Deutsche Bank Markets Research
Rating Company Date Sell China Cinda 15 May 2014 Initiation of Coverage Asia China Reuters Bloomberg Exchange Ticker Price at 15 May 2014 (HKD) 3.91 Banking / Finance 1359.HK 1359 HK HSI 1359 Price target - 12mth (HKD) 3.20 Other Financial Services 52-week range (HKD) 5.43 - 3.60
HANG SENG INDEX 22,583
A misplaced sense of security - Hans Fan, CFA Tracy Yu initiating with Sell Research Analyst Research Analyst (+852) 2203 6353 (+852) 2203 6191 History cannot repeat itself [email protected] [email protected] We initiate our coverage of Cinda with a Sell rating and a HKD3.2 target price (1.05x 2014E P/B), as we believe the company is significantly more exposed Michael Zhang, CFA Jacky Zuo than banks to China's long-term slowing economy while historical recovery rates may not be indicative of future trends given the changes in operating Research Associate Research Associate environment. Contrary to market perceptions that Cinda benefits from rising (+852) 2203 6158 (+852) 2203 6255 NPLs, the traditional NPL acquisition/recovery business only contributed to 4% [email protected] [email protected] of assets or 11% of income in 2013. For the other businesses, we see higher connectivity to the riskier shadow banking activities, with close ties with the Price/price relative price cycle of property and coal sectors. 5.6 Restructuring distressed assets (26% of assets) to face rising impairments 5.2 Cinda’s restructuring distressed assets (RDA) business (26% of total assets) is 4.8 a sub-prime lending business, with 60% of the lending extended to property 4.4 4.0 developers (we estimate >50% in lower tiered cities). While we forecast 54% 3.6 yoy RDA asset growth on Cinda’s growth strategy, we expect 2014 PBT from 3.2 the business to decline by 5% yoy (2013: up 383% yoy), given high impairment 12/13 provisions (294bps of gross balance) on a rising impaired ratio of 1.8% in China Cinda 2014E from 1% in 2013. With the gross loan balance growing by 9.4x from HANG SENG INDEX (Rebased) 2011, to Rmb101bn in 2013, Cinda is vulnerable to any potential reversal of Performance (%) 1m 3m 12m China’s long-term property bull cycle. In addition to the RDA business, Cinda Absolute -7.3 -20.2 – also owns Jingu Trust (stake: 92.3%) with AUM of Rmb94bn in 2013 (collective HANG SENG INDEX -0.4 1.3 -2.0 trust: 24%), which may pose potential event risk/earnings impact on Cinda. Source: Deutsche Bank Debt equity swaps (11% of assets) – falling exit multiple to limit profit growth
We believe the exit multiple, which has already fallen from 2.7x in 2012 to 1.9x in 2013, will fall further to 1.4x in 2014, translating into a 10% decline in DES’s total income and pre-tax losses of Rmb234m. As the coal sector made up 62% of the book value of the DES assets (11% of Cinda’s assets), the profitability of this business is closely tied to the coal price cycle. Our study concludes that the value of Cinda’s DES assets may fall 30% from the appraisal/market value in June 2013 to mainly reflect: (1) the 16% price decline for the 14 listed coal comparables to Cinda’s top unlisted coal DES companies, which made up 54% of total DES assets; and (2) our house view that China’s coal sector will likely see a persistent oversupply imbalance, suggesting potential further downside of Cinda’s coal DES portfolio and also making exit through IPOs difficult. Traditional distressed assets (4% of assets) – volume offsets by falling margin Contrary to market perception that Cinda’s business is driven by the resolution of NPLs, TDA only made up 11% of 2013 income, implying a limited profit boost potential from rising NPL acquisitions/recoveries. We expect Cinda’s NPL recovery rate to fall as China’s economic growth normalizes. SOTP-based target price of HKD3.20; stronger economic recovery the key risk We value Cinda by using a sum-of-the-parts (SOTP) valuation, with an HKD3.20 target price based on 1.05x 2014E P/B. Given the downside to our target price, we initiate with a non-consensus Sell. Upside risks: stronger economic recovery and improving conditions in coal/property companies.
______Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.
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Table Of Contents
Investment thesis ...... 3 Outlook ...... 4 Valuation ...... 6 Risks ...... 6 Valuation ...... 7 Sum-of-the-parts value Cinda at 1.05x P/B or HKD3.20 ...... 7 Valuations of Cinda’s various business lines ...... 7 De-rating triggered by concerns on Cinda’s exposure to trust, coal and property sectors ...... 10 RDA – A shadow bank with mounting risks and insufficient protection ...... 13 Restructuring Distressed Assets – A shadow bank in nature ...... 13 Mounting risks due to heavy reliance on real estate sector ...... 14 We expect rising impaired ratio and hence higher provision ...... 18 DES – A lower-than-expected margin of safety ...... 21 Overall we apply 30% haircut to appraisal/market value of DES assets ...... 21 32% haircut to appraisal value of unlisted DES assets ...... 23 10% further decline to market value of listed DES assets ...... 28 TDA – Lower margin but faster turnover ...... 30 We expect margin on NPL disposal to trend lower ...... 30 Growth potential in NPL supply ...... 34 Jingu Trust – A higher-risk trust company ...... 36 Jingu Trust – Rmb2.8bn high risk trust assets ...... 36 Potential earnings impact on Cinda ...... 39 Business lines and forecasts ...... 40 Company profile and business overview ...... 40 Distressed asset management – Cinda’s core business ...... 42 Financial investment and asset management business ...... 49 Financial service business ...... 53 Appendix A – AMC Industry in China ...... 55 A bit of history ...... 55 From distressed asset managers to financial holding companies ...... 56 Financial overview of big-four AMCs ...... 57 Appendix B – More about Cinda ...... 59 Funding mix shifting towards bank loans and bonds ...... 59 Synergies ...... 59 Cinda’s history ...... 61 Corporate structure of Cinda ...... 61 Cinda management profile ...... 62 Appendix C ...... 64 The list of the 74 listed comparables to Cinda’s top-20 unlisted DES companies ...... 64
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Model updated: NA Fiscal year end 31-Dec 2011 2012 2013 2014E 2015E 2016E Running the Numbers Data per share Asia EPS (stated) (CNY) 0.27 0.25 0.30 0.29 0.34 0.41 Growth rate - EPS (stated) (%) -15% -6% 17% -2% 17% 20% China BVPS (stated) (CNY) 1.50 1.82 2.14 2.42 2.73 3.10 Other Financial Services DPS (CNY) 0.07 0.05 0.03 0.06 0.07 0.08 Market cap (HKDm) 0 0 138,644 138,644 138,644 138,644 Share in Issue (m) 25,155 30,140 35,459 35,459 35,459 35,459 China Cinda Valuation Ratios & Profitability Measures P/E (stated) na na 10.29 10.65 9.10 7.61 Reuters: 1359.HK Bloomberg: 1359 HK P/E FD (DB adj.) na na 10.29 10.65 9.10 7.61 P/B (stated) na na 1.42 1.291.14 1.00 Sell P/B (DB adj.) na na1.42 1.29 1.14 1.00 Price (15 May 2014) HK$3.91 ROAE (stated) (%) 18.07% 15.78%13.81% 12.81% 13.28% 14.03% ROAA (stated) (%) 4.18% 3.42% 2.83% 2.45% 2.43% 2.57% Target price HK$3.20 Dividend yield (%) 1.11% 1.88% 2.20% 2.63% 52-week Range: HK$3.6 - 5.43 Payout ratio (%) 27% 22% 13% 20% 20% 20% Profit & Loss (CNYm) Market Cap HK$143,106m Income from DDA classified as receivables 181 3,518 10,144 15,009 20,372 24,556 Fair value changes on DDA 4,463 3,878 4,618 6,688 7,716 9,196 Investment income 5,779 6,529 7,044 7,030 6,732 6,285 Company Profile Net insurance premiums earned 5,698 5,325 5,772 6,415 7,307 8,330 Cinda is a leading asset management company (AMC) in Interest income 1,479 2,493 5,059 6,144 7,245 8,583 China, focusing on distressed asset management with a Revenue from sales of inventories 3,237 3,924 4,322 4,827 5,300 5,820 market share of 35.5% in terms of distressed assets Fee & commission 1,902 2,226 2,520 2,877 3,214 3,595 acquired. Established in 1999, Cinda has been dedicating to provide customized financial solutions and differentiated Other revenue 1,427 1,456 2,195 2,598 2,829 3,126 asset management services to its clients, leveraging on its Operating income 24,382 32,335 42,413 52,402 61,610 70,475 nationwide branch network and diversified financial service Operating expenses 16,027 23,200 30,601 38,805 45,712 51,481 subsidiaries. Cinda went listed in December 2013. Operating profit 8,355 9,135 11,812 13,597 15,897 18,994 Taxes 2,272 2,379 2,671 3,119 3,649 4,362 Minorities 24 - 89 74 81 89 98 Net profit attributable to shareholders 6,763 7,306 9,027 10,361 12,127 14,504 Key Balance Sheet Items (CNYm) & Capital Ratios TDA net balance 7,415 7,960 16,392 25,188 32,842 37,661 RDA net balance 9,681 48,068 97,971 148,450 189,239 219,355 DES book value 50,595 48,239 42,275 31,982 22,489 14,881 Loans and advances to customers - net 9,448 25,042 48,636 60,522 73,679 88,260 Total assets 173,124 254,614 383,785 462,671 534,146 595,642 Total liabilities 130,281 193,730 301,023 369,424 429,198 476,646 Total equity 42,843 60,885 82,762 93,248 104,948 118,996 CAR - company 19.18% 20.96% 21.58% na na na Leverage ratio 25% 24% 22% 20% 20% 20% Credit Quality Impaired ratio of RDA 0.75% 1.20% 1.00% 1.80% 2.50% 3.20% Credit cost of RDA (bps) 41 494 194 294 287 257 Provision to impaired loan ratio - RDA 27% 248% 291% 240% 235% 230% Provision to loan ratio - RDA 0.21% 2.99% 2.92% 4.32% 5.88% 7.36% Impaired ratio of RDA + loans 0.38% 1.17% 1.02% 1.66% 2.23% 2.78% Credit cost of RDA + loans (bps) 161 367 174 232 226 204 Provision to impaired loan ratio - RDA + loans na 219% 253% 227% 223% 218% Provision to loan ratio - RDA + loans 0.99% 2.56% 2.58% 3.75% 4.97% 6.07% Growth Rates & Key Ratios Growth in income from DDA classified as receiva na 1845% 188% 48% 36% 21% Growth in revenue 1% 33% 31% 24% 18% 14% Growth in cost 8% 45% 32% 27% 18% 13% Growth in net profit -9% 8% 24% 15% 17% 20% Growth in DDA 134% 228% 104% 52% 28% 16% Growth in DES -3% -5% -12% -24% -30% -34% Growth in total assets 15% 47% 51% 21% 15% 12% Growth in impaired loans (RDA+loans) na 1099% 75% 134% 71% 48% Cost income ratio 39% 33% 31% 31% 32% 33% By Segment Revenue - DAM 9,957 14,392 21,850 28,667 34,846 40,352 Revenue - FIAM 5,946 7,911 8,977 10,274 11,376 12,593 Revenue - FS 9,231 10,553 12,134 14,008 15,936 18,077 PBT - DAM 7,202 6,234 8,314 9,812 12,213 15,270 PBT - FIAM 2,488 3,285 3,012 3,213 3,346 3,571 PBT - FS -207 164 515 605 375 191 Total assets -DAM 91,551 140,328 228,604 285,643 331,401 365,026 Total assets - FIAM 35,387 49,027 72,776 81,618 92,881 104,043 Total assets - FS 49,786 69,352 86,248 99,254 113,707 130,416
Hans Fan, CFA +852 2203-6353 [email protected] Source: Company data, Deutsche Bank estimates
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Outlook
China Cinda Asset Management (Cinda) is the second largest of the big-four asset management companies (AMCs) in China in terms of total assets, with a focus on three main businesses, including distressed asset management (DAM), financial investment and asset management (FIAM), and financial services (FS). DAM, the major contributor to assets (60% of total) and profit before tax (71%), can be further divided into four sub categories: restructuring distressed assets (RDA), traditional distressed assets (TDA), debt-to-equity swaps (DES) and others, as shown in Figure 1 and 2.
