Value Partners Group reported net profit of approximately HK$230 million in 2018, a year-on-year decrease of 88.8%. The main reason for the decline in earnings expectations is that revenue from performance fees declined because the returns of most of the relevant funds managed by the company at the end of 2018 did not exceed the previous high prices. The performance fee in 2018 was HK$56 million, a decrease of 97.8% over the previous year. At the same time, the company recorded a net loss of approximately HK$190 million on its initial capital investment and its fund investments, compared with revenue of HK$199 million in 2017. We updated our earnings forecast based on the new asset management scale and product net worth performance forecasts. We adjusted our earnings per share forecast for 2019/2020 from HK$0.18/HK$0.23 to HK$0.28/HK$0.34, up 122%/22%, respectively. We forecast earnings per share forecast for 2021 to HK$0.30, a decrease of 11% over the previous year. We raised our target price from HK$7 to HK$8.1, which is equivalent to 11.6% of the 2019 P/AUM, corresponding to a 28% price increase and maintain the buying rating.

Net capital inflow. Despite a weak market atmosphere, the company recorded an increase in management fees in 2018 due to a net inflow of assets under management, partially offsetting the impact of performance fees. By the end of 2018, Value Partners Group had assets under management of $15 billion (down 9.6% year over year). Value Partners recorded a net capital inflow of $1.2 billion at the end of 2018. We believe the net inflow was mainly supported by continued strong demand for fixed income funds and the global expansion of its distribution network. Net management fees increased due to the expansion of the average asset management size, which increased 9% year-on-year to $169 billion at the end of 2018. The net management fee rate expanded to 59 basis points, thanks to a strong inflow of flagship fixed income products with higher management fees.

Diversified expansion. By joining a mutual fund recognition program between China and Hong Kong to sell its traditional fund products to retail investors in mainland China, its value fund management scale ($1.2 billion in February 2019) is expected to be included in the mutual fund recognition program between the two countries due to a 50% expansion in subscriptions from retail investors in mainland China. Subsequent high-interest equity funds ($2.7 billion in February 2019) are also expected to be included in mutual fund recognition plans between the two countries. By the end of 2018, asset management from mainland China exceeded 1.1 billion US dollars (up 28% year over year), thanks to new entrustment products for special accounts, strong capital inflows from existing accounts, and private equity fund management products first launched in June 2018 (raised 150 million yuan at the end of June 2018). In addition to expanding its business in Greater China, Value Partners plans to open multiple offices around the world to focus on alternative asset management products in the future, including private debt funds, fixed income hedge funds, and real estate private equity funds.

Maintain the buy rating. 2018 was one of the hardest years for Value Partners, but the positive start of 2019 made us think that the market is gradually recovering. We expect the company's performance fee revenue to increase year-on-year by the end of 2019. Meanwhile, we still expect the company's net capital inflows to be supported by continued strong demand for fixed income funds and global expansion. We updated our earnings forecast based on the new asset management scale and product net worth performance forecast. We adjusted our earnings forecast per share for 2019/2020 from HK$0.18/HK$0.23 to HK$0.28/HK$0.34, up 122%/22%, respectively. We forecast earnings per share forecast for 2021 to HK$0.30, a decrease of 11% over the previous year. We raised our target price from HK$7 to HK$8.1, which is equivalent to 11.6% of the 2019 P/AUM, corresponding to a 28% price increase and maintain buying.