Main points of investment:

The performance was in line with expectations and the dividend rate exceeded expectations. China Huarong released its 2018 results on Thursday. Total revenue reached 127.2 billion yuan, down 16% from the same period last year. Net profit reached 1.58 billion yuan, down 93% from the same period last year. The main reasons for the decline in net profit are as follows: (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 declined, 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. The company's traditional non-performing assets grew by 15% year-on-year in 2018, compared with 136% in 2017. The rate of return on traditional non-performing assets disposal was 14.5%, compared with 11.9% in 2017. 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 company's net restructuring non-performing assets grew by 13% compared with the same period last year, compared with 22% in 2017. The rate of return on the disposal of corporate restructuring non-performing assets was 8.9%, which was 9.0% in 2017.

Maintain and increase holdings. We raised the company's EPS forecast for 2019-2021 to 0.04, 0.04, 0.05 yuan, corresponding to a year-on-year increase of 3.1%, 4.6%, 7.1%. 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 0.37 times 2019 PB, and we give the company an overweight rating of 0.43 times the 2019 PB and HK $1.96 target price, corresponding to 16% room for increase.