Event: China Renaissance Holdings Ltd. released the mid-2021 report, recording total income and net investment income of 2.458 billion yuan, + 110.6% year-on-year, net profit of 1.228 billion yuan, + 201.5% year-on-year. Annualized ROE38.4%, year on year + 23.1ppts. Excluding Huaxing Securities business ROE reached 47%, year-on-year + 27ppts.

Comments:

Revenue and profits increased sharply in the first half of the year compared with the same period last year. China Renaissance Holdings Ltd. achieved total income and net investment income of 2.458 billion yuan in the first half of 2021, + 110.6% year-on-year, and net profit of 1.228 billion yuan, + 201.5% year-on-year, mainly due to the rapid growth of investment and investment banking underwriting. Due to the improved efficiency in the use of its own funds and the increase in the proportion of its own funds invested in Huaxing Fund, the Group's annualized ROE increased to 38.4 (18.8 per cent in 2020).

Investment income promotes the strong growth of the investment management business. The company's investment management business performed well in the first half of 2021, with income and net income of 1.32 billion yuan and YoY + 105.3%, which increased 3.4ppts to 53.7% of total revenue compared with the end of 2020. The operating profit was 990 million yuan, + 152.2% compared with the same period last year. Operating margin was + 14.0ppts to 75.3% compared with the same period last year. The high increase in investment management business income was mainly due to the substantial increase in self-managed private equity funds and third-party funds, resulting in a year-on-year increase in net investment income of 165.3% to 1.12 billion yuan. As of the first half of the year, the average internal rate of return of self-managed private equity funds and third-party funds was 46.8% and 36.8% respectively, and the average IRR of completed funds was 54%. The management fee income is-2.3% compared with the same period last year, mainly due to the gradual withdrawal of some projects in the previous fund and the slowdown in the inflow of newly subscribed capital. Taking into account the good performance of the fund, as well as the raising of RMB and US dollar funds in the third quarter of this year and four issues next year, and the broadening of the category of new funds (mezzanine funds and hedging mother funds), the size of the fund is expected to expand (the size of assets that generate management fees in 2022-2023e is expected to increase to 40 billion), resulting in a steady increase in the scale of management fees. Unrealized carried interest income in the first half of 2021 was + 48.1% to 1.2 billion yuan compared with the same period last year, totaling 6 billion yuan. 1H21 did not realize a big increase in net carried interest, which was + 55.4% to 290 million yuan compared with the same period last year, totaling 1.9 billion yuan, or + 171.4% year-on-year. In the next 2-3 years, as the fund continues to enter the exit stage, the cumulative unrealized net carried interest will be gradually released. Considering that 1) the excellent investment income promotes the steady increase of AUM related to management fees, 2) the fund will usher in the withdrawal period, and the unrealized carried interest income will be gradually released, 3) the proportion of self-owned capital investment will increase to 10%, we expect the investment management business to maintain steady growth and is expected to thicken ROE.

Investment bank underwriting business and secondary market distribution performance is outstanding. 1H21 investment banking business income and net investment income 740 million yuan, YoY+168%, revenue accounted for + 6.5ppts to 30.2%, but down 6.5ppts from 36.7% at the end of 2020. Operating profit of 280 million yuan, YoY+627.5%.

Operating profit margin increased by + 24.2ppts to 38.3%. The performance is mainly due to: 1) Stock underwriting + 1411.9% compared with the same period last year, due to the low base last year and the growth of star enterprises' IPO projects (such as Kuaishou Technology, JD Logistics, Inc., Baidu, Inc., Lianyirong, etc.) in the first half of the year. Huaxing played the role of sponsor in Kuaishou Technology's IPO project, accounting for 24% of the underwriting share. In the first half of the year, Hong Kong IPO underwriters ranked sixth, while Chinese underwriters ranked third. 2) Stock sales, trading and brokerage achieved + 108.2%, and the distribution status of the secondary market increased steadily. The brokerage business in Hong Kong rose to 16th, while Chinese investment banks ranked third. We believe that investment banking revenue is affected by stricter regulatory policies in China and the United States, and investment banking business is under pressure to some extent in the second half of the year, but we believe that the company is expected to pass through the industry cycle. it is mainly because: 1) the company has increased the integration of investment banking business in the past few years, broadened its business scope, and at the same time increased talent investment to provide customers with more comprehensive and life-cycle solutions, and the results will gradually show. 2) at present, the investment of talents and the adjustment of organizational structure are beginning to bear fruit, and a rich project reserve has been accumulated in the next 6-18 months, mainly in Hong Kong stocks.

