China Huarong, founded in 1999, is the largest full-license financial holding group in China with non-performing asset management business as its core. We give China Huarong buy rating mainly for the following three reasons:
1. Huarong's traditional non-performing asset management business will benefit from a stabilising real economy and an upward yield curve. We believe that Huarong is a pro-cyclical company. During the economic downturn, although the acquisition of non-performing assets increases rapidly, the speed and rate of return of non-performing assets disposal decline, which puts pressure on the company's capital level and profitability. However, in the economic upswing, although the growth rate of the acquisition of non-performing assets has slowed down, the speed of disposal of non-performing assets and the rate of return have increased significantly, thus improving the company's capital strength and profitability. In fact, since the initial signs of economic stabilization in 2017, Huarong's acquisition of new traditional non-performing assets has slowed down, while the growth rate of income from traditional non-performing assets disposal has begun to increase. Looking forward to 2018, in the context of economic stabilization and upward return on assets, we believe that financial companies with more aggressive asset allocation will stand out, while Huarong's traditional non-performing assets disposal speed and rate of return will be significantly improved.
two。 Huarong's restructuring non-performing asset management business will benefit from continued tight monetary policy and industry regulation. Since the fourth quarter of 2016, against the backdrop of CPI, PPI, rising house prices and rising pressure on RMB depreciation, the central bank's monetary policy and industry regulation have continued to be tight, which has led to a decline in the availability of effective credit, bonds and non-standard financing and pushed up financing costs in the real economy. In this context, financial companies with strong financing capacity on the liability side, great expansion potential on the asset side and stronger bargaining power will stand out. Huarong's restructuring non-performing assets management business (accounts receivable acquisition), which is similar to the supplement and substitution of traditional financing methods, can benefit from the improvement of financing demand and yield of this business.
3. We believe that Huarong will be more attractive than Cinda in 2018. Huarong and Cinda are the largest leaders in China's non-performing asset management industry and the only two listed non-performing asset management companies. We believe that Huarong will be more attractive in 2018 for two main reasons: (1) Huarong's business is purer than Cinda. In terms of the structure of assets and income, Huarong's non-performing asset management business accounts for a higher proportion. Huarong's non-performing asset management business accounts for 45 per cent of total assets and 57 per cent of net assets, while Cinda accounts for 39 per cent and 52 per cent, respectively. In terms of income structure, Huarong's non-performing asset management business accounts for 53 per cent of total revenue, while Cinda accounts for 35 per cent. Therefore, Huarong has a higher level of ROE and will benefit more from the improvement of the prospects of the non-performing asset management industry in the future.
(2) Huarong is preparing for the listing of A shares, which is expected to be completed in 2018. On the one hand, this will make the communication between the company and the capital market more sufficient, on the other hand, it will also create a more solid foundation for the company's future business expansion and profitability.
Cover for the first time to give a buy rating. We expect Huarong's basic earnings per share to reach 0.59,0.68 and 0.81 yuan respectively from 2017 to 2019, corresponding to year-on-year growth rates of 17%, 16% and 18%. The company's current valuation corresponds to 5.7 times 2017 PE and 0.95 times 2017 PB, with a dividend yield of 5.3%, while global comparable peer valuations correspond to 16 times 2017 PE and 3.9 times 2017 PB, with a dividend yield of only 3.7%. Based on the improvement of Huarong fundamentals and the safety margin of valuation, we think that the risk-return ratio of the company is excellent. Through the absolute valuation method and the relative valuation method, we give Huarong the target price of HK $5.02, corresponding to the 2018 target PB0.98 times, corresponding to 23% of the upside space, and give the buy rating for the first time.