The company is a leader in the domestic non-performing asset management industry, and the extremely low valuation reflects pessimistic market expectations. The company will return to the main business of non-performing assets, continue to optimize its business structure, and handle its paper assets more prudently, which will help to travel light in the future. Flexible asset allocation capacity and rich business experience will be the long-term competitiveness of the company to maintain the "overweight" rating.
In 2019, China Cinda achieved operating income of 96.1 billion yuan (down 2% from the same period last year) and net profit of 13.05 billion yuan (up 8.4% from the same period last year). The profit growth for the whole year was mainly contributed by Happy Life, while the operating income from non-performing assets decreased (especially the acquisition and restructuring business). In addition, the fair value loss of some financial investments (funds, asset management plans, trust plans, financial management, etc.) and the decline in gross profit of some Cinda real estate projects have a certain drag on performance.
The operation of non-performing assets continues to optimize its structure. The company's annual operating income from non-performing assets decreased by 4% compared with the same period last year. Specific sub-business point of view: 1) the continued prudent disposal of acquisition and restructuring business is the main reason for the decline in operating income of non-performing assets, and the related non-performing debt assets decreased by 4.9% for the whole year. At the same time, increased risk resolution led to an increase in losses arising from the disposal of endogenous non-performing assets (2 billion of disposal losses of non-performing debt assets measured at amortised cost, compared with a gain of 170 million in 2018). 2) the active layout of the acquisition and operation business, seizing the market opportunity to add new acquisitions and improve the disposal income, achieving a 20.7% increase in income. 3) the debt-to-equity swap business steadily expanded, with book value increasing by 10.2% compared with the same period last year, but due to the reduction of dividends on some assets, the income from debt-to-equity swap business decreased by 11.8%.
The performance of financial services has improved significantly driven by the insurance business. For the whole year, financial services business income and pre-tax profits increased by 15% and 1092% respectively compared with the same period last year. 1) Happy Life is the most important growth point, turning losses into profits for the whole year (2018 / 19 pre-tax profit was-3.71 billion / 490 million), but the company signed a transaction contract at the end of 2019 for the transfer of its entire stake in Happy Life. The deal is expected to be completed in 2020. 2) the profit of South Commercial Bank improved in the second half of the year, with year-on-year income and pre-tax profit respectively + 11.8% and 12.3% compared with the same period last year (+ 15.9% + 12.3%), mainly due to an increase in provision in the first half of the year (loan impairment loss in the first half / year + 44% / + 0.4%); 3) among the rest of the business, securities futures and fund business and leasing business improved, while trust business declined.
On the cost side, interest payments benefit from a decline in interest rates, while asset impairment losses increase. 1) interest expenditure year-on-year-4.1% (year-on-year + 0.1% in the first half of the year), mainly due to the downward interest rate in the beneficiary market, which can still achieve interest cost savings while the balance of interest-bearing liabilities is basically the same as the same year-on-year. 2) in addition, there was a significant increase in expenses such as asset impairment loss, employee compensation, depreciation and amortization, of which asset impairment loss increased by 9.7% year-on-year (up 9% in the first half of the year), mainly due to the impairment of equity held by joint ventures and joint venture companies.
Risk factors: faster-than-expected decline in macroeconomic growth; risk of fluctuations in the real estate market; tighter regulation of AMC.
Investment advice: the company is the leader in the domestic non-performing asset management industry, and the extremely low valuation reflects pessimistic market expectations.
The company will return to the main business of non-performing assets, continue to optimize its business structure, and handle its paper assets more prudently, which will help to travel light in the future. Flexible asset allocation ability and rich business experience will be the long-term competitiveness of the company.
Considering that the company may sell its stake in Happy Life in 2020, which will bring an one-time investment return, the company slightly raised its EPS forecast in 2020 to 0.34 yuan (the original forecast is 0.33 yuan), corresponding to 3.94x PE and 0.34xPB in 2020, and added 0.37 yuan in EPS forecast for 21 years, maintaining the "overweight" rating.