The performance exceeded expectations. China Huarong released interim results in 2019. The total income reached 56.8 billion yuan, an increase of 0.64% over the same period last year. The net profit of homing reached 2.5 billion yuan, up 268% from the same period last year. Basic earnings per share reached 0.06 yuan. The main reasons for the substantial increase in net profit are: (1) due to the rise in the domestic stock market in the first half of 2019, the valuation of some equity investments held by the company increased; (2) the company continued to reduce leverage and optimize the debt structure, financing scale and interest rates have decreased, interest expenses have decreased; (3) the company has returned to the main business of non-performing assets to improve the efficiency of asset disposal, and the income of the main business has increased.

The core business faces challenges. The net growth rate of the company's traditional non-performing assets was 12.6% year-on-year. In mid-2018, the year-on-year growth rate was 80.1%. At the end of 2018, the year-on-year growth rate was 15.5%. The net growth rate of the company's restructuring non-performing assets was-1.4% at the end of 2018 compared with the same period last year. The rate of return on traditional non-performing assets disposal was 11.2% in mid-2018, 15.5% in mid-2018, 14.5% in 2018, and 8.2% in mid-2018, 8.7% in mid-2018, and 8.9% in 2018. In mid-2019, the proportion of three-stage non-performing debt assets in the acquisition and restructuring category was 11.5%. At the end of 2018, it was 9.8%; and the provision coverage rate of three-stage non-performing debt assets was 64%. At the end of 2018, it was 67.7%. The company's core tier one capital adequacy ratio and total capital adequacy ratio decreased to 9.6% and 12.6% from 12.3% and 13.0% at the end of 2018.

Looking ahead, we expect its core business to continue to face challenges. As far as the traditional non-performing assets management business is concerned, the economic downward pressure will affect the disposal speed and rate of return of non-performing assets, which is not conducive to the improvement of its profitability and capital quality, and then limit its ability to purchase non-performing assets. In terms of restructuring non-performing assets management business, due to the relatively high proportion of real estate-related business, government restrictions on real estate financing and mortgage interest rate guidance may affect the company's restructuring non-performing assets management business. In addition, the slowdown in economic growth will also further increase asset quality risks and provision pressure.

Maintain and increase holdings. We have raised the company's EPS forecast for 2019-2021 to 0.13, 0.14, 0.15 yuan, corresponding to a year-on-year increase of 221.4%, 8.1%, 9.1%. The company's share price now corresponds to 0.27 times the 2019 PB. We have lowered the company's 2019 target PB to 0.31 times and reduced the target price from HK $1.96 to HK $1.33. Maintain the overweight rating corresponding to 13.4% of the upside space.