We believe Cinda is significantly more exposed than banks to China's long- term economic slowdown, as GDP growth rates stabilize. Contrary to market perceptions that Cinda benefits from rising NPLs, the traditional NPL acquisition/recovery business only contributed to 4% of assets or 11% of income in 2013. For the rest of the businesses, we see relatively high connectivity to the riskier shadow banking activities, with close ties to the price cycle of properties in lower tier cities and coal sector. In particular, we see rising impairment losses on substantial exposure of its RDA business to the property sector, lower exit multiples from DES assets and lower TDA disposal margin on stalled asset appreciation. Jingu Trust, a trust company 92.3%-owned by Cinda, may pose potential event risk/earnings impact on Cinda given the higher risks involved. We expect Cinda’s earnings growth to slow from 24% yoy in 2013 to 15%/17% yoy in 2014-15E, translating into lower ROAA of 2.45%/2.43% in 2014-15E (2013: 2.83%).
Figure 1: Cinda’s total assets breakdown by segment – Figure 2: Cinda’s income breakdown by segment – DAM DAM makes up the majority (60%) is the major earnings contributor (52%)
Others 22% Others 29% Other DAM, RDA, Other 5% 11% 19% DAM, FS FS 19% 21% TDA, RDA, 12% 26%
FIAM FIAM TDA, DES, 60% 4% 24% DES, 52% 11% DAM DAM
Total assets Income breakdown - breakdown - FY13 FY13
Source: Deutsche Bank, company data Source: Deutsche Bank, company data
RDA – Mounting risks on high real estate exposure to face rising impairments Cinda’s restructuring distressed assets (RDA) business (26% of total assets) is a sub-prime lending business, with 60% of the lending extended to property developers (over 50% in lower tiered cities we estimate). While we forecast RDA asset growth of 54% yoy in 2014 on Cinda’s growth strategy, we expect PBT from the business to decline by 5% yoy in 2014 (2013: 383% yoy), given high impairment provisions charged (294bps of gross balance) on a rising impaired ratio of 1.8% in 2014 from 1% in 2013 when facing the first
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Other Financial Services China Cinda repayment peak in 2H14. With the gross loan balance growing by 9.4x from 2011, to Rmb101bn in 2013, Cinda is vulnerable to the reversal of China’s 10- year plus property bull cycle and we expect some smaller, weaker developer borrowers of Cinda’s RDA business to go under amid the property price correction and dried-up credit availability.
Figure 3: 60% of Cinda’s RDA net balance were extended Figure 4: Cinda started to grow RDA strongly from 2012, to real estate sectors thus the first repayment peak would be in 2H14 Rmb bn Evolution of RDA gross balance during 2012-14E Mining, 1% 250.0 Transportation, Others, 3% 12.9 Construction, 9% 200.0 5% 35.3 89.7 Manufacturing, Real estate, 150.0 50.5 6% 60% 28.7
Public utilities, 100.0 76.5 6% The first 155.2 repayment 50.0 peak at 2H14 49.2 Leasing & 9.7 commercial, - Gross Acquired - Acquired - Acquired - Repayment Repayment Repayment Accured Gross 10% balance - 2012 2013 2014E -2012 - 2013 - 2014E interest - balance - 2011 2012-14E 2014
Source: Deutsche Bank, company data Source: Deutsche Bank estimates, company data
DES – 30% haircut applied to market value leads to lower exit multiples We believe the exit multiple from DES assets, which has dropped from 2.7x in 2012 to 1.9x in 2013, will fall further to 1.4x in 2014, translating into a 10% decline in DES’s income and pre-tax losses of Rmb234m. As the coal sector made up 62% of the book value of the DES assets (11% of Cinda’s total assets), the profitability of this business ties closely with the coal price cycle. Our study concludes that the value of Cinda’s DES assets may fall 30% by end- 2014 from the appraisal value in June 2013 and current market value to reflect: (1) the 16% price decline for the 14 listed coal comparables to Cinda’s top unlisted coal DES companies, which made up 54% of total DES assets; and (2) our house view that China’s coal sector should see persisting oversupply, suggesting potential further downside of Cinda’s coal DES portfolio and also making exit through IPOs/capital market difficult.
Figure 5: The share prices of listed coal comparables and Figure 6: Cinda’s DES portfolio heavily concentrated in Cinda’s listed DES companies have declined by 16% and troubled coal sector (62%) 11% since June 2013, respectively Top 20 listed DES - % change since Jun13 DES sector breakdown - 1H13 14 coal production comparables for unlisted DES - % change since Jun13 30%
20% Others, 13%
10% Metals, 9% Coal, 62%
0% Chemical, 16% -11% -10%
-16% -20%
-30% Jul13 Aug13 Sep13 Oct13 Nov13 Dec13 Jan14 Feb14 Mar14 Apr14 May14 Source: Deutsche Bank, Bloomberg. Note: Prices are updated on 14 May 2014. Source: Deutsche Bank, company data
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TDA – 84 resolution cases points to lower disposal margin but faster turnover Contrary to market perception that Cinda’s business is driven by the resolution of banks’ NPLs, TDA only made up 4% of total assets or 11% of 2013 income, implying a limited profit boost from rising NPL acquisition and subsequent recovery. While its TDA business has generated decent return on disposal of 119% during 2010-13, our study of 84 of Cinda’s TDA resolution cases, together with a recent survey of listed banks on NPL disposals, suggests that the NPL recovery rate should trend lower in coming years. On the other hand, we expect Cinda to accelerate the acquisition and disposal of NPLs under the backdrop of rising supply of NPLs from banks.
Figure 7: 84 TDA resolution cases suggest higher-return Figure 8: We expect the supply of NPLs from the means may be no longer workable banking sector to grow strongly in coming years NPL recovery rate on average (cents in a dollar) NPL balance - other banking FIs NPL balance - commercial banks NPL ratio - commercial banks (RHS) NPL ratio - other banking FIs (RHS) Litigation 86 NPL ratio - entire banking system (RHS) 3,000 Rmb bn 7.00% Auction of collateral 2,647 85 6.29% 6.00% Development of the land/property 84 2,500 5.50% 2,096 Execution of guarantee 69 5.00% 2,000 5.00% 4.50% 1,389 Debt restructuring 1,659 49 4.06% 4.00% 4.00% 3.78% 1,500 1,289 1,121 Multiple means 30 Suggesting asset 1,244 1,053 1,075 3.00% Repayment in real assets 21 appreciation was the 891 2.44% 2.15% 2.43% key driver to strong 1,000 697 1.92% 1.81% 1.68% 2.00% Debt to equity swap 19 return 810 582 1.60% 625 1.30% 1.50% 1.15% 1,258 Sell to third-party buyers 17 500 1.14% 1.00% 0.95% 1.00% 975 768 1.00% 493 592 TOTAL 36 434 428 - 0.00% - 20 40 60 80 100 2010 2011 2012 2013 2014E 2015E 2016E
Source: Deutsche Bank, NPL Disposal Case Selection of China Cinda Asset Management (Edited by Mr. Source: Deutsche Bank estimates, PBOC, CBRC TIAN Guoli, former President of the company)
Jingu Trust could pose potential earnings impact on Cinda Jingu Trust is 92.3%-owned by Cinda with trust AUM of Rmb94bn as of 2013. Our in-depth screening into 65 collective trust products issued by Jingu Trust identified Rmb2.8bn trust assets with higher default risks, or 21% of our sample. Together with Jingu Trust’s unfavorable sector concentration in the real estate sector, the recent regulatory penalty and management change, we see Jingu Trust as a higher-risk trust company. Our sensitivity analysis shows that 30% loss of Jingu Trust’s high risk trust assets (assuming at 6.5% of total trust AUM) would translate into a 13% negative impact on Cinda’s 2014E PBT.
Valuation
We value Cinda based on sum-of-the-parts (SOTP) valuation methodology, with a target price of HKD3.20, equivalent to 1.05x 2014E P/B and 8.72x 2014E P/E, as we believe Cinda does not have direct comparables in the market and its business lines are notably different from each other in terms of business models and risk profiles.
Risks
Upside risks: 1) stronger-than-expected economic recovery, leading to improvements in financial conditions of coal companies and real estate developers; 2) faster asset appreciation to push up the TDA recovery rate; 3) Slower regulatory progress to allow competition in the RDA market; 4) better- than-expected synergies among the three group segments.
