2023 results fall short of our expectations

The company's net operating income in 2023 was HK$1.40 billion, with a net loss due to mother of HK$1.92 billion (loss of HK$7.44 billion in '22), a year-on-year decrease of 74%, and a net loss of HK$1.14 per share, of which 2H23 had net operating income of HK$330 million and net loss to mother of HK$1.96 billion. The performance fell short of our expectations, mainly due to continued pressure on the capital market, which dragged down the company's failure to achieve return on investment. Despite losses, the company still declared a dividend of HK$0.25 per share throughout the year, reflecting the importance placed on shareholder returns and a relatively abundant cash flow.

Development trends

Investment businesses have reduced losses, but there is still a lot of pressure on operations under market fluctuations. The company's investment business lost HK$490 million in 2023 (vs. loss of HK$5.9 billion in 2022), of which unrealized investment loss of HK$2.13 billion (vs. loss of HK$8.6 billion in 2022): 1) Own capital investment was affected by the downturn in the capital market and recorded an unrealized investment loss of HK$2.25 billion throughout the year, including financial investment losses of HK$1.80 billion, and investment losses of HK$450 million for major investment enterprises; 2) The fund management business benefited from a rebound in the price of investment projects in the secondary market and recorded unrealized investment gains HK$0.6 billion. If market sentiment recovers in '24, we expect the company's investment income to improve significantly under a low book value base.

The decline in the scale of managed assets is dragging down management fee revenue. In 2023, the company's fund business AUM fell 24% year over year to HK$126.2 billion, mainly due to: 1) some fund calibrations and expiration withdrawals; 2) secondary market fund redemptions and net asset value declines; 3) the decline in the RMB exchange rate dragged down the size of the HKD-denominated RMB fund in the report. In terms of revenue, client contract revenue was -6% year-on-year to HK$790 million, of which management fees ranged -32% to HK$180 million, mainly due to a decline in asset size and a reduction in the exit/extension period of some funds, and lower fee bases and fees. In 2023, in the context of capital raising pressure in the private equity industry, the company still established new projects such as the Yixing Optical Control Parent Fund and raised 1.32 billion yuan in additional capital, showing steady fund-raising capabilities. Looking ahead, the company relies on the brand effect and strong ability to raise capital for state-owned LPs. We expect that if market sentiment improves, the asset scale is expected to rise steadily.

The exit benefits of the project were good, and at the same time, the return of funds further strengthened the cash flow. The company withdrew from key projects including Ambrx, Baichuan Huanneng, Yacheng Microelectronics, Haitai Xinneng, Sanxing Media, and Xiaopeng Motors. Compared with the overall cost, the company achieved an overall revenue of about HK$2,776 billion, or about 1.6 times the exit return (MOIC). Furthermore, capital was returned to HK$7.458 billion through project withdrawal, and the company's cash balance at the end of the year was HK$9.6 billion. At the same time, banks holding approximately HK$141 billion had not used credit lines. We believe that the company's abundant cash flow and sound financial position will support future development.

Profit forecasting and valuation

Adjusted investment assumptions due to market fluctuations, we lowered 2024e profit by 50% to HK$1.22 billion and introduced 2025e profit of HK$2.28 billion; the company currently trades at 0.2x/0.2x 2024/25e P/B, maintaining the industry performance rating, and lowering the target price by 19% to HK$4.74 (0.3x/0.2x 2024/25e P/B, corresponding to 20% upward space).

risks

Withdrawals such as the tightening of IPOs fell short of expectations, the market fluctuated greatly, and the scale of asset management grew less than expected.