China Huarong yesterday released its 2017 results. Total revenue reached 128 billion yuan, an increase of 35% over the same period last year. The net profit reached 22 billion yuan, an increase of 12% over the same period last year. The company's traditional non-performing assets grew by 136% year-on-year in 2017, compared with 22% in 16 years, and the company's restructuring net non-performing assets grew by 22% year-on-year, compared with 21% in 16 years. The rate of return on the disposal of traditional non-performing assets was 11.9%, compared with 20.2% in 2016 and 19.2% in the first half of 2017. The rate of return on the disposal of corporate restructuring non-performing assets was 9.8%, compared with 12.5% in 2016 and 9.8% in the first half of 2017. The impairment rate of restructured non-performing assets rose to 2.25 per cent from 1.98 per cent and 1.87 per cent in 2016 and the first half of 2017, while provision coverage decreased slightly to 310 per cent from 444 per cent in 2016 and 381 per cent in the first half of 2017.

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 2017, the availability of social financing declined due to monetary policy and financial regulation, which in turn affected the speed and rate of return of Huarong's traditional non-performing assets management and disposal. Looking forward to 2018, our macro team expects GDP growth to rebound to 6.9% and 7.1% in 2018 and 2019 to 2.3% 2.5%. Against the backdrop of economic stabilization and mild inflation, we believe that monetary policy and industry regulation will be relatively moderate in 2018, while Huarong's traditional non-performing assets disposal speed and yield will bottom out.

Huarong's restructuring non-performing asset management business will be improved. Huarong's restructuring non-performing assets management business (accounts receivable acquisition) is similar to the supplement and substitution of traditional financing methods. From the perspective of industry distribution, real estate accounts for about 60%. Under the background of the continuous limitation of real estate financing, Huarong's restructuring non-performing asset management business will benefit from the improvement of the financing demand and yield of the business. In terms of asset quality, as Huarong still disposed of non-performing assets acquired before 2016, Huarong strengthened its risk management after 2016, and the real economy gradually stabilized in the second quarter of 2016. therefore, we expect that the asset quality of Huarong restructuring non-performing assets will gradually improve in 2018.

Maintain the buy rating. We lowered Huarong's basic earnings per share from 2018 to 2019 to 0.64 and 0.74 yuan, corresponding to year-on-year growth rates of 14% and 16%. The company's current valuation corresponds to 0.70 2018 PB, with a dividend yield of 6.6 per cent. 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. We have lowered the target price of Huarong to HK $4.65, corresponding to the 2018 target PB0.90 times, corresponding to 28% of the upside, and maintain the buy rating.