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Sum-of-the-parts value for Cinda at 1.05x P/B or HKD3.20
We value Cinda based on the sum-of-the-parts (SOTP) valuation methodology, as we believe Cinda does not have direct comparables in the market and its business lines are notably different from each other in terms of business models and risk profiles. By applying different valuation methodologies to each business line of the company, we value Cinda at HKD3.20, equivalent to 1.05x 2014E P/B and 8.70x 2014E P/E.
Given the downside of 18% to our target price and our 2014E earnings forecast being 15% lower than consensus, we initiate with a non-consensus Sell, reflecting our view that Cinda will likely be more vulnerable to weak economic activities than banks, given its substantial exposure to weaker property developers and coal companies. The market once perceived that Cinda may benefit from rising NPLs and high exit-multiples from DES assets. However, with traditional distressed assets only making up 4% of total assets, the benefit from acquiring/recovering rising bank NPLs is not sufficient to offset the asset quality deterioration in its sub-prime lending business (RDA) and lower exit- multiples from DES assets.
Figure 9: Our sum-of-the-parts model values Cinda at 1.05x P/B or HKD3.20
Fair value Revenue 2014E % of group Business lines Valuation methodology (Rmb mn) P/B 2014E (Rmb mn) revenue DAM Various 57,926 1.32 28,667 55% TDA One-stage GGM 6,223 1.60 6,688 13% RDA Three-stage GGM 14,097 0.62 15,009 29% DES Market value with a hair-cut 28,360 5.76 4,502 9% Other DAM assets P/B comparables 9,246 0.75 2,468 5% FIAM P/B comparables 19,590 0.60 10,274 20% FS P/B comparables 12,651 0.75 14,008 27% Cinda Group 90,167 1.05 52,402 Target price (HK$) 3.20 P/E 2014E 8.70
Source: Deutsche Bank estimates, company data
Valuations of Cinda’s various business lines
We adopt different valuation methodologies to value the different business lines of Cinda in order to better capture the risk/reward profiles.
Traditional Distressed Assets (TDA) – One-stage GGM We use a one-stage Gordon Growth Model (GGM) to value Cinda’s TDA business, as we believe TDA is mainly driven by flows of NPL acquisition and margins of NPL disposal. We have adopted a sustainable ROAE of 20%, reflecting faster turnover of NPL disposal, offset by lower disposal margin on a falling recovery rate. Our valuation of 1.6x 2014E P/B is based on cost of equity of 13.6% and a long-term growth rate of 3%.
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Figure 10: We value the TDA business at 1.6x 2014E P/B using one-stage GGM TDA - one-stage GGM Sustainable ROAE 20.0% COE 13.6% Growth rate 3.0% Fair P/B 1.6 Net assets 2014E (Rmb m) 3,880 Valuation (Rmb m) 6,223 Source: Deutsche Bank estimates, company data
Restructuring Distressed Assets (RDA) – Three-stage GGM We use a three-stage GGM to value Cinda’s RDA business, as we believe RDA is essentially a sub-prime lending business. Reflecting its higher return than banks, we have adopted slightly higher ROE than banks for the three stages at 17.9%, 14.5% and 10%, respectively. On the other hand, given its high concentration in the property sector and insufficient provision protection, we used a cost of equity of 16.6%, which is higher than 11-13% for listed Chinese banks. Our three-stage GGM pegs Cinda’s RDA business at 0.6x 2014E P/B.
Figure 11: We value RDA business at 0.6x 2014E P/B using three-stage GGM RDA - three-stage First Stage Second Stage Terminal GGM RoE 17.9% 14.5% 10.0% Growth 14.4% 9.4% 4.0% COE 16.6% 16.6% 16.6% Payout Ratio 20% 35% 60% No. of Years 3 3 Fair P/B 0.6 Net assets 2014E 22,870 Valuation 14,097 Source: Deutsche Bank estimates, company data
Debt-to-equity Swaps (DES) – Market value with a haircut We value Cinda’s DES assets using the market/appraisal value and applying a haircut (see section A much lower margin of safety on its DES portfolio for more details). We value its unlisted and listed DES assets separately:
For unlisted DES, which accounts for 79% of total DES book value, we apply a 32% discount (including 25% discount on share price correction of comparables and 10% discount on lack of marketability) to the appraisal value, which was provided by American Appraisal China Limited (AACL), a third-party valuation specialist appointed by Cinda. Hence, our adjusted fair value of Rmb48.9bn implies an exit multiple of 1.4x, much lower than the 2.3x suggested by AACL.
Figure 12: We apply a 32% discount to the appraisal value of unlisted DES assets, implying an exit multiple of 1.4x Unlisted DES 13 coal companies 7 non-coal companies Other unlisted DES Total unlisted DES Book value - 1H13 22,403 5,286 6,690 34,378 Appraisal value - unadjusted 52,700 9,600 9,700 72,000 Implied exit multiple - unadjusted 2.4x 1.8x 1.5x 2.1x Discount - share price correction of comparables 30% 0% 25% 25% Discount - lack of marketability 10% 5% 10% 10% Appraisal value - adjusted 33,201 9,120 6,547 48,868 Implied exit multiple - unadjusted 1.5x 1.7x 1.0x 1.4x Source: Deutsche Bank estimates, company data, American Appraisal China Limited
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For listed DES, we use current market value of the listed companies attributable to Cinda and apply a further downside of 10%, given its heavy concentration on overcapacity sectors (85%).
Figure 13: We apply a 10% further downside discount to listed DES assets Listed DES Book value of all listed DES 8,140 Current market value of top-20 listed DES 7,141 As % of total listed DES 98% Current market value of all listed DES 7,274 Further MTM losses 10% Current market value of all listed DES - adjusted 6,546 Source: Deutsche Bank estimates, company data
Overall, we value Cinda’s DES assets at Rmb28.4bn.
Figure 14: Adding unlisted and listed DES together, we value Cinda’s DES assets at Rmb28.4bn Listed + unlisted DES Total adjusted fair value of DES assets 55,415 Liabilities of DES - 2014E 27,055 Valuation = market value - liabilities 28,360 Source: Deutsche Bank estimates, company data
Other Distressed Asset Management (DAM) – 0.8x 2014E P/B For other DAM assets, we simply apply 0.8x 2014E P/B and derive a fair value of Rmb9.3bn.
Figure 15: We value other DAM business at 0.8x 2014E P/B Other DAM assets Other DAM net assets 2014E 12,328 P/B 2014E 0.80 Valuation 9,246 Source: Deutsche Bank estimates, company data
Financial Investment and Asset Management (FIAM) – Market value and P/B As there are two listed companies under Cinda’s FIAM business, i.e. Cinda Real Estate (600657 CH) and Tongda Venture (600647 CH), we value them using current market value attributable to Cinda. For the rest of the FIAM business, we simply peg it at 0.7x P/B. As a result, we value FIAM business at Rmb19.6bn, or 0.6x 0214E P/B.
Figure 16: We value FIAM business at 0.6x 2014E P/B FIAM Cinda Real Estate Tongda Venture Other FIAM assets Total FIAM Stock code 600657.CH 600647.CH Net assets 2013 7,611 268 24,643 32,521 P/B 2014E 0.7 5.8 0.7 0.6 Total valuation (market cap) 5,015 1,554 16,018 22,587 % owned by Cinda 58.5% 41.0% 100.0% 86.7% Valuation attributable to Cinda 2,935 638 16,018 19,590 Source: Deutsche Bank estimates, company data
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Financial Services (FS) – P/B comparables We value the subsidiaries of Cinda’s FS business using P/B comparables and peg the business at 0.8x 2014E P/B. Reflecting the relatively weaker market positions for Cinda’s FS subsidiaries, we generally adopt a discount to the P/B of listed comparables.
Figure 17: We value Cinda’s FS business at 0.8x 2014E P/B Securities Jingu Trust Cinda Leasing First State Fund Cinda P&C Happy Life Total FS subsidiaries Net assets 2014E 7,059 3,719 3,372 213 3,109 1,333 18,804 PBR 0.8 0.6 0.7 0.8 1.0 0.6 0.8 Total valuation 5,506 2,231 2,360 170 3,109 800 14,177 % owned by Cinda 99.3% 92.3% 99.6% 54.0% 51.0% 61.6% 89.2% Discount - lack of marketability 5% 5% 5% 5% 5% 5% 5% Valuation attributable to Cinda 5,742 2,162 2,467 96 1,665 517 12,651 Source: Deutsche Bank estimates, company data
Should we apply a valuation discount as a holding company? Overall, we do not view Cinda as a financial holding company, given: (1) the group company has its own business functions, which include the DAM and part of FIAM; and (2) Cinda has tight control on its subsidiaries with dominating shareholdings, so that it should not be subject to a discount on lack of control. Nevertheless, for Cinda’s unlisted DES assets and FS business, we apply a discount to reflect the lack of marketability.
De-rating triggered by concerns on Cinda’s exposure to trust, coal and property sectors
Following a strong performance of 52% increase since its IPO in December 2013, Cinda’s share price has de-rated to 1.3x 2014E P/B. We believe its de- rating was mainly triggered by market concerns on its heavy exposure to the coal (62% of total DES assets), property (60% of its RDA gross balance) and trust sectors (Jingu Trust, 92%-owned by Cinda, with total trust AUM of Rmb94bn as of end 2013).
Page 10 Deutsche Bank AG/Hong Kong
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Other Financial Services China Cinda
Figure 18: Share price performance of Cinda since its IPO in December 2013 – The de-rating was triggered by negative news related to default cases of trust, bonds and property developers
HK$ Share price performance of Cinda reflects plenty of negative news
6.00 23 Jan 2014 Default case of China Credit Trust triggered 5 Mar 2014 5.50 concerns on trust co.s The first corp bond default from 27 Mar 2014 Most recent Shanghai Chaori FY13 results of Mounting concerns 5.00 Rmb9.03bn, beating on property sector consensus by 5% in China
4.50 +52% -28% -10% 4.00
19 Mar 2014 3.50 A small-sized default 11 Dec 2013 case of a small H-share IPO at developer (Zhejiang Xingrun) 3.00 HK$3.58
Source: Deutsche Bank, Bloomberg Finance LP, media report. Note: Share price updated on 14 May 2014.
