The adjustment of accounting standards has led to a decline in earnings growth. China Huarong issued a profit warning on Thursday night. The net profit of shareholders belonging to the parent company for the year ended December 31, 2018 fell by about 90% compared with the same period in 2017. The main reasons for the above changes are: (1) the company began to implement IFRS 9-Financial Instruments in 2018. Under the influence of large fluctuations in the capital market, the valuation of some of the financial assets held by the company measured at fair value decreased, resulting in a large floating loss of fair value changes. (2) under the influence of the company's contraction of non-main business, non-advantageous business, market environment and credit risk exposure, non-financial subsidiaries have incurred large attributable losses belonging to the shareholders of the parent company; (3) affected by the changes in the external economic situation, out of prudent consideration, the company has made a large provision for some of the financial assets held. (4) due to the influence of management changes on financing costs and liquidity requirements, the company's interest expenditure has increased significantly.

reform from the bottom. On the whole in 2018, the supervision of the financial industry shows a strict trend, in order to more standardize the development of the financial industry and encourage financial institutions to return to their origin and main business. As far as the non-performing assets management industry is concerned, according to the capital management methods of the non-performing assets management industry, traditional non-performing assets, restructuring non-performing assets, debt-to-equity assets and financial investments are calculated according to the risk weight of 50%, 100%, 150% and 400% respectively, which shows that regulators encourage non-performing assets management companies to return to the main business of non-performing assets management. We expect that the company will strive to achieve a smooth transition and firmly return to the main business of non-performing assets management.

Marginal improvement. Looking to the future, we believe that there is room for marginal improvement in the company's non-performing asset management business. First of all, the traditional non-performing asset management business will benefit from the rise in non-performing loans and the easing of competition. With the increasing downward pressure on the economy and the expansion of banks' exposure to private small and micro loans, the pressure on banks' non-performing loans will further increase. For the company, on the one hand, the scale of traditional non-performing assets available for acquisition will continue to increase, on the other hand, since 2018, local non-performing asset management companies have ended the aggressive expansion after the intensive establishment of the previous two years, and the pace of acquisition has slowed down significantly, alleviating the competition in the traditional non-performing assets market, so we expect the company's traditional non-performing assets business to maintain a steady expansion and further improve its bargaining power. Second, the restructuring of non-performing asset management business will hit bottom against the backdrop of policy recovery. In order to alleviate the increasing downward pressure on the economy, the government has launched a series of policies to encourage financial institutions to increase their support for the real economy. While the company's restructuring non-performing asset management business as a supplement to the traditional financing channels, its expansion speed and yield will hit bottom and pick up in the context of policy recovery.

The worst is over. We downgrade the company's EPS forecast for 2018-2020 to 0.033, 0.034, 0.035 yuan, corresponding to a year-on-year growth of-94%, 3%, and 4%. Although we believe that China Huarong is a pro-cyclical company, its low valuation has provided it with a high margin of safety. The current share price corresponds to 0.33 times 2019 PB, and we give the company a target price of 0.4 times 2019 PB and HK $1.94, with an overweight rating of 13%.