Company Background: Huarong International Financial Holdings (Huarong Financial Holdings) is a listed comprehensive financial services provider. The company was previously known as Tianxing International. On August 31, 2015, a wholly-owned subsidiary of China Huarong (2799.HK) purchased 1,702 million new shares of Tianhang International at HK$0.275 per share and became its controlling shareholder. The company later changed its name to Huarong Financial Holdings on October 29, 2015. China Huarong currently owns 51% of Huarong Financial Holding's shares. Huarong Financial Holdings is the only listing platform for China's Huarong Hong Kong business.

2015 Earnings Summary: The company changed its fiscal year end date from April 30 to December 31 to follow its parent company's fiscal year. From May to December 2015, Huarong Financial Holdings's revenue surged 262%, albeit compared to the 12 months ending April 30. In terms of continuing operations, the company achieved net profit of HK$155 million, compared with a loss of HK$70 million in 2014. [Note: The company terminated its gold and foreign exchange trading business, pawnbroker loan and financial leasing business.]

Revenue from the company's three major businesses - asset management, corporate financing, and securities services - accounted for 38%, 35%, and 27% of total revenue, respectively, while its operating profit accounted for 56%, 7%, and 17% of total operating profit. The company's operating profit margin rose from 42% to 98%, mainly due to an increase in the share of asset management business last year (including sales proceeds). As for the corporate financing business, the company achieved revenue of HK$59 million from May to December 2015, mainly from underwriting the IPO and bonds of parent company China Huarong.

Investment and financing services promote licensing business. Due to fierce competition in the Hong Kong market, the company will try to use investment and financing services to promote its licensing business, namely No. 1 (securities trading), No. 2 (futures trading), No. 4 (advising on securities), No. 6 (advising on institutional financing), and No. 9 (asset management). For example, the company spent HK$250 million to buy high-yield notes (annual interest rate of 9%) from Xingmei Culture (2366.HK) in January. The company also set up an investment fund holding 90% of the shares in February to invest in $40 million convertible bonds issued by China Soft International (0354.HK).

With strong support from the parent company. The company's business development will benefit from the following factors: 1) strong support from the parent company; 2) Huarong's established brand image; 3) the ability to easily obtain financing through China Huarong; and 4) continuous recruitment of talents.

Business goals for 2016: The company currently has no specific return on equity target. However, management said that its parent company's current forecast return on net assets of 17.1% for 2016 (based on market consensus predictions) can be used as a reference.

There is a need to expand the share capital base: Currently, the company's leverage ratio (assets/equity) is about 7.3 times, far higher than that of its Hong Kong-listed peers. Since the $500 million loan is provided by the parent company, we don't think this is a big problem, but we believe the company will consider stock valuation: the company's net price-to-market ratio is 10.1 times, and the price-earnings ratio (annualized) is 33 times. However, if the company issues 20% new shares at the current price (accounting for the expanded share capital), its net market ratio will drop to 3.6 times.