Deutsche Bank AG/Hong Kong Page 11
15 May 2014
Other Financial Services China Cinda
Figure 19: Valuation comparable table of various types of financial stocks in Great China space
Price Crncy Market cap PE Ratio PB Ratio Dividend Yield Ticker Name (LCY) (USD) 14Y 15Y 14Y 15Y 14Y 15Y China banks ` 1398 HK Equity ICBC-H 4.80 HKD 201,300 4.94 4.64 0.93 0.82 7.1% 7.5% 939 HK Equity CCB-H 5.50 HKD 176,418 4.95 4.70 0.91 0.81 7.1% 7.4% 1288 HK Equity ABC-H 3.37 HKD 128,585 4.95 4.57 0.84 0.74 6.9% 7.3% 3988 HK Equity BOC-H 3.49 HKD 120,949 4.81 4.54 0.76 0.69 7.3% 7.7% 3328 HK Equity BCOM-H 4.98 HKD 46,274 4.46 4.18 0.64 0.58 6.7% 7.2% 3968 HK Equity CMB-H 13.68 HKD 41,218 5.00 4.62 0.92 0.81 6.0% 6.5% 998 HK Equity CITIC Bank-H 4.69 HKD 32,112 4.02 3.65 0.68 0.60 6.2% 6.8% 1988 HK Equity Minsheng-H 7.80 HKD 33,607 3.73 3.34 0.74 0.63 4.6% 5.2% 3618 HK Equity CRCB 3.46 HKD 4,151 3.86 3.46 0.63 0.56 7.6% 8.5% 3698 HK Equity Huishang 3.53 HKD 5,018 5.91 5.39 0.89 0.80 5.9% 6.5% 1963 HK Equity BOCQ 5.00 HKD 1,741 4.05 3.63 0.70 0.60 4.9% 5.5% 600000 CH Equity SPDB 9.74 CNY 29,236 4.17 3.88 0.78 0.68 7.2% 7.8% 601166 CH Equity Industrial Bank 10.00 CNY 30,657 4.10 3.75 0.80 0.68 4.9% 5.3% 601818 CH Equity CEB 2.47 CNY 18,715 3.75 3.13 0.65 0.56 8.0% 9.6% 000001 CH Equity Ping An Bank 11.18 CNY 17,109 6.02 5.19 0.84 0.74 3.3% 3.9% 601169 CH Equity Bank of Beijing 7.59 CNY 10,740 4.31 3.71 0.73 0.62 2.7% 3.2% 601009 CH Equity Bank of Nanjing 7.90 CNY 3,757 4.52 4.25 0.77 0.68 6.7% 7.1% 002142 CH Equity Bank of Ningbo 9.10 CNY 4,214 4.69 4.24 0.88 0.76 5.1% 5.6% Average 4.76 4.43 0.84 0.74 6.7% 7.2% Insurance ` 2628 HK Equity China Life 20.10 HKD 65,423 18.31 14.71 1.82 1.66 1.7% 2.1% 2318 HK Equity Ping An 57.25 HKD 53,658 11.84 10.68 1.88 1.53 NA NA 2601 HK Equity CPIC 24.20 HKD 25,080 15.25 13.52 1.62 1.50 7.4% 0.0% 1336 HK Equity NCI 23.65 HKD 9,853 10.20 8.51 1.32 1.14 0.0% 0.0% 966 HK Equity CTIH 12.26 HKD 3,850 11.89 8.92 1.26 1.10 NA NA 1299 HK Equity AIA 38.05 HKD 59,201 20.24 17.92 2.21 2.04 1.2% 1.4% 1339 HK Equity PICC Group 3.04 HKD 16,583 10.49 9.76 1.23 1.10 NA NA 2328 HK Equity PICC P & C 10.98 HKD 19,270 11.56 10.23 1.92 1.68 NA NA Average 15.65 13.49 1.84 1.64 1.5% 0.9% Securities firm ` 6030 HK Equity Citic Securities- H 16.32 HKD 20,960 30.52 25.98 1.59 1.53 1.0% 1.2% 6837 HK Equity Haitong Securities- H 11.46 HKD 14,708 18.77 17.14 1.35 1.29 2.1% 2.3% 6881 HK Equity Galaxy Securities 4.93 HKD 4,764 11.55 10.50 1.09 0.99 0.0% 2.9% 1788 HK Equity GUOTAI JUNAN INTERNATIONAL 4.05 HKD 989 12.74 9.88 1.32 1.22 4.4% 5.4% Average 23.74 20.67 1.44 1.37 1.4% 1.9% Financial leasing ` 5871 TT Equity CHAILEASE HOLDING 73.20 TWD 2,418 11.71 10.59 2.42 2.18 0.0% 0.0% 3360 HK Equity FAR EAST HORIZON 5.31 HKD 2,251 7.38 5.69 0.84 0.75 5.0% 6.2% 000415 CH Equity BOHAI LEASING CO 7.74 CNY 2,203 10.32 8.23 NA NA NA NA Average 9.80 8.17 1.63 1.47 2.5% 3.1% Trust ` 000563 CH Equity SHAANXI INTL TRUST CO LTD-A 7.04 CNY 1,371 15.64 11.93 NA NA NA NA 600816 CH Equity ANXIN TRUST CO LTD-A 14.64 CNY 1,071 21.69 17.96 4.54 3.65 1.2% 2.0% 600643 CH Equity SHANGHAI AJ CORPORATION-A 9.73 CNY 1,738 15.69 11.45 1.55 NA 3.9% 3.8% Average 17.68 13.78 3.04 3.65 2.6% 2.9% Financial holding group ` 2318 HK Equity Ping An 57.25 HKD 53,658 11.84 10.68 1.88 1.53 NA NA 2882 TT Equity CATHAY FINANCIAL HOLDING 44.80 TWD 17,779 14.37 15.47 1.79 1.72 4.1% 3.8% 2881 TT Equity FUBON FINANCIAL HOLDING 39.85 TWD 13,526 10.66 10.00 1.18 1.10 3.5% 3.7% 2891 TT Equity CTBC FINANCIAL HOLDING 18.50 TWD 9,028 10.87 10.24 1.28 1.21 4.1% 4.3% 2886 TT Equity MEGA FINANCIAL HOLDING 23.75 TWD 9,807 11.91 11.16 1.13 1.07 3.4% 3.6% 2880 TT Equity HUA NAN FINANCIAL HOLDING 17.40 TWD 5,227 11.20 10.68 0.86 NA 3.3% 3.5% 2892 TT Equity FIRST FINANCIAL HOLDING 17.90 TWD 5,138 12.84 12.54 1.04 0.99 2.6% 2.7% 2885 TT Equity YUANTA FINANCIAL HOLDING 15.25 TWD 5,004 0.94 0.92 0.94 0.92 1.1% 1.1% 2890 TT Equity SINOPAC FINANCIAL HOLDING 13.25 TWD 3,611 7.70 7.65 0.69 NA 3.4% 3.4% 2884 TT Equity E.SUN FINANCIAL HOLDING 18.85 TWD 4,041 1.22 1.13 1.22 1.13 0.8% 0.9% 2887 TT Equity TAISHIN FINANCIAL HOLDING 14.40 TWD 4,184 1.03 0.95 1.03 0.95 1.0% 1.0% 2888 TT Equity SHIN KONG FINANCIAL HOLDING 9.22 TWD 2,853 7.73 7.30 0.55 NA 0.5% 0.7% Average 15.65 13.49 1.84 1.64 1.5% 0.9% Alternative asset management ` BX US Equity BLACKSTONE GROUP 29.61 USD 33,460 9.31 8.40 NA NA 6.1% 7.2% KKR US Equity KKR & CO LP 23.10 USD 18,511 6.55 6.65 1.55 1.42 9.8% 9.3% APO US Equity APOLLO GLOBAL MANAGEMENT 25.69 USD 9,767 7.36 7.46 2.88 2.68 12.9% 11.5% CG US Equity CARLYLE GROUP 31.55 USD 10,293 8.21 7.82 0.72 0.59 8.1% 8.8% OAK US Equity OAKTREE CAPITAL GROUP 50.53 USD 7,969 9.28 8.67 3.25 3.53 7.7% 8.5% FIG US Equity FORTRESS INVESTMENT 6.89 USD 2,967 6.82 5.57 1.43 1.29 10.4% 11.7% OZM US Equity OCH-ZIFF CAPITAL MANAGEMEN 12.90 USD 6,083 10.50 7.59 2.77 2.83 8.9% 12.2% Average 8.29 7.45 2.10 2.06 9.1% 9.9% Note: closing price of May 14, 2014
Source: Deutsche Bank, Bloomberg Finance LP
Page 12 Deutsche Bank AG/Hong Kong
15 May 2014
Other Financial Services China Cinda RDA – A shadow bank with mounting risks and insufficient protection
Restructuring Distressed Assets – A shadow bank in nature
We believe Cinda’s Restructuring Distressed Assets (RDA) is essentially a sub- prime lending business, offering loans to distressed borrowers (60% are property developers) to refinance their bank loans, trust loans and accounts payable, with a relatively higher interest rate of 13.5% on average and an average duration of two years. Figure 19 illustrates the deal structure of RDA with a property developer borrower as an example.
Figure 20: A quasi-loan business – The deal structure of Restructuring Distressed Asset business with a property developer borrower as an example
- Repayment schedule: 2 years Debt Restructuring* - Interest rates: 13 – 15% per annum Property - Collateral/guarantee enhancement developer • • Formation of Distressed Distressed of Formation Debt Repayment Collateral Claims on Loans/ Debt Assets Receivables
Creditors Transfer of debt -Suppliers Cinda -Banks - Trust cos. Payment
Source: Deutsche Bank, company data
With total RDA assets growing by 9.4 times in the past two years, Cinda mainly sources RDA deals from the below three major channels:
Non-financial enterprises (NFEs) – 61% of total acquisitions in 2013. As the only AMC that obtained approval from the CBRC to purchase accounts receivable from NFEs, Cinda’s RDA sourced from NFEs has accounted for the majority in the past few years. With property developers making up 60% of the underlying borrowers, we believe Cinda mainly acquired accounts receivable from upstream sectors of the real estate sector, e.g. construction, steel and cement makers.
Non-bank financial institutions (FIs) – 16%. We believe Cinda mainly acquired troubled trust plans from trust companies before the due dates. Within the 21 nearly-defaulted trust cases we collected, two of them were bailed out by AMCs.
Deutsche Bank AG/Hong Kong Page 13
15 May 2014
Other Financial Services China Cinda
Commercial banks – 23%. Cinda also provided “bridge loans” to troubled borrowers of banks before the loans turned to NPLs.
