20170331-广发证券_香港_-Distressed_Asset_Management_Industry_A_booming_industry_with_expanding_market_size_17页_785kb

Summary of the Distressed Asset Management Industry in China

Core Content

The distressed asset management (DAC) industry in China has experienced significant growth and development, driven by an increasing supply of distressed assets and evolving regulatory frameworks. The industry is dominated by the Big Four AMCs, which include China Huarong, China Great Wall, China Orient, and China Cinda. These AMCs were originally established to manage distressed assets from state-owned banks and have since expanded their operations to include non-financial institutions. In addition to the Big Four, local AMCs and non-licensed AMCs have emerged as key players, particularly with the relaxation of regulations and the encouragement of market-oriented operations.

Main Viewpoints

• Industry Growth: The DAC industry has grown rapidly since 2013, with a surge in both financial institution (FI) and non-financial enterprise (NFE) distressed assets. This has supported the expansion of the industry.

• Regulatory Evolution: The government has introduced several regulatory measures to promote marketization and diversification. These include:

  • Relaxing restrictions on local AMCs, allowing up to two per province.
  • Permitting local AMCs to dispose of distressed assets via debt restructuring and external transfers.
  • Reducing the minimum package size for distressed asset transfers from 10 to 3 items.
  • Encouraging market-oriented debt-to-equity swaps and promoting financial services that are more flexible and diverse.

• Business Models:

  • Acquisition-and-Disposal: This model involves buying distressed assets at a discount and selling them at a higher value. It has seen a resurgence in recent years, with approximately 40% of new distressed debt asset acquisition costs attributed to this model.
  • Acquisition-and-Restructuring: This model focuses on restructuring existing debt assets to improve their value. It is more complex and involves three-party agreements. It has shown pro-cyclical characteristics due to its reliance on market interest rates and customer risk premiums.

• Performance Metrics:

  • IRR (Internal Rate of Return): Demonstrates counter-cyclical characteristics, as it remains stable even during economic downturns, primarily due to shortened disposal cycles.
  • ROA (Return on Assets): Shows pro-cyclical behavior, as it decreases during economic downturns due to the impact of increased asset acquisition costs.

• Market Trends:

  • The Big Four AMCs have maintained their dominance due to their extensive experience, capital strength, and professional expertise.
  • Local AMCs are growing in number and gaining market share, supported by new policies and relaxed regulations.
  • Non-licensed AMCs are also participating, focusing on niche segments such as property and small/micro loans.
  • The industry is becoming more segmented, with various types of AMCs catering to different asset types and market needs.

Key Information

Types of Distressed Asset Management Companies in China

Distressed Asset Sources

• FI Distressed Assets: Mainly distressed loans and other debt assets from large commercial banks, joint-stock banks, and non-bank financial institutions.
• NFE Distressed Assets: Overdue receivables, receivables expected to default, and receivables from debtors with liquidity issues. NFE distressed assets contributed over 50% of newly acquired distressed debt in 2012–2015.

Regulatory Documents

Business Model Characteristics

• Acquisition-and-Disposal:

  • Core Features: Acquiring distressed assets from financial institutions, shortening disposal cycles to maintain IRR, and using various disposal methods.
  • Performance: IRR remains stable (15–20%), while net disposal returns have dropped significantly. The model is counter-cyclical in IRR but pro-cyclical in ROA.
  • Trends: The proportion of new distressed debt acquisition costs attributed to this model has increased to ~40% due to a surge in FI distressed assets.

• Acquisition-and-Restructuring:

  • Core Features: Restructuring debt assets, enhancing their value, and providing financing to companies with flawed credit profiles.
  • Performance: Monthly annualized returns declined to ~11% in 1H16. It is pro-cyclical due to its dependence on market interest rates and risk premiums.
  • Trends: The business is focused on the property sector and fixed assets as credit enhancements. It is a key part of the Big Four AMCs' diversified financial services.

Future Outlook

• The Big Four AMCs are facing capital adequacy bottlenecks, with their capital adequacy ratios approaching the minimum of 12.5%.
• To sustain growth, they are moving towards full-service financial operations, aiming to become financial holding groups.
• Local AMCs are expected to grow and compete more effectively with the Big Four due to policy support and relaxed regulations.
• Non-licensed AMCs are gaining traction, especially in niche segments, as the market becomes more segmented and competitive.

Conclusion

The distressed asset management industry in China is evolving rapidly, driven by regulatory changes and market dynamics. The Big Four AMCs remain dominant, but local and non-licensed AMCs are increasingly contributing to the industry. The shift towards more market-oriented operations and diversified financial services is reshaping the landscape, with the acquisition-and-restructuring model becoming more prominent. As the market continues to grow, the industry is expected to become more competitive and segmented, with a focus on efficiency, innovation, and value-added services.