The 2023 results fell slightly short of our expectations

China Cinda announced 2023 results: 2023 revenue fell 6.0% year on year, net profit to mother fell 7.8% year on year, ROAE disclosed value was 2.7%, down 0.68ppt year on year; 2H23 revenue increased 5.4% year on year, and net profit to mother fell 2.9% year on year; slightly lower than our expectations, mainly due to the decline in acquisition and restructuring revenue as the scale contracted. The company actively adjusts the asset structure, accelerates business transformation and upgrading, promotes investment banking, asset management, ecology and digital transformation and upgrading of the main non-performing asset business, and constructs a “large ecosystem of non-performing assets plus multiple lines and small ecosystems in multiple regions” development pattern.

Development trends

Actively adjust the non-performing asset business structure. Revenue from 2H23's non-performing asset management business fell 5% year on year, mainly due to the continued decline in the scale of acquisitions and restructuring, which led to a 52% year-on-year decrease in revenue from acquisition and restructuring.

The company actively adjusted its asset structure. At the end of 2H23, the acquisition and restructuring of non-performing debt assets decreased by 20.5% compared to the end of 1H23; the acquisition of operating non-performing assets increased slightly by 0.3%, mainly due to a decrease in the scale of new acquisitions of non-financial non-performing assets and an increase in the company's disposal turnover rate; the book value of other non-performing assets increased by 3.7% compared to the end of 1H23. The company actively positioned itself around the four major business sectors of energy and basic industries, real estate, new economy and capital markets, and central local state-owned enterprises.

Yields are still on a downward trend. At the end of 2023, the internal rate of return on acquisitions and operations fell 0.4ppt year on year, and the average monthly annualized return on acquisitions and restructuring was 6.1%, down 1.5ppt year on year.

The rise in debt costs is mainly due to the increase in interest rates on foreign currency deposits at China Southern Commercial Bank. We estimate that 2H23's half-year debt cost was 3.45%, up 16 bps month-on-month and 32 bps year-on-year increase. We think it was mainly due to the increase in deposit interest rates of the US dollar due to the increase in US dollar interest rates. Furthermore, we estimate that the cost of 2H23 bonds payable in a single half-year period also showed a slight increase of 4 bps month-on-month.

Depreciation accruals for non-performing debt assets have declined, and impairment accruals for other debt investments have increased. Asset impairment losses in 2H23 fell 10% year-on-year in the single half of the year. Among them, as asset size continued to decline, impairment losses on non-performing assets measured at amortized costs decreased by 74% year on year; due to changes in the macroeconomic situation and market environment, impairment losses of other debt investments measured at amortized costs increased 145% year on year; and loan impairment losses decreased 18% year on year. Observe the static indicators of asset quality at the end of 2H23:1) The impairment ratio of non-performing assets such as acquisitions and restructuring increased 2.48ppt to 13.66% at the end of 1H23, mainly due to continued contraction on the denominator side; provision coverage declined 18.1ppt to 112.4% from the end of 1H23; the real estate industry accounted for 63.5%. 2) The impairment ratio of customer loans and advances increased by 3.7ppt to 5.8% compared to the end of 1H23, and depreciated assets were concentrated in the Pearl River Delta and Bohai Rim regions; 3) The impairment ratio of investment products increased by 3.5ppt to 5.5% compared to the end of 1H23.

Profit forecasting and valuation

Considering the continued decline in revenue from acquisitions and restructuring, we lowered 2024E net profit by 11% to 5.61 billion yuan, while introducing 2025E net profit of 5.53 billion yuan. The current stock price corresponds to 0.14x/0.14x2024E/2025E P/B. Maintaining a neutral rating, since the company is still in the process of business transformation and upgrading, we lowered our target price by 13% to 0.87 yuan, corresponding to 0.18x/0.18x 2024E/2025E P/B, which has 29.9% upside compared to the current stock price.

risks

The quality of non-performing debt assets, other debt investments, and loan assets has deteriorated beyond expectations.