Value Partners Group announced on December 19 that its Value Partners Value Fund (with assets under management of 1.2 billion US dollars as of the end of October 2018) was officially approved by the China Securities Regulatory Commission on December 6, 2018, registered as the Beishang Mutual Recognition Fund under the Mainland and Hong Kong Fund Mutual Recognition Arrangement, and has appointed Tianhong Fund as the mainland agent for this fund. This mutual recognition of Beishang Fund validates our confidence in the continued growth of Value Partners Group's management scale. We believe that the driving force for growth comes mainly from the expansion of the product portfolio and the strengthening of the distribution network.

Net capital inflow. As of the end of November 2018, Value Partners Group's asset management reached US$151 billion (up 2.7% month-on-month and down 10.1% year-on-year). As of the end of the third quarter of 2018, Value Partners recorded a net capital inflow of $1.3 billion. We believe the net inflow was mainly supported by continued strong demand for fixed income funds and the global expansion of its distribution network. However, due to fluctuations in the market investment environment, we expect the scale of asset management for the full year of 2018 to record a year-on-year decrease. The net management fee rate expanded to 60 basis points, thanks to a strong inflow of flagship fixed income products with higher management fees.

Performance fees are under pressure. Since most of the company's private label funds are settled at the end of the year, combined with current fund performance, we think the company's performance fee revenue will be under pressure by the end of 2018. The average net worth of the company's private label stock funds (accounting for about 30% of the total asset management scale) was 17% lower than the high level of the previous round (all recorded at the end of 2017). At the same time, due to unfavorable market conditions, we expect the company to record losses on its own investments.

Distribution network expansion. By joining mutual fund recognition programs between China and Hong Kong to sell their traditional fund products to retail investors in mainland China, it is expected that the management scale of its value fund ($1.2 billion in October 2018) may be doubled. Subsequent high-interest equity funds ($2.4 billion in October 2018) are also expected to be included in mutual fund recognition plans between the two countries. By the end of June 2018, the asset management volume from mainland China exceeded 1 billion US dollars, an increase of about 30% since the end of 2017. This was due to new special account entrustment products, strong capital inflows from existing accounts, and private equity fund management products first launched in June (raised 150 million yuan at the end of June). In addition to expanding its business in Greater China, Value Partners plans to open multiple offices around the world to focus on alternative asset management products in the future, including private debt funds, fixed income hedge funds, and real estate private equity funds.

Maintain the buy rating. Given that its major private label funds reached an all-time high at the end of 2017, and the current global financial market environment is sluggish. We think the company's performance fee revenue will be under pressure by the end of 2018. However, due to continued strong demand for fixed income funds and global expansion, we still expect the company's net capital inflows to be supported. We updated our earnings forecast based on the new asset management scale and product net worth performance forecast. The new 17E/18E/19E earnings forecast was HK$0.12/HK$0.18/HK$0.23, a year-on-year change of -89%/+43%/+29%. We adjusted our target price forecast to 2019 and lowered it from HK$9.4 to HK$7.0, corresponding to 10% 19E P/AUM. The target price is still 23% higher than the current price, so we maintain our buying rating.