Profits from continuing business activities in 2020 are in line with our expectations.
The company announced its 2020 results: revenue of 100.1 billion yuan, an increase of 4.1% over the same period last year; net profit of 13.25 billion yuan, an increase of 1.5% over the same period last year; of which the net profit of continuing business activities was 11 billion yuan, an increase of-19% over the same period last year. The net profit exceeded our previous expectations, mainly due to the better-than-expected after-tax profit from the termination of operating activities, while the profit from continuing operating activities was in line with expectations (in July 2020, the CBRC approved the transfer of Cinda's equity in Happy Life. The relevant data are listed as termination profits in the annual report).
Trend of development
The scale of assets, profits and return on equity are stable for the whole year. In 2020, total assets increased by 0.3% compared with the same period last year, net profit increased by 1.5%, and the return on net assets fell slightly to 8.26% from the same period last year. 2H20 revenue increased by 7.2% year-on-year, excluding Happy Life's continuing operating pre-tax profit increased by-14% year-on-year. Sub-sector: 2H20 non-performing sector income increased by 11% year-on-year, pre-tax profit increased by-21%. 1) 2H20's acquisition and disposal non-performing business income increased by-46% year-on-year, mainly due to the company's more prudent valuation of non-performing debt assets, resulting in a decline in unrealized fair value changes; the realized fair value changes increased year-on-year, although IRR fell to 11%. 2) the non-performing business income of 2H20 acquisition and restructuring increased by 25% compared with the same period last year, which is related to the low base caused by endogenous poor disposal in 2019.
Revenue in the 2H20 financial services sector grew-10 per cent year-on-year, while pre-tax profit rose-6 per cent year-on-year.
Continue to strengthen risk control and improve governance. 1) in the new business, both the acquisition of operating non-performing debt assets and the acquisition of restructuring non-performing debt assets are less than in 2019. We believe that mainly because the company is more cautious about business expansion, the book value of acquisition non-performing debt assets increased by 0% year-on-year, 3% month-on-month growth,-3% year-on-year growth and-6% month-on-month growth. 2) in terms of stock risk resolution, the company is more cautious in the valuation and provision of non-performing debt assets. The annual asset impairment loss increased by 58% compared with the same period last year. 2H20 increased by 73% compared with the same period last year. The proportion of impairment that occurred in the acquisition of restructured non-performing debt assets at the end of 2020 rose from 3.5% in the middle of the year to 3.9%, and the provision coverage rate rose from 195% to 217%.
Two major transformations: bad business model transformation + digital transformation. 1) the company actively participates in risk resolution of small and medium-sized financial institutions and bankruptcy reorganization of large enterprise groups, and uses investment banking thinking to upgrade bad business models, providing financial services including bankruptcy reorganization, M & A reorganization, bridge financing, mezzanine investment and phased shareholding. 2) the company establishes the vision of "Digital Cinda", formulates the preliminary plan of 2021-2025 informatization plan, strengthens the construction of information system, and starts the comprehensive planning of group data governance and information security construction plan.
Profit forecast and valuation
Taking into account good cost control and the reduction in provisions as the economy recovers, we increase the 2021 net profit by 15% to 13.3 billion yuan, and introduce a net profit of 14 billion yuan in 2022. The current share price corresponds to 0.3 times / 0.3 times price-to-book ratio in 2022. We expect that high-quality development will eventually lead to a return to profitability, maintaining outperforming industry ratings and a target price of HK $2.22, corresponding to 0.5 times 2021 market-to-book ratio and 0.4 times 2022 market-to-book ratio, with 41.4% upside compared to current stock prices.
Risk
The macroeconomic recovery was less than expected.