Figure 21: The net balance of RDA has soared 9.1x Figure 22: Cinda sourced RDA from NFEs (60.7% in during the past two years FY13) – based on the acquisition cost for the period
(Rmb mn) Net balance of RDA (LHS) As % of total assets (RHS) NFE Banks Non-bank FIs 180,000 30.0% 100% 12.3% 16.3% 15.9% 160,000 90% 25.5% 25.0% 80% 140,000 18.5% 70% 23.4% 23.4% 120,000 20.0% 18.9% 60% 100,000 97,971 15.0% 50% 80,000 40% 60,000 10.0% 69.2% 48,068 30% 60.2% 60.7% 40,000 5.6% 5.0% 20% 20,000 9,681 10% 0 0.0% 0% 2011 2012 2013 2011 2012 2013 Source: Deutsche Bank, company data Source: Deutsche Bank, company data
Mounting risks due to heavy reliance on real estate sector
Our key concern on Cinda’s RDA business is its heavy reliance on the real estate sector, which accounted for 60% of gross RDA balance as of end 2013.
We see rising risks related to Cinda’s real estate exposure, reflecting a lower- quality borrower profile, emerging weaknesses in the property sectors in lower-tiered cities and deleveraging in shadow banking, which we believe represents the key financing channel to Cinda’s underlying borrowers.
Our property analyst expects inevitable property price cuts in the near term and to see diverging operating performance with stronger developers benefiting while selected developers suffer from financial distresses. As such, a potential property price correction could lead to cash flow deterioration among Cinda’s weaker developer borrowers and hence may push up the impaired ratio of the RDA portfolio (impaired ratio at only 1.0% as of end- 2013).
Page 14 Deutsche Bank AG/Hong Kong
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Other Financial Services China Cinda
Figure 23: 60% of Cinda’s RDA net balance was Figure 24: Cinda’s RDA has been concentrated in real extended to real estate sectors estate sector over the past years, as has Orient, another big-4 AMC 100% Others Mining, 1% Transportation, 90% Others, 3% Mining Construction, 9% 80% 5% 70% Transportation R eal estate, Manufacturing, 60% Construction 6% 60% 50% Leasing&commerci Public utilities, 40% 78% al services 6% 74% 68% Public utilities 30% 60%
20% Manufacturing Leasing & 10% Real estate commercial, 0% 10% Cinda - Cinda - Cinda - Orient - 2011 2012 2013 2013
Source: Deutsche Bank, company data Source: Deutsche Bank, company data
A lower quality borrower profile Given relatively higher interest rates charged on underlying borrowers and the nature of extending loans to distressed borrowers, we believe the majority of Cinda’s RDA clients are weaker medium- and small-sized developers. Figure 24 demonstrates that the interest rate of Cinda’s RDA business is higher than that of other financing channels for property developers.
Figure 25: Ranges of interest rates charged on various financing channels for real estate developers – Cinda’s RDA interest rate is among the highest, suggesting weaker underlying borrowers
% Range of interest rates on various financing channels 16.00
14.00 13.00 Avg: 13.5
12.00 10.78 10.00 10.00 11.00 8.40 Avg: 8.7 8.00 Avg: 7.35 8.00 6.00 6.60
4.00 3.57 2.00
- Avg funding cost of General bank USD bonds Real estate trust loans Cinda's RDA lending listed developers developer loans Risks
Source: Deutsche Bank, company data
Emerging weaknesses in property sector in lower-tiered cities While the company does not disclose its real estate exposure breakdown by tier of city, we estimate at least half of its real estate RDA is located in lower- tiered cities (lower tier-2 and tier-3/4), as more than half of its RDA gross balance was extended to borrowers in less developed regions in China, i.e. the western (27% of gross balance), central (16%) and northeastern regions (8%).
Deutsche Bank AG/Hong Kong Page 15
15 May 2014
Other Financial Services China Cinda
We see weaknesses emerging in property sectors in lower-tiered cities, evidenced by a notable decline in YTD residential property sale value (Figure 25) and a rising inventory period for lower tier-2 and tier-3/4 cities (Figure 26).
Figure 26: YTD residential property sales value yoy Figure 27: Inventory period for residential property (2011 growth by city tiers (2009 - 2M14) – Low-end tier-2 cities – 3M14) – Tier 2/3/4 cities were all trending up above 15 were showing the sharpest decline months Tier 1 Cities Inventory High-end Tier 2 Cities Inventory Tier-1 Cities YoY High-end Tier-2 Cities YoY month Low-end Tier-2 Cities YoY Tier-3/4 Cities YoY Low-end Tier 2 Cities Inventory Tier 3/4 Cities Inventory 150% 30.0
100% 25.0
20.0 50% 15.0 0% 10.0
-50% 5.0
-100% - 1H09 1H11 1H13 2M09 4M09 8M09 3M10 5M10 7M10 9M10 2M11 4M11 8M11 3M12 5M12 7M12 9M12 2M13 4M13 8M13 Jul-11 Jul-12 Jul-13 Jan-11 Jan-12 Jan-13 Jan-14 09M09 12M09 11M10 10M11 12M11 11M12 10M13 12M13 Sep-11 Sep-12 Sep-13 Mar-11 Nov-11 Mar-12 Nov-12 Mar-13 Nov-13 Mar-14 May-11 May-12 May-13
Source: Deutsche Bank, NBS. Note: We refer high-end tier-2 cities to tier-2 cities with higher GDP Source: Deutsche Bank, Soufun. Note: We refer high-end tier-2 cities to tier-2 cities with higher GDP
In addition, risks related to commercial property in tier-2 cities are climbing, in our view. As shown in Figure 27, for the six selected tier-2 cities, i.e. Chengdu, Tianjin, Qingdao, Chongqing, Shenyang and Wuhan, the vacancy rate of office buildings combined has been trending up and is expected to even rise much higher in 2014E, given the massive new supply, which is nearly three times 2013’s sales. Specifically, office building vacancy rates for Chongqing and Tianjin are expected to rise to 45% and 37% in 2014, according to the estimates of Jones Lang LaSalle (Figure 28).
Figure 28: For the six selected tier-2 cities, office building Figure 29: Also, vacancy rates of these cities have been supply in 2014E is nearly three times 2013’s sales, on the rise, and Jones Lang LaSalle expects vacancy potentially leading to much higher vacancy rates rates for Chongqing and Tianjin to rise to 45% and 37% Office building supply & demand dynamics - 6 tier-2 cities 50% Vacancy rates of selected tier-2 cities 000'sqm GFA completed Sales Future Supply Vacancy rate (RHS) 3,000 30% 45% Chengdu 26% 26% 26% 24% 2,531 40% 2,500 25% Tianjin 35%
2,000 20% 30% 17% Qingdao 25% 1,500 15% 1,195 1,056 20% Chongqing 1,000 820 853 10% 15% 673 699 605 Shenyang 10% 500 5% 240 294 81 5% Wuhan - 0% 0% 2009 2010 2011 2012 2013 2014E 2009 2010 2011 2012 2013 2014E Source: Deutsche Bank, Jones Lang LaSalle Source: Deutsche Bank, Jones Lang LaSalle
The deceleration in shadow banking credit may squeeze the credit availability We believe weaker medium- and small-sized developers have been more reliant on shadow banking financing over the past few years, as banks loans have been restricted to top-tier developers since 2011 with name list lending strictly imposed.
Page 16 Deutsche Bank AG/Hong Kong
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Other Financial Services China Cinda
Reflecting several recently-issued regulations aiming to curb riskier shadow banking lending, including Circular No. 8 (on off-balance sheet non- standardized WMP assets and issued in March 2013), No. 107 (overall guideline in regulating shadow bank in January 2014), No. 99 (on trust lending in April 2014) and No. 11 (on non-standardized assets for rural financial institutions in April 2014), shadow banking credit growth has slowed down and we expect low growth to remain in the near term, leading to less credit availability to Cinda’s RDA borrowers. For example, total new trust loans have dropped 70% yoy in the first four months of 2014. As a result, we expect some smaller, weaker developer borrowers of Cinda may go under amid the property price correction and dried-up credit.
Figures 29 and 30 show a slowdown in growth of real estate trust and Chinese banks’ on-balance sheet non-standardized assets, respectively. Figure 31 demonstrates that shadow bank credit made up a smaller proportion of total social financing in 1Q14.
Figure 30: Real estate trust slowed down in 1Q14 due to Figure 31: Non-standardized assets from Chinese banks, regulatory crackdown once an important financing channel to smaller property developers, has declined by 4% hoh in 2H13 New real estate trust (LHS) New real estate trust % total new trust Rmb bn Rmb bn 5,000 5.0% 160 30% Proprietary 140 4,500 4,184 4.6% 4.4%4.5% 140 3,997 investments in 25% loan-type WMPs 118 118 4,000 4.0% 120 20% 3,500 3.5% Reverse repo 100 1,869 82 82 15% backed by trust 75 3,000 2,193 3.0% 80 2,510 beneficiary rights 55 10% 2,500 2.5% 60 Reverse repo 42 2,000 919 2.0% 5% 895 backed by bills 40 1.6% 1,201 0% 1,500 1.5% 20 8 12 626 1,158 1 1,000 680 293 1.0% % of total assets -5% 0.8% - 248 1,420 (RHS) 500 193 965 0.5% (2) 283 0.5% 660 647 (20) (11) -10% 0 204 0.0% 2H11 1H12 2H12 1H13 2H13 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14
Source: Deutsche Bank, Trustee Association of China Source: Deutsche Bank estimates, company data
Figure 32: Total social financing breakdown – Shadow Figure 33: Bank loans extended to property developers banking proportion decreased in 1Q14 remained largely stable over the past quarters Total Social Financing in China - Breakdown New developer loans as % of total new loans 100% 2% 2% 2% 2% 2% 2% 2% 1% 2% 4% 3% 4% 2% Others 30% 4% 7% 5% 4% 3% 2% 1% 7% 5% 7% 90% 9% 8% 10% 4% 8% 11% 14% 3% 5% 25% 0% 3% Non-FI Enterprise 80% 6% 5% 6% 2% Equity Raising 4% 11% 13% 6% 3% 10% 8% 11% 20% 70% 17% 8% Net Corporate 8% 15% 10% Bond Financing 8% 60% 7% 15% 4% Trust Loans 10% 50% 10%
83% Entrusted Loans 40% 77% 73% 76% 5% 67% 63% 30% 60% 58% 61% 55% Undiscounted 0% 20% bank acceptance bills -5% 10% Bank loans -10% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 3M14 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Source: Deutsche Bank, PBOC Source: Deutsche Bank, PBOC
Potential default ratio of real estate entrusted loans is rising, media reported The sluggish sales and elevated inventory level has already led to cash flow tightness of selected weaker property developers, evidenced by Rmb600m
Deutsche Bank AG/Hong Kong Page 17
15 May 2014
Other Financial Services China Cinda entrusted loans extended by listed companies in Zhejiang province to property developers that have already been overdue, rolled over or filed in litigation process, equivalent to a potential default ratio of 12%, according to 21st Century Business Herald on 10 May 2014.
