The performance was in line with expectations. China Cinda announced 2019 interim results. Total revenue reached 53.3 billion yuan, down 2.7% year on year. Guimu's net profit reached 8.69 billion yuan, up 0.8% year on year. Basic earnings per share reached $0.23. The company's net traditional non-performing assets grew 4.5% year on year, the year-on-year growth rate in mid-2018 was 65%, and the year-on-year growth rate at the end of 2018 was 27%; the corporate restructuring net non-performing assets grew -6.22% year on year, the year-on-year growth rate in mid-2018 was 10%, and the year-on-year growth rate at the end of 2018 was 0.3%. The return on disposal of traditional non-performing assets was 15.9%, 17.4% in mid-2018, and 15.5% for the full year of 2018; the return on disposal of restructured non-performing assets was 8.5%, 8.1% in mid-2018, and 8.4% for the full year of 2018.

The impairment ratio of corporate non-performing asset acquisitions and restructuring was 2.18% in mid-2019, 2.23% in mid-2018, and 3.13% at the end of 2018; provision coverage was 209%, 210% in mid-2018, and 180% at the end of 2018. The company's core Tier 1 capital adequacy ratio and total capital adequacy ratio stabilized at 10.4% and 16.0% from 10.2% and 16.0% at the end of 2018.

The core business is facing challenges. As far as traditional non-performing asset management businesses are concerned, downward economic pressure will affect the speed and disposal yield of the company's non-performing assets, which is not conducive to the improvement of its profit situation and capital quality, thereby limiting its ability to acquire non-performing assets. As far as the restructuring type of non-performing asset management business is concerned, since real estate-related business accounts for a relatively high share, the government's restrictions on real estate financing and guidance on mortgage interest rates may affect the company's restructuring non-performing asset management business. Furthermore, the slowdown in economic growth will further increase asset quality risks and provision pressure.

Valuations are under pressure. Following on June 10, the central bank provided credit enhancement for interbank deposits issued by Bank of Jinzhou by providing credit risk mitigation tools, and on July 28, Industrial and Commercial Bank of China Financial Asset Investment Company, Cinda Asset Management Company, and Great Wall Asset Management Company announced the signing of an equity transfer agreement to acquire Bank of Jinzhou shares. After the transaction was completed, the three institutions collectively owned 25% of the bank's shares, with Cinda holding 6.49% of the shares. Bank of Jinzhou is an urban commercial bank in Liaoning Province, with total assets of 748 billion yuan as of the end of the first half of 2018. It failed to disclose its most recent financial statements for 2018 due to the resignation of its previous auditor, which previously changed auditors three times since May 2018. According to its disclosed results for the first half of 2018, loans from high-risk industries such as manufacturing, mining, and wholesale and retail industries accounted for 63% of total loans, while retail loans accounted for only 4%. This put pressure on its capital strength and capital quality. The non-performing loan ratio and overdue loan ratio were 1.26% and 3%, respectively, and the core Tier 1 capital adequacy ratio was only 7.95%. Although the acquisition had little direct impact on Cinda, the market is still concerned that the company will continue to participate in the restructuring of the financial institutions in question, thereby suppressing the company's valuation.

Lower to an increase in holdings. We maintain our earnings per share forecast of RMB 0.30 for 2019 (up 3.6% year over year), RMB 0.32 for 2020 (up 5.2% year over year), and RMB 0.34 for 2021 (up 7.3% year over year). Currently, Cinda's stock price corresponds to 0.37 times 2019 PB. We lowered the company's 2019 PB target to 0.45 times and lowered the target price from HK$2.58 to HK$1.90. In response to an upward space of 19.5%, we downgraded our rating to increase holdings.