margin financing business elasticity. Stable and high-return proprietary investments, market confirmation of asset allocation capability Net investment income (including fair value changes) in the first three quarters was 12.103 billion yuan, achieving a year-on-year increase of 42.4% despite a high base; a single-quarter increase of 32.6% year-on-year in the third quarter, with a 10.7% increase quarter-on-quarter, demonstrating excellent investment and risk control capabilities. At the end of the third quarter, the financial asset scale was 417 billion yuan, a 9% increase from the beginning of the year, with the scale of other debt investments increasing by 16.3% to 256.7 billion yuan. The equity securities and derivatives-to-net capital ratio increased from 27.27% at the beginning of the year to 32.69%, providing ample elasticity for the subsequent market upward cycle. Significant rebound in investment banking business, simultaneous advancement in stock and bond underwriting Investment banking net income in the first three quarters was 480 million yuan, a year-on-year increase of 29.9%, with impressive growth; however, due to scale and revenue proportion restrictions, its contribution to overall performance is limited, with future focus on project reserves and policy implementation pace. Main equity underwriting reached 24.1 billion yuan, a year-on-year increase of 14.2 times, with a market share increase of 1.68 percentage points to 2.5%, ranking eighth in the industry; there were 5 follow-on financing projects, with underwriting volume of 23.6 billion yuan, and 1 IPO project (Beijing Stock Exchange), raising 400 million yuan. Main bond underwriting reached 576.1 billion yuan, a year-on-year increase of 76.1%, with a market share increase of 1.44 percentage points to 4.7%, ranking sixth in the industry; local government bonds and financial bonds underwriting reached 357.5 billion yuan and 130.3 billion yuan, respectively. Investment recommendation: It is expected that the company's net profit attributable to shareholders for 2025-2027 will be 14.7 billion / 16.9 billion / 18.3 billion yuan, corresponding to year-on-year growth rates of +46.5% / +14.9% / +8.6%. The current stock price corresponds to a PB of less than 1 times in 2026, providing ample investment safety margin. Important Risks: 1) Market systemic risk; 2) Policy regulatory risk; 3) Operational and reform risk.