Cinda is highly sensitive to property price, we estimate Our sensitivity analysis on the impact from property price correction suggests Cinda is highly sensitive to property prices. Under our assumptions, a 15% property price decline might impact Cinda’s FY13 earnings by 31%, including: (1) impact of 19% from worsening asset quality on RDA assets, where the rising impaired RDA ratio would push up the impairment losses; and (2) impact of 12% from more provisions charged on its held for sale property inventories and real estate investment.
Figure 34: Our sensitivity analysis on property price correction suggests Cinda is sensitive to property price change, with a 15% property price drop knocking 31% off FY13 earnings
Property price drop by 5% 10% 15% 20% Impact 1 - Worsening asset quality on RDA assets Current impaired ratio 1.00% 1.00% 1.00% 1.00% Increase to impaired ratio by (based on stress test of Huaxia Bank in 2010) 0.00% 0.46% 1.10% 1.73% based on stress test of Huaxia Bank in 2010 Increase to impaired ratio at Cinda's RDA assets 0.50% 0.96% 1.60% 2.23% 0.5% higher on weaker property borrowers Incremental impaired assets 378 726 1,206 1,686 Impairment provision coverage ratio to incremental impaired assets 200% 200% 200% 200% Assume 200% coverage Incremental impairment provision charged (756) (1,452) (2,412) (3,373) Impact on FY13 earnings -6% -11% -19% -27%
Impact 2 - Fair value changes in its property investment and development portfolio Impact on investment property (held for sale inventories + RE investment) (491) (982) (1,474) (1,965) Assume 50% impairment provision charged Impact on FY13 earnings -4% -8% -12% -16%
Overall impact on FY13 earnings (Impact 1 + Impact 2) -10% -19% -31% -42%
Source: Deutsche Bank estimates, company data
We expect rising impaired ratio and hence higher provision
Amid the mounting credit risks related to its real estate exposure, the near- term challenge for Cinda is the first repayment peak of RDA assets in 2014E with Rmb50.5bn RDA due, which would mostly likely be concentrated in 2H14E, as Cinda started aggressively acquiring RDA assets from 2012 and the average duration was around two years. Figure 34 shows the evolution of Cinda’s RDA gross balance during 2012-14E.
Page 18 Deutsche Bank AG/Hong Kong
15 May 2014
Other Financial Services China Cinda
Figure 35: Cinda started aggressively acquiring RDA assets in 2012, thus the first repayment peak would occur in 2014E, most likely in 2H14E, we estimate
Rmb bn Evolution of RDA gross balance during 2012-14E 250.0 12.9 200.0 35.3 95.6 50.5 150.0 29.0
100.0 76.5 Repayment 161.5 50.0 peak at 2014E 49.2
- 9.7 Gross Acquired - Acquired - Acquired - Repayment -Repayment -Repayment - Accured Gross balance - 2012 2013 2014E 2012 2013 2014E interest - balance - 2011 2012-14E 2014
Source: Deutsche Bank estimate, company data
Compared with Chinese banks, Cinda’s RDA business indeed generates a higher margin. However, the provision coverage of Cinda’s RDA business was only slightly higher than Chinese banks, which seems insufficient, in our view, considering more distressed borrowers and much heavier concentration on the real estate sector.
Figure 36: Cinda’s RDA business generates much higher Figure 37: But given the riskier profile of RDA business, margin (9.52%) than that of Chinese banks (3.93%) Cinda’s provision coverage, which was only slightly higher than Chinese banks, looks light
16.0% NPA ratio (%) NPA coverage ratio (%) loan coverage ratio (%) RDA yield - 14.0% 13.5% 1.00 291 2.92 0.98 275 12.0% 2.69
10.0% Spread - 9.52% 8.0% Loan yield - 5.90% 6.0%
4.0% Spread - 3.93% Funding cost - 2.0% 3.98% Deposit cost - 1.98% 0.0% Cinda Chinese banks Cinda RDA Bank loans Cinda RDA Bank loans Cinda RDA Bank loans
Source: Deutsche Bank, company data; Note: data of banks is the aggregate data of listed Chinese Source: Deutsche Bank, company data; Note: data of banks is the aggregate data of listed Chinese banks DB covers. banks DB covers.
The asset quality of Cinda’s RDA business has started to deteriorate in 2H13, with the impaired loan balance soaring 114% hoh to account for 1.0% of gross RDA balance (1H13: 0.6%).
Looking ahead, we expect some smaller, weaker developer borrowers of Cinda’s RDA business to go under amid the property price correction and dried-up credit availability, and hence to push up its RDA impaired balance by 176% and 80% yoy to make up 1.8% and 2.5% of RDA gross balance in 2014E and 2015E respectively. As such, we expect Cinda to charge credit cost of 294bps and 287bps in 2014E and 2015E.
Deutsche Bank AG/Hong Kong Page 19
15 May 2014
Other Financial Services China Cinda
Figure 38: We expect Cinda’s RDA impaired balance to Figure 39: As a result, we expect Cinda to charge credit increase by 176% and 80% yoy to make up 1.8% and cost of 294bps and 287bps in 2014E and 2015E 2.5% of RDA gross balance in 2014E and 2015E Rmb mn Impaired balance Impaired ratio (RHS) Rmb mn New provision Credit cost on average RDA balance (RHS) bps 8,000 3.5% 7,000 600 3.2% 5,921 7,000 3.0% 6,000 494 5,312 500 6,000 2.5% 2.5% 5,000 400 5,000 3,873 2.0% 4,000 4,000 1.8% 300 7,577 294 287 1.5% 3,000 3,000 194 257 1.2% 5,026 200 1.0% 1.0% 2,000 2,000 1,472 1,501 0.8% 2,793 41 100 1,000 0.5% 1,000 73 597 1,011 20 - 0.0% - - 2011 2012 2013 2014E 2015E 2016E 2011 2012 2013 2014E 2015E 2016E
Source: Deutsche Bank estimates, company data Source: Deutsche Bank estimates, company data
Page 20 Deutsche Bank AG/Hong Kong
15 May 2014
Other Financial Services China Cinda DES – A lower-than- expected margin of safety
Cinda’s DES (debt-to-equity swap) portfolio was primarily converted from distressed assets of SOEs during the policy NPLs carve-out in 1999-2000. Premised on the low acquisition costs and the turnaround of many DES companies during the past economic cycles, Cinda realized a high exit multiple of 2.2x from the disposal of DES assets during 2010-13, translating into revenue contribution of 15% on average to the company. The market once perceived that there should be further potential for asset appreciation from Cinda’s DES portfolio, especially for its unlisted DES companies, as American Appraisal China Limited (AACL), an independent valuation specialist, valued Cinda’s top-20 unlisted DES companies at Rmb62.3bn as of 1H13, equivalent to 2.25 times the book value.
Nevertheless, our studies into 74 listed comparables to Cinda’s top-20 unlisted DES companies and financial data of six unlisted DES companies among the top-20, and Cinda’s heavy exposure to troubled coal sector (62%) lead us to apply a 30% haircut to total appraisal/market value of DES assets, translating into lower exit multiples from DES disposal in coming years and hence declining net gains.
Figure 40: Overview of Cinda’s DES portfolio – 62% exposure to coal sector
Manufact Others, Chemicals uring, 4% 11% , 30% Listed DES 21% Total DES sector breakdown
15% Metals, Others, 37% Coal, 18% Other unlisted DES 13% Coal, Metals, 9% 62%
Top 20 unlisted DES Non- Chemica coal, l, 16% 19% 63% Coal, 81%
Source: Deutsche Bank, company data
Overall we apply 30% haircut to appraisal/market value of DES assets
As of end 2013, Cinda’s total DES book value amounted to Rmb42.3bn, accounting for 11% of total assets. Within its DES portfolio, 81% are unlisted with top-20 unlisted companies making up 65% of total DES book value.
We estimate the appraisal value of unlisted DES assets (based on the appraisal from AACL) and the market value of listed DES assets in combine amounted to Rmb79.3bn, equivalent to 1.8 times book value as of June 2013.
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However, in order to estimate the “true” fair value of Cinda’s DES assets, we believe a 30% discount should be applied to the total appraisal/market value, leading to a much lower margin of safety at 1.3 times book value as of December 2013. Our estimate reflects the following factors, which are elaborated in the subsequent sections:
32% haircut to appraisal value of unlisted DES assets, which was derived from 30% expected correction in share prices of 14 listed comparable coal companies since June 2013 and 10% discount due to lack of marketability, offset by relatively resilient share price of listed comparables to non-coal DES companies.
10% further decline to current market value of listed DES assets, due to heavy exposure to overcapacity sectors (85% of total listed DES). Figures 40 and 41 illustrate how we derive the 30% haircut:
Figure 41: We believe the fair value of Cinda’s DES portfolio should be subject to a 30% haircut to its appraisal/market value (32% haircut for unlisted DES and 10% for listed DES), leading to a lower safety of margin
Appraisal / market Implied multiple Discount / further Implied multiple Rmb mn Book value - 1H13 value (x) MTM loss exp. Fair value - current (x) - adjusted Unlisted DES Appraisal value - 1H13 Discounts applied Top 20 unlisted 27,689 62,300 2.25x 32% 42,321 1.53x - 13 coal companies 22,403 52,700 2.35x 37% 33,201 1.48x - 7 non-coal companies 5,286 9,600 1.82x 5% 9,120 1.73x Other unlisted 6,690 9,700 1.45x 33% 6,547 0.98x Sub-total 34,378 72,000 2.09x 32% 48,868 1.42x Listed DES Market value - current Further MTM loss exp. Top 20 listed 9,110 7,141 n.a. 10% 6,427 n.a. Other listed 167 131 n.a. 10% 117 n.a. Sub-total 9,277 7,271 n.a. 10% 6,544 n.a.
