Performance review
2022 results are in line with market expectations
China Huarong announced 2022 results: full-year revenue fell 45% year on year, profit before provision fell 141% year on year, net profit from continuing operations decreased by 30.9 billion yuan year on year to record a loss of 33.4 billion yuan, net profit to mother decreased by 28 billion yuan year on year and recorded a loss of 27.6 billion yuan; 2H22 revenue fell 35% year on year, and net profit to mother recorded a loss of 8.7 billion yuan; in line with profit warnings. In 2022, the company joined CITIC Group and continued to promote stock risk mitigation and accelerate main business transformation around the “13th Five-Year Plan” strategic goal. In the second half of the year, the scale of main business investment and risk pressure reduction increased dramatically, and performance recovered month-on-month. We will continue to pay attention to Huarong's transformation and implementation results within the next 3-5 years.
Development trends
CITIC Group became the largest shareholder. In 2022, Huarong joined CITIC Group, and a new chairman and management team were put in place, and new strategic goals for the “13th Five-Year Plan” were set. In March 2023, the Ministry of Finance and CITIC Group completed the registration procedure for 3% of Huarong's shares held by the Ministry of Finance. CITIC Group officially became the company's largest shareholder, and the shareholding ratio increased from 23.5% to 26.5%. The company accelerated the reduction of chemical insurance. The annual risk exposure pressure drop increased 17% year over year, completed transfers to 4 financial subsidiaries, and reduced asset size by 39% year on year. At the same time, relying on the Group's advantages of combining industry and finance, the company launched 42 collaborative projects in 2022.
Net losses due to poor financial asset valuations and pressure on asset quality. Revenue pressure in 2022 was mainly due to 1) changes in the fair value of other financial assets decreased by 22.8 billion yuan to -11.2 billion yuan year-on-year, and due to capital market fluctuations, valuations of some equity financial assets confirmed losses; 2) revenue from acquisitions and restructuring businesses fell 19% year on year. The company continued to reduce the size of this business, and the average monthly annualized return decreased by 1.7ppt to 7.9% year on year.
2H22's impact weakened marginally, and revenue increased 53% month-on-month. Net profit attributable to mother in 2022 was 27.6 billion yuan, mainly due to a 122% year-on-year increase in credit impairment losses to 29.4 billion yuan, and asset quality was under pressure due to the downturn in the economy and real estate industry. At the end of 2022, three-stage non-performing debt assets such as acquisitions and restructuring accounted for 37.1%, up 19.5ppt year on year, up 3ppt from month to month, and the real estate industry accounted for 45.6%, down 0.7ppt year on year, and down 0.3ppt from month to month. By business sector, non-performing assets, asset management and investment, and financial services businesses accounted for 86%, 1%, and 20% of revenue, respectively, while assets accounted for 74%, 22%, and 11%, respectively.
The size of interest-bearing debt has declined; capital adequacy ratios are higher than regulatory requirements. At the end of 2022, major interest-bearing liabilities fell 20% year over year, with loans falling 16% year over year and bonds and notes payable falling 30% year over year. We estimate that the cost ratio of major interest-bearing liabilities increased by 3 bps to 4.01% year over year at the end of 2022, mainly due to the 80 bps increase in the cost ratio of bonds and notes payable. At the end of 2022, the company's capital adequacy ratio was 15.07%, up 2.1ppt year-on-year. We expect it to come from 30 billion yuan of secondary capital bonds issued in November. We continue to monitor the potential impact of net profit on the core tier 1 capital adequacy ratio.
Profit forecasting and valuation
Due to the month-on-month increase in debt costs and pressure on asset quality, we lowered 2023E net profit from 200 million yuan to 5.2 billion yuan, and introduced 2024E net profit of -160 million yuan. Maintaining a neutral rating, we maintained a target price of HK$0.36, corresponding to 0.6x/0.6x 2023E/2024E P/B due to economic recovery and marginal improvement in real estate sentiment in 2023, with 21% downside compared to the current stock price.
The current stock price corresponds to 0.7x/0.7x 2023E/2024E P/B.
risks
The accrual of impairment losses exceeded expectations, and the recovery of profitability fell short of expectations.