1H20 results are in line with previous profit warnings
1H20 revenue increased 1% year on year, and net profit of the mother increased -27% year on year. In line with previous profit warnings, the large negative profit increase came from changes in the fair value of financial assets and increased provision plans. The company pursued steady scale expansion and provision planning.
Development trends
The scale of non-performing loan assets is expanding steadily. Total assets at the end of 1H20 increased slightly by 1% compared to the end of last year. Among them, the non-performing asset management sector grew 3% and the financial services sector grew -12%. 1) In the non-performing asset management sector, the size of the acquisition of operating non-performing asset management/acquisition and restructuring of bad asset management/debt-for-equity swaps increased by -3%/+4%/0%, respectively, compared to the end of last year. New acquisitions of operating non-performing assets increased -27% year-on-year, mainly due to the impact of the epidemic and the company's more prudent collection principles. Research reported that 1H20 banks did not outsource much (the number of transactions received from stock banks decreased significantly year-on-year), and the purchase price increased slightly compared to 2H19; the scale of acquisition and restructuring of non-performing assets increased. We expect enterprises to demand higher short-term liquidity financing and better prices after the pandemic. 2) In the financial services sector, the downsizing of Cinda Leasing and Happy Life Insurance led to negative scale growth.
Changes in the fair value of other financial instruments have dragged down revenue growth, and revenue fluctuations have stabilized in acquisitions and restructuring businesses. The revenue of 1H20 companies increased 1% year on year. Among them, the non-performing asset management sector increased 0% year on year, and the financial services sector increased 1% year on year. 1) In the non-performing asset management sector, 1H20's acquisition of operating non-performing asset management/acquisition and restructuring of bad asset management/debt-for-equity swaps increased -3%/+8%/-71% year-on-year respectively. The disposal volume of non-performing assets acquired and operated increased -20% year-on-year. We expect the disposal yield to fall slightly by 0.6ppt to 14.7% month-on-month, and fair value bucked the trend and increased 19.2% year-on-year, reflecting the company's strict prudent pricing; the average monthly annualized yield of non-performing assets acquired and restructuring increased 0.7ppt to 9.2% year on year (down slightly 0.5ppt from half-year to year); the fair value of other financial instruments represented by debt-for-equity swaps declined due to the impact of the economy and the epidemic, and fair value increased -80% year-on-year, significantly dragging down operations Receive. 2) In the financial services sector, the revenue growth rate of Cinda Leasing and Nanyang Commercial Bank dragged down, while Cinda Securities and others performed well.
Asset impairment losses increased 34% year over year, and increased provision planning efforts dragged down net profits. Considering the pressure of the macroeconomic downturn and the impact of the epidemic, the company has significantly increased its provisions and plans for the acquisition of restructuring-type non-performing assets. The non-performing ratio of non-performing assets acquired and restructured at the end of 1H20 increased 66 bps to 3.53% month-on-month, and provision coverage decreased by 5 ppt to 195% month-on-month.
Profit forecasting and valuation
Considering the pressure on the company's potential asset quality, we raised credit costs and lowered the 2020/2021 net profit by 23.3%/16.9% to 10.1 billion yuan/11.5 billion yuan. The current stock price corresponds to the 2020/2021 net market ratio of 0.4 times/0.3 times. Looking ahead, we expect 2021 to follow macroeconomic recovery, and the company's non-performing asset disposal revenue may show upward elasticity, maintaining an outperforming industry rating and HK$2.22 target price, corresponding to 0.5 times the 2020 net market rate and 0.5 times the 2021 net market ratio. There is room for 42.3% upward compared to the current stock price.
risks
Asset quality performance fell short of expectations.