Total DES assets 43,655 79,271 1.82x 30% 55,412 DES book value 2013 42,275 Fair value % 2013 book value 1.31x
Source: Deutsche Bank estimates, company data。Note: Appraisal value is provided by American Appraisal China Limited.
Figure 42: Our analysis into 74 listed comparables for Cinda’s top-20 unlisted and listed DES portfolio points to potential 30% haircut to total appraisal and market value
Rmb bn The market once perceived huge But we believe significant discount should be applied 90.0 potential for asset appreciation... 33% discount 10% further MTM loss
80.0 32% discount 0.7 6.5 30% 70.0 3.2 1.82x 6.5 23.9 hair-cut 60.0
50.0 20.0 1.31x
40.0 9.3 79.3
30.0 6.7 55.4 20.0 43.7 42.3 42.3 27.7 10.0
- Top 20 unlisted Other unlisted Listed DES Total DES - BV Total DES - Top 20 unlisted Other unlisted Listed DES Total DES - fair Total DES - BV DES DES 1H13 Appraisal + DES DES value 2013 market value
Source: Deutsche Bank estimates, company data
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As a result, we expect Cinda to record decreased exit multiples of 1.37 and 1.36 in 2014E and 15E (vs. 2.19x on average during 2010-13), translating into fewer net DES disposal gains and lower revenue contribution from DES portfolio of 6% on average during 2014E-16E (vs. 15% during 2010-13), as shown in Figures 42 and 43.
Figure 43: We expect the exit multiples of Cinda’s DES Figure 44: In the meantime, total income from DES as a assets to trend downward percentage of total group income should also decrease from 12% in 2013 to 5% in 2016E [x] Exit multiples of Cinda's DES portfolio Rmb bn Total DES income As % of total income 6.0 20% Total Unlisted Listed 4.00 18% 17% 5.0 17% 3.50 3.44 16% 2.86 15% 3.00 2.73 14% 4.0 2.50 2.12 2.20 12% 12% 3.0 10% 2.00 5.6 9% 1.68 1.42 1.42 1.42 5.0 8% 1.50 1.55 4.5 2.0 4.1 3.9 2.66 3.6 6% 6% 2.27 1.10 1.20 1.10 1.10 3.3 1.00 2.16 5% 1.85 4% 1.37 1.36 1.36 1.0 0.50 2% 0.00 - 0% 2010 2011 2012 2013 2014E 2015E 2016E 2010 2011 2012 2013 2014E 2015E 2016E Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
32% haircut to appraisal value of unlisted DES assets
With stakes in 187 unlisted companies, Cinda’s unlisted DES book value amounted to Rmb34.1bn as of 2013, making up 81% of total DES book value. Cinda recorded unlisted DES companies at acquisition costs.
Its top-20 unlisted companies accounted for 80.5% of total unlisted DES book value as of June 2013. Among its top-20 unlisted DES companies, 13 are coal companies, whose book value and appraisal value by AACL make up 81% and 85% of the top-20, respectively.
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Figure 45: List of Cinda’s top-20 unlisted DES companies with total book value of Rmb27.7bn and appraisal value of Rmb62.3bn (equivalent to 2.25x book value) Item Sector Investee company Stake 1 Coal Shenhua Group Zhungeer Energy Co., Ltd. 42.24% 2 Coal Datong Coal Mine Group Co., Ltd. 30.12% 3 Coal Huainan Mining Industry (Group) Co., Ltd. 24.84% 4 Coal Xishan Coal Electricity Group Co., Ltd. 35.47% 5 Coal Yangquan Coal Industry (Group) Co., Ltd. 40.42% 6 Chemicals Wengfu (Group) Co., Ltd. 47.16% 7 Coal Shanxi Jincheng Anthracite Mining Group Co., Ltd. 16.45% 8 Coal Tiefa Coal Industry (Group) Co., Ltd. 30.46% 9 Coal Huozhou Coal Electricity Group Co., Ltd. 36.97% 10 Coal Shanxi Fenxi Mining Industry (Group) Co., Ltd. 36.02% 11 Manufacturing China National Materials Co., Ltd. 8.96% 12 Coal Shandong Zhongxing Energy Co., Ltd. 20.74% 13 Transportation Ningxia Ningdong Railway Corporation Limited 25.90% 14 Metals Baiyin Nonferrous Metal Group Co., Ltd. 5.97% 15 Coal Ningxia Lingxin Coal Industry Co., Ltd. 52.46% 16 Manufacturing Tianjin Pipe (Group) Corporation 6.11% 17 Chemicals Shanghai Coking & Chemical Corporation 26.58% 18 Construction China Nuclear Engineering Corporation Limited 14.85% 19 Coal Guizhou Shuicheng Coal Mining (Group) Co., Ltd. 20.23% 20 Coal Huaibei Mining Co., Ltd. 6.79% Book value of top-20 unlisted companies – 1H13 27,674 As % of total book value of unlisted companies – 1H13 80.5% Acquisition cost of top-20 unlisted companies – 1H13 27,689 Calculated value by American Appraisal – 1H13 * 62,300 Calculated value / book value of top-20 unlisted companies (x) – 1H13 2.25 Source: Deutsche Bank, Company data * Note: American Appraisal is an independent valuation specialist
We apply a 32% haircut to the appraisal value from AACL on Cinda’s unlisted DES assets and we take the following factors into consideration:
1) 74 listed comparables’ recent share price performance For Cinda’s top-20 unlisted DES companies, we collected 74 listed comparables, including 14 listed coal companies and 60 listed non-coal companies.
For Cinda’s 13 unlisted coal companies, which accounted for 81% of the top- 20, the share prices of the 14 listed comparables have declined by 16% during June 2013 to 14 May 2014. In addition, these listed coal companies are trading at 5.87x EV/2013 EBITDA (according to data from Bloomberg Finance LP), representing a 24% decline from 7.72x EV/2012 EBITDA, which was employed by AACL to derive the appraisal value. As such, we applied a 20% discount to account for share price correction of listed comparables.
For non-coal companies, the share price and valuation of the 60 listed comparables have increased by 15% and 21% respectively since June 2013.
Please refer to Appendix B for the full list of the 74 listed comparables. Figures 46 and 47 showcase the share price performance of the selected listed comparables.
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Figure 46: An analysis into 74 listed comparables for Cinda’s top-20 unlisted DES portfolio – Valuation and market cap of the 14 listed coal companies have decreased by 26.5% and 20.5% respectively, since June 2013
Listed comparables to Cinda's % of Cinda's No. of Total market cap (Rmb bn) EV/EBITDA (x) unlisted DES companies unlisted DES comparables 28-Jun-13 14-May-14 Change % 28-Jun-13 14-May-14 Change % Coal 85% 14 625.98 526.22 -16% 7.72 5.87 -24% Non coal 15% 60 2,129.73 2,454.51 15% 11.22 13.62 21% - Phosphate compounds and fertilizer 8 40.06 41.24 3% 16.96 11.88 -30% - Coking chemicals 5 14.66 14.96 2% 71.15 30.71 -57% - Cement 10 154.37 190.53 23% 7.97 9.79 23% - Non-ferrous metals 10 120.46 108.20 -10% 16.28 16.99 4% - Steel pipes 8 53.67 53.09 -1% 13.37 11.21 -16% - Railway construction 12 1,383.40 1,702.98 23% 11.24 39.70 253% - Nuclear power plants 7 363.12 343.50 -5% 7.50 5.82 -22%
Source: Deutsche Bank estimates, company data
Figure 47: For the 14 listed coal company comparables to Cinda’s unlisted DES companies, weighted market capitalization has declined by 16% since June 2013
14 listed coal comparables for unlisted DES - % change since Jun13 15%
10%
5%
0%
-5%
-10%
-15% -16%
-20%
-25%
-30% Jul13 Aug13 Sep13 Oct13 Nov13 Dec13 Jan14 Feb14 Mar14 Apr14 May14
Source: Deutsche Bank, Bloomberg Finance LP. Note: Price updated on 14 May 2014.
2) Further downside on heavy exposure to coal sector and weakening financial conditions We expect further downside of 15% to the share price of listed comparables to Cinda’s top-20 unlisted DES companies, which reflects the following two reasons.
Firstly, Cinda’s DES portfolio is heavily concentrated in the coal sector with exposure of 62% as of 1H13. Our coal analyst remains bearish on the coal sector and expects a persistent oversupply imbalance with mounting supply pressure and slowed demand. Specifically, with anticipated GDP growth slowdown (vs. the past decade), structural changes in the economy, energy mix changes and energy efficiency improvements, Deutsche Bank believes China’s demand for thermal coal will rise, at most, 3-4% pa in the coming years. In the meantime, over-investment in the past years should still lead to high nameplate capacity addition (9% in 2013 and 7% in 2014, according to DB estimates). The structural overcapacity issue will likely trigger the Chinese thermal coal equilibrium price to trend lower than that in 2013.
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Figure 48: Coal price could continue to remain low Figure 49: 13 listed coal companies recorded declines in net profits in recent years
Rmb/t QHD 5500kcal FOB coal price (2003 - 2015E) Rmb bn Sector net profit YoY growth (RHS) % 100 60% 1200 90 50% 995 1000 80 40% DB forecast 70 800 30% 60 20% 600 50 88 89 10% 40 76 69 400 0% 30 56 57 -10% 20 37 200 10 -20%
0 0 -30% 3-Mar-03 3-Mar-05 3-Mar-07 3-Mar-09 3-Mar-11 3-Mar-13 3-Mar-15 2007 2008 2009 2010 2011 2012 2013
Source: Deutsche Bank estimates, WIND Source: Deutsche Bank, WIND
Secondly, our financial analysis of the six unlisted DES companies among the top-20 which have issued bonds points to worsening financial conditions with sluggish profitability and weakened debt servicing ability. As shown in Figure 50, the weighted average ROAE of the six companies has declined to negative 0.11% in 1H13 from 8.58% in 2011. Accordingly, EBIT coverage of the six companies weakened to 1.37x in 1H13 from 2.71x in 2011.