Huaxing Securities turned losses into profits in the first half of the year, and the internal synergy effect appeared. The income and net investment income of Huaxing Securities reached 350 million yuan, while YoY+81.4%, made a profit of 160 million yuan, + 267.1% year-on-year, turning a loss into a profit compared with the end of 2020. The company adheres to the concept of "boutique investment bank, innovative securities firm", and its operating efficiency has improved significantly. In terms of investment banking business, the company has completed the listing of two project disciplines and completed a major asset restructuring. Next year, four IPO will be listed on the gem and gem, and the scale of investment banking business is expected to continue to improve. In terms of proprietary business, after the company has obtained its own license, the rate of return on capital has increased, superimposed by the contribution of Kecheng board and investment income, and self-operating income in the first half of the year has increased by 56% compared with the same period last year. The synergy between Huaxing Securities and China Renaissance Holdings Ltd. is gradually emerging, which is expected to open up China Renaissance Holdings Ltd. 's investment banking business, realize the coordination of research and business implementation, and give full play to organizational advantages. Huaxing Securities through brokerage, asset management, wealth business license cooperation and product investment research, actively layout innovative business.

Wealth management has developed steadily. As of 1H21, the wealth management AUM exceeded 7 billion yuan, compared with the target of + 105.9% AUM100 at the end of 2021 at the beginning of the year. The company aims at the wealth group of the new economy, providing personal asset allocation of ultra-high net worth people and cash management services of new economy enterprises, which may further sink the wealth group in the future. In the first half of 2021, the company team continued to upgrade, improve the organizational structure and set up a professional wealth management service organization with frontline sales and investment consultants as service output and product managers supported by experts. With the steady development of wealth management business, customer development and the gradual establishment of product system, the team continues to upgrade and introduce domestic wealth leaders, laying the foundation for steady business expansion. In addition, the advantages of internal synergy highlight, wealth management with alternative investment and new economic investment as the core, relying on the group Hong Kong-US stock IPO and Huaxing characteristic equity project will provide a subscription path for wealth customers.

Profit forecast and investment rating: with the increase in the proportion of self-owned funds invested in New economy funds (10%), the unrealized release of carried interest income, the steady improvement of AUM driven by excellent performance returns, and the raising of the fourth phase of the fund from the third and fourth quarters, resulting in an increase in management fee income, investment management income is expected to continue to grow. The leading position of the investment banking business is significant, the head effect is further enhanced, and the rich project reserve and talent structure are expected to accumulate strength for the investment banking business and play a role of drainage. Although there are uncertainties in the regulatory policies of China and the United States, we are optimistic about the depth of the company's project reserves and its ability to pass through the cycle. Huaxing Securities will benefit from the huge reserves of investment banking and the improvement in the efficiency of the use of funds after obtaining a proprietary license, and ROE is expected to improve gradually. We expect the profit growth rate from 2021 to 2023 to be 37.8%, 25.5% and 24.5%, corresponding to PE5.7x/4.5x/3.7x. Through the segment valuation method, the target price of HK $29.56 in 2021 is obtained, maintaining the "buy" rating.

Risk factors: economic downside risks, intensified trade frictions between China and the United States, stricter regulatory policies between China and the United States, fluctuations in the market value of invested projects, etc.