Focus of opinion
Investment suggestion
China Cinda released its 2021 results. The profit before provision for the whole year increased by-16% compared with the same period last year, and the net profit from continuing business activities increased by 18% compared with the same period last year. 2H21 net profit before provision increased by-10% year-on-year, and net profit from continuing business activities increased by 51.6% year on year. The company's pre-provision profit was lower than expected, mainly due to a significant decrease in non-performing debt assets income measured by amortized cost compared with the same period last year (corresponding to the acquisition and restructuring of bad business), a decline in inventory sales profit, an increase in debt cost ratio, and so on. Considering that there is still uncertainty about the impact of recent real estate risks on Cinda's business, we downgrade the company to neutral.
The reasons are as follows:
Non-performing sector business risk preference decreased, the rate of return fell at the same time. In 2021, the revenue of the company's non-performing assets management sector decreased by 3.8% compared with the same period last year, of which 1) the non-performing business income of acquisition and operation increased by 32.5% compared with the same period last year, mainly due to the acquisition side expanding the source of asset acquisition and the disposal side speeding up disposal; the internal rate of return has declined due to the company's increased efforts to dispose of long-term assets. 2) the non-performing business income of acquisition and restructuring decreased by 29.8% compared with the same period last year, mainly due to the company's more prudent investment and the decline in business scale and yield; 3) the income from debt-to-equity swap business increased by 146.7% compared with the same period last year, mainly because Cinda chose the right time to reduce its holdings of some debt-to-equity projects in 2021.
The financial services sector maintained stable operation. At the end of 2021, the revenue of the company's financial services sector increased by 0.2% compared with the same period last year, the pre-tax profit of continuing operating activities increased by 4.0% to 5.1 billion yuan, and the size of assets increased by 9.2% to 577.4 billion yuan compared with the same period last year. This is mainly due to the expansion of securities, futures and fund management subsidiaries, Jingu Trust and Cinda Leasing.
Pay attention to the impact of real estate industry risks on the company's asset quality and new business opportunities. The real estate industry accounts for 42.0% of Cinda's acquisition of restructuring non-performing debt assets, and we expect that the recent exposure of real estate risks may be a drag on Cinda's asset quality. By the end of 2021, the balance of Cinda's acquisition and restructuring of non-performing debt assets fell 18.2 per cent to 148.8 billion yuan from the previous year, the non-performing rate increased by 52bp to 4.75 per cent, and the proportion of full-caliber three-stage assets increased by 35bp to 3.31 per cent. In addition, the recession in the real estate industry also has a certain drag on Cinda's performance.
We believe that the company is still in a period of business adjustment, and profitability is expected to be stable at the current level.
In 2021, the company's ROAE disclosure value was 7.15%, a year-on-year decline in 1.11ppt. We expect the company's profitability to stabilize at the current level during the transition period of business adjustment, and expect the company's balance sheet to be more robust after the transformation, and the ability to dispose of non-performing assets and profitability to go further.
What is the biggest difference between us and the market? There is uncertainty about the impact of real estate risk on the quality of corporate assets.
Potential catalysts: increase in the proportion of assets in three stages, increase in the acquisition of sufficient non-performing debt assets, and increase in impairment losses.
Profit forecast and valuation
Taking into account the uncertainty caused by real estate risks to Cinda's profitability, we cut the 23-year net profit forecast for 2022 Universe by 8.4% to 1.27 billion yuan. The current share price corresponds to 0.3x/0.3x 2022/23EP/B. Downgrade the company to neutral, with a target price of 14.4 per cent to HK $1.66, corresponding to 0.3x/0.3x 2022max 23e Phand B, with 15.3 per cent upside.
Risk.
The company's real estate exposure was lower than expected, and asset quality improved better than expected.