2019 results are in line with expectations
Revenue in 2019 was 96.1 billion yuan, down 2% from the previous year; net profit from continuing operations in 2019 (excluding Happy Life Insurance) recorded 13.5 billion yuan, down 14% from the previous year, an improvement over 2018. Net profit (including Happy Life Insurance) increased 26% year over year, and Guimo's net profit increased 8% year over year. The 2019 performance is on a steady path of improvement. We expect it to be maintained for the next two years, mainly due to the sale of Happy Life's shares in 2020, the acquisition of non-performing assets at low prices against the backdrop of macroeconomic pressure, and the achievement of better non-performing disposal returns in 2021.
Development trends
Non-performing income from acquisitions maintained strong growth, and the share of revenue increased by 3ppt to 14%.
In 2019, non-performing income from the acquisition of operating enterprises increased 21% year on year, mainly due to 1) the accelerated pace of disposal, 2H19 disposal of non-performing assets increased 24% year on year, 2) the increased included return rate of 2H19, 15.3%, an increase of 1.5ppt over the previous year, 3) Furthermore, 2H19's new acquisition of non-performing assets increased 15% year on year, providing a basis for future revenue. The company stated that the average settlement price stabilized at around 30% off.
Conservative scale expansion, rising cost to revenue ratios, and prudent allocation have led to lower profit growth. 1) At the end of 2019, total assets increased by 1% and 2% year-on-year and month-on-month. The company focused on its main business and expanded steadily. What is particularly noteworthy is that in bad business, acquisitions and restructuring fell 13% and 6% year-on-month. We believe this trend reflects the company's greater focus on acquiring bad business in the operating category. This business includes a high reward ratio, which is where the company's core competitiveness lies. 2) The cost to revenue ratio increased 5 ppt year over year in 2019, mainly due to employee remuneration and inventory sales costs, while interest expenses benefited from declining market interest rates. The 2H19 debt cost ratio was 3.63%, down 37 and 31 bps from the same period on year to month. 3) Provision accrual increased 9% year over year in 2019 (-29% year on year in 2018), and provision planning was more prudent.
Compared to 2019 results, we are more concerned about the possibility of a steady increase in the company's profitability over the next two years. 1) The company may complete the sale of Happy Life Insurance in 2020. The previous announcement stated that the sale would bring in a profit of 4.42 billion yuan before tax. 2) In the current context of macroeconomics and corporate solvency pressure, we expect that poor supply in the market will increase, and Cinda may be able to expand its business at lower costs, including lower acquisition costs and lower interest costs under loose monetary policies. 3) Judging from the short duration of the epidemic, we expect Cinda to obtain considerable disposal benefits when the economy stabilizes in the future. Based on this, we expect the company's net profit growth rate to increase to around 10% in 2020 and 21. Furthermore, assuming a 30% dividend rate, the corresponding high dividend rate of 8.9% in 2020e is attractive.
Profit forecasting and valuation
Due to more prudent provision calculations, we lowered our 2020/2021 net profit by 2.8%/5.4% to 14.4 billion yuan/15.8 billion yuan. The current stock price corresponds to 0.3x 2020e P/B. Maintaining an outperforming industry rating and a target price of HK$2.30 corresponds to 0.5x 2020e P/B and 57% upward space.
risks
Bad businesses such as acquisitions and restructuring have gone bad for the second time, and asset quality performance fell short of expectations.