德银-中国-银行业-2018展望：当前周期仍有利于收益-20171215-27页_997kb

2018 Outlook for China AMCs: Earnings and Valuation Analysis

Core Content Summary

Current Cycle Favoring Earnings

• 2018 Outlook: The current macroeconomic and policy cycles are still favorable for the earnings of Asset Management Companies (AMCs) in China.
• Earnings Growth: Cinda and Huarong are expected to deliver mid- to high-teen earnings growth (14%-19% for both), with dividend yields of 6%-8%.
• Valuation: Cinda is the preferred stock pick due to higher-quality earnings and less exposure to shadow banking. It trades at 0.67x 2018E P/B and 4.8x P/E, with a target price of HK$3.75. Huarong is given a "Hold" rating with a target price of CNY3.90.

Key Trends in Distressed Asset Management

Traditional Distressed Asset (TDA) and Debt-to-Equity Swap (DES)

• TDA: The NPL acquisition and disposal business continues to benefit from elevated asset prices and rising disposal returns. AMCs are expected to focus on maximizing returns from existing portfolios rather than aggressive bidding.
• DES: The DES business is influenced by capital market conditions and the pace of IPO approvals. AMCs are less active than banks in the new market-driven DES deals. IFRS 9 may provide one-time revaluation gains for unlisted DES assets, boosting capital.
• RDA: Restructuring distressed assets (RDA) are expected to see yield recovery in 2018, similar to trust product yields. RDA is likely to grow with more supply from shadow banking and corporate sectors.

Supply and Demand Dynamics for Distressed Assets

• Supply: Distressed assets are forecast to grow at a 15% CAGR, reaching Rmb1.9tr by 2019E. More supply is expected from shadow banking and corporate sectors, not traditional banks.
• Demand: There are now 56 local AMCs with total registered capital exceeding Rmb118bn, and distressed funds are active in the secondary market, which benefits AMCs' NPL disposal.

Impact of PBOC's New Asset Management Rules

• Shadow Banking: The new rules may squeeze liquidity and increase asset quality pressure, creating more distressed asset opportunities.
• AMC Exposure: Huarong is more exposed to non-standardized credit assets (NSCA) with 28% of group assets, making it more vulnerable to the tightening policy. Cinda has only 6% NSCA exposure.

Sector Top Pick – Cinda

• Upside Earnings Potential: Cinda benefits from:
  • Larger TDA assets to capitalize on rising NPL prices.
  • A larger unlisted DES portfolio, which can benefit from elevated commodity prices and IFRS 9 revaluation gains.
  • A turnaround in life insurance (Happy Life) and bank subsidiaries (NCB), with expected profitability and rising ROE.
• Valuation Methodology: A sum-of-the-parts (SoTP) valuation approach is used.
• Risks: Key sector risks include property prices, investment losses, and weaker-than-expected distressed asset supply.

Valuation and Financial Performance

Cinda

• Target Price: HK$3.75 (up 7% from current price)
• Market Cap: HK$100,284m
• Dividend Yield: Expected to rise to 6.35% in 2018E
• Payout Ratio: 30%
• EPS Growth: 14% in 2018E
• BVPS Growth: 15.07% in 2019E
• P/E (2018E): 4.73x
• P/B (2018E): 0.66x
• ROAE (2018E): 14.61%
• ROAA (2018E): 1.35%
• Key Business Lines:
  • TDA: Expected to account for 14-15% of PBT
  • FIAM: Growing revenue and profit
  • FS: Increasing revenue and profit

Huarong

• Target Price: CNY3.90 (up 12% from current price)
• Market Cap: CNY87,904m
• Dividend Yield: Expected to rise to 6.1% in 2018E
• Payout Ratio: 30%
• EPS Growth: 10% in 2018E
• BVPS Growth: 15.26% in 2019E
• P/E (2018E): 5.19x
• P/B (2018E): 0.85x
• ROAE (2018E): 17.16%
• ROAA (2018E): 1.37%
• Key Business Lines:
  • TDA: Expected to account for 7% of PBT
  • FIAM: Revenue and profit growth
  • FS: Increasing revenue and profit

Investment Recommendation

• Cinda: Buy recommendation due to better quality earnings, less shadow banking exposure, and strong upside potential.
• Huarong: Hold recommendation due to higher exposure to shadow banking and potential earnings dilution from preferred and A-share issuances in 2018.

Key Ratios and Growth Projections

• Cinda:
  • Net Profit Growth: 15% in 2019E
  • Total Assets Growth: 14% in 2019E
  • Leverage Ratio: 14.19% in 2019E
  • CAR: 15.42% in 2019E
• Huarong:
  • Net Profit Growth: 15% in 2019E
  • Total Assets Growth: 14% in 2019E
  • Leverage Ratio: 16.7% in 2019E
  • CAR: 15.26% in 2019E

Conclusion

• The sector is expected to continue benefiting from the current macro and policy environment, with Cinda outperforming Huarong due to its stronger earnings quality and less exposure to shadow banking.
• Investors are advised to consider accumulating Cinda before its March 2018 results, as it is expected to deliver better performance in the coming year.