China Cinda's net profit in 2022 fell 47.7% year-on-year

China Cinda announced 2022 results: full-year revenue -17.1% year on year, profit before provision -41.6% year on year, net profit before provision -47.7% year on year; 2H22 revenue -29.5% year on year, profit before provision -63.5% year on year, net profit of Guimo -66.4% year on year; ROAE disclosed value 3.4%; in line with previous profit warning. The company continues to explore and upgrade the core business channel model, optimize the balance and liability structure, and reduce the pressure on some high-risk assets. We continue to pay attention to future profitability recovery trends.

Development trends

Increase investment in acquisition and management businesses. Seizing the economic downturn window, the company acquired an additional 74.2 billion yuan of operating non-performing debt assets in 2022, an increase of 41% over the previous year. In addition to traditional banking channels, the company is actively expanding channels such as upgrading trusts, defaulted bonds, and legal assets. The change in the fair value of non-performing debt assets fell 27% year over year in 2022. Among them, acquisitions of operating businesses fell 26% year over year, and the internal rate of return fell to 7.8% from 8.2% at the end of 2021, mainly due to a decline in disposal scale. The scale of acquisitions and operating disposals in 2022 fell 22% year-on-year to 40 billion yuan.

The scale of acquisitions and restructuring businesses continues to drop. In 2022, revenue from bad debt assets measured at amortized costs fell 25% year on year, mainly due to the acquisition of restructuring type non-performing debt assets falling by 24% year on year. The company insisted on prudent and effective launch of new business to reduce the scale of existing business; the average monthly annualized yield increased 0.6ppt to 7.6% year on year because the company increased its turnover and disposal efforts for low-yield projects in stock.

Fluctuations in capital markets have led to confirmed losses in the valuation of financial instruments. The decline in the company's revenue in 2022 was mainly affected by changes in the fair value of other financial instruments. The change in the fair value of other financial instruments in 2022 fell 63% year over year, and fell 93% year over year in the second half of the year. Looking at the split, changes in the fair value of debt-for-equity assets fell 7.9 billion yuan to -80 billion yuan year-on-year, mainly due to declining valuations due to capital market fluctuations.

Asset quality is under pressure. Asset impairment losses increased 13% year over year in 2022, mainly due to changes in macroeconomic conditions and deterioration in the quality of bad debt assets due to exposure to real estate risks. Judging from the non-performing debt asset quality index, the acquisition and restructuring impairment ratio at the end of 2022 was 8.20%, up 0.6 ppt from the end of 1H22; provision coverage was down 11.9 ppt to 141% from the end of 1H22; the size of the real estate industry fell 14% year over year, accounting for 47%; and the central region fell 63% year over year, accounting for 24%. Furthermore, the overdue ratio of investment products (340 billion yuan at the end of 2022) was 9.7%, up 4.9ppt from the end of 1H22; the impairment ratio was 1.9%, which is basically the same as 1H22.

The restructuring of debt brought about a decline in financing costs. We estimate the cost of interest-paying debt at the end of 2022 to 3.06%, a decrease of 24 bps from the end of 2021. We expect this is due to the company's optimization of its debt structure.

At the end of 2022, payable bonds fell 20% year on year, and the share of interest-paid debt fell 6ppt year on year; while loans with lower financing costs rose 11% year over year, and the share of interest-paid debt rose 3ppt year over year.

Profit forecasting and valuation

Considering the impact of capital market fluctuations and funding pressure, we lowered 2023E/2024E net profit by 10% and 14% to 6.5 billion yuan and 6.8 billion yuan. The current stock price corresponds to 0.2x/0.2x 2023E/2024EP/B. Maintaining the neutral rating, the target price was lowered by 4% to HK$1.26, corresponding to 0.3x/0.3x2023e/2024E P/B. There is room for 24% upward from the current stock price.

risks

The deterioration in the quality of non-performing loan assets exceeded expectations.