Figure 50: Weighted average ROAE of the six unlisted Figure 51: Weighted average EBIT coverage of the six DES companies dropped to negative 0.11% in 1H13 from unlisted DES companies declined to 1.37x in 1H13 from 8.58% in 2011 2.71x in 2011 ROAE -6 unlisted DES weighted E B IT coverage - 6 unlisted DES weighted 10.00% 3.50 9.00% 3.19 8.58% 8.00% 3.00 7.00% 2.71 6.50% 6.00% 2.50 2.36 5.00% 4.00% 2.07 2.00 3.00% 2.47% 2.00% 2.02% 1.00% 1.50 1.37 0.00% -0.11% -1.00% 1.00 2009 2010 2011 2012 1H13 2009 2010 2011 2012 1H13
Source: Deutsche Bank, company data, WIND Source: Deutsche Bank, company data, WIND
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Figure 52: Financial summary of the six unlisted DES companies with deteriorating debt servicing capabilities and sharp decline in profit and ROAE Unlisted DES Sector 2011 2012 1H13 2011 2012 1H13 2011 2012 1H13 2011 2012 1H13 Debt servicing EBIT coverage CFO coverage Leverage (A/E) Cash conversion days China National Materials Co., Ltd. Manufacturing 4.85 2.28 1.99 -0.56 1.68 2.47 3.33 3.20 3.52 1.57 19.56 44.40 Tiefa Coal Industry (Group) Co., Ltd. Coal N.A. 3.91 1.85 N.A. -0.18 -2.35 1.87 2.21 2.17 3.85 15.69 60.56 Shanxi Jincheng Anthracite Mining Group Coal 2.85 1.85 1.39 3.06 1.36 0.41 4.19 4.34 4.42 -29.40 -17.64 -7.49 Wengfu (Group) Co., Ltd. Chemicals 4.07 1.77 1.05 -2.60 4.28 -6.53 3.35 4.23 3.93 38.54 14.77 26.88 Datong Coal Mine Group Co., Ltd. Coal 2.28 1.75 1.18 8.55 -1.41 7.45 3.24 3.70 4.19 3.80 1.80 15.21 Yangquan Coal Industry (Group) Co., Ltd. Coal 3.46 1.90 1.44 4.79 1.09 -0.62 3.57 4.21 3.82 -9.28 -6.53 5.11 Profitability Profit growth Cost-to-income ratio ROAA ROAE China National Materials Co., Ltd. Manufacturing 31% -67% -60% 92.1% 98.3% 97.6% 5.49% 1.89% 1.27% 14.24% 4.39% 1.76% Tiefa Coal Industry (Group) Co., Ltd. Coal 11% -78% -40% 88.9% 97.5% 99.2% 6.29% 1.16% 0.50% 11.84% 2.56% 1.51% Shanxi Jincheng Anthracite Mining Group Coal 52% -22% -23% 95.2% 98.7% 99.4% 3.16% 1.35% 0.60% 14.65% 9.74% 6.83% Wengfu (Group) Co., Ltd. Chemicals 27% -79% N.A. 97.6% 99.0% 100.0% 2.76% 0.64% 0.01% 8.91% 1.73% -0.73% Datong Coal Mine Group Co., Ltd. Coal -14% N.A. N.A. 98.2% 99.4% 99.6% 0.49% -0.07% -0.39% 2.68% -1.55% -5.60% Yangquan Coal Industry (Group) Co., Ltd. Coal 198% -85% -27% 96.7% 98.8% 99.3% 2.24% 0.35% 0.31% 10.01% 1.43% 2.02% Source: Deutsche Bank; Company data
3) Discount of 10% due to lack of marketability Cinda disposed its DES assets through IPOs, mergers and acquisitions and repurchases from controlling shareholders, with IPOs normally generating the highest exit multiples. However, due to unfavorable capital market conditions and IPO pipelines, we believe it would be quite difficult for Cinda to dispose unlisted DES assets through IPOs. Hence, we apply a further discount of 10% to reflect the lack of marketability.
China’s capital market has shifted towards smaller-sized deals and government-supported sectors over the past years. We estimate Cinda’s top- 20 unlisted DES companies could potentially have an IPO size of Rmb1.28bn, which is much higher than the Rmb0.68bn on average in 2012, as shown in Figure 53. In addition, we collected the information of 186 companies in the IPO pipeline released by the CSRC and we found that there is only one mining company expected to go public (Figure 54). None of Cinda’s top-20 listed companies is included in the pipeline list.
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Figure 53: Average IPO size has been on the downtrend Figure 54: Unfavorable IPO pipelines – Only one mining since 2009, much smaller than the estimated IPO size of company is expected to go public Cinda’s top-20 unlisted DES companies Rmb mn Average IPO size Current IPO pipeline companies by sector 5,000 4,413 Estimated Manufacturing 4,500 Mining, 1, potential IPO size , 37, 20% 4,000 1% of Cinda's top 20 Others, 40, 3,500 3,120 unlisted DES 21% 3,000 companies Transportation Technology, 2,500 , 8, 4% 19, 10% 1,888 Design&decor 2,000 ation, 8, 4% 1,398 1,349 1,282 1,500 1,153 Automobile 1,013 , 8, 4% 1,000 762 680 430 Food&beverag Pharmaceutica 500 l&bio-tech, 18, - e, 9, 5% 0 Chemical, Electronics, Machinery, 10% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Cinda 9, 5% 14, 8% 15, 8%
Source: Deutsche Bank estimate, CSRC Source: Deutsche Bank, CSRC Note: Estimated IPO size of Cinda’s top-20 unlisted DES companies = Average book value per company / percentage of Cinda’s shareholding (27%) * estimated average issuance contribution (25%)
10% further decline to market value of listed DES assets
With shareholdings in 26 companies, Cinda’s listed DES book value amounted to Rmb8.1bn as of 2013. Cinda booked the value of listed DES assets based on trading prices and any mark-to-market losses (gains) are reflected in impairment losses (recoveries) charged on DES assets.
Figure 55: The list of Cinda’s top-20 listed DES companies – Total market capitalization attributable to Cinda has decreased by 13.1% since June 2013 Item Sector Investee company BBG ticker Stake Market cap (RMB m) as of As of 1H13 6/28/2013 12/31/2013 hoh chg 4/30/2014 Ytd chg 1 Chemicals Qinghai Salt Lake Industry Co., Ltd 000792 CH Equity 7.27% 1,959 1,934 -1.2% 1,665 -13.9% 2 Metals Aluminum Corporation of China 601600 CH Equity 5.92% 2,248 2,421 7.7% 2,297 -5.1% 3 Coal Henan Dayou Energy 600403 CH Equity 4.01% 817 683 -16.4% 517 -24.3% 4 Coal Jizhong Energy Resources 000937 CH Equity 2.82% 576 484 -16.0% 370 -23.5% 5 Chemicals Yangmei Chemical 600691 CH Equity 2.48% 308 226 -26.7% 167 -26.1% 6 Chemicals Yunan Yuntianhua 600096 CH Equity 2.29% 305 230 -24.6% 192 -16.6% 7 Metals Yunnan Copper 000878 CH Equity 2.20% 302 271 -10.2% 237 -12.6% 8 Coal Zhengzhou Coal Industry & Electric Power 600121 CH Equity 4.81% 248 246 -0.8% 201 -18.5% 9 Coal Guizhou Panjiang Refined Coal 600395 CH Equity 1.44% 218 173 -20.7% 164 -5.1% 10 Transportation Jiangsu Lianyungang Port 601008 CH Equity 5.75% 133 176 32.2% 237 34.3% 11 Transportation Erzhong Group (Deyang) Heavy Industries 601268 CH Equity 1.24% 121 72 -40.1% 67 -7.5% 12 Finance Bank of Communications 601328 CH Equity 0.04% 119 120 0.6% 113 -6.1% 13 Manufacturing Fujian Qingshan Paper Industry 600103 CH Equity 5.02% 116 123 6.0% 119 -3.0% 14 Chemicals Kailuan Energy Chemical 600997 CH Equity 1.61% 113 111 -2.3% 87 -21.4% 15 Construction China Gezhouba Group 600068 CH Equity 0.80% 110 110 0.5% 140 26.4% 16 Manufacturing CITIC Heavy Industries 601608 CH Equity 0.73% 66 67 2.4% 63 -6.2% 17 IT Shandong Ispur Software 600756 CH Equity 1.36% 32 50 57.9% 46 -8.4% 18 Manufacturing FAWER Automotive Parts 200030 CH Equity 1.79% 128 140 9.3% 150 6.8% 19 Coal Anyuan Coal Industry Group 600397 CH Equity 0.64% 29 27 -5.6% 25 -6.4% 20 IT China National Software & Service 600536 CH Equity 1.08% 27 101 270.2% 73 -27.3% Subtotal of total 20 listed companies 7,975 7,766 -2.6% 6,930 -10.8% Source: Deutsche Bank; company data
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Since June 2013, the share price of Cinda’s top-20 listed DES companies, which combined made up 98% of total listed DES book value, has declined 14% on average.
Figure 56: Top 20 listed DES companies – Weighted market capitalization attributable to Cinda has declined by 11% since June 2013
Top 20 listed DES - % change since Jun13 25%
20%
15%
10%
5%
0%
-5%
-10% 11%
-15%
-20% Jul13 Aug13 Sep13 Oct13 Nov13 Dec13 Jan14 Feb14 Mar14 Apr14 May14
Source: Deutsche Bank, Bloomberg Finance LP. Note: Price updated on 14 May 2014.
We assume a further share price correction of 10% to Cinda’s listed DES, to reflect its heavy exposure on overcapacity sectors, i.e. chemical (30%), coal (18%) and metals (37%).
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Other Financial Services China Cinda TDA – Lower margin but faster turnover
For Cinda’s Traditional Distressed Asset (TDA) business, the company acquires NPLs from commercial banks at a certain discount to NPL original value and disposes of them through various means for cash.
Figure 57: The deal structure of Cinda’s TDA business – Acquiring NPLs from commercial banks and disposing NPLs through various means
Claims on Loans Debtor Commercial Company banks Formation of Distressed Debt Assets Transfer of Distressed Payment Assets
• Asset Securitization • Entrusted Disposal Cinda • Debt Restructuring • Sale • Recovery through Litigation • Debt Repayment in • Regular Collection Real Assets • Asset Swaps • Debt Repayment in Equity Holdings • Debt to Equity Swaps
Cash Equity Real Assets • Negotiated Transfer • Conversion to Equity • Issuer Repurchase • Equity Swap • Packaged Disposal • Public Auctions • Lease and Transfer of Real Assets
Source: Deutsche Bank, company data
We expect margin on NPL disposal to trend lower
Cinda’s TDA business has generated a decent return on disposal of 119% during 2010-13, contributing to 16% of group revenue. We believe such a high return was mainly attributable to cheap acquisition costs during 2004-05 when the big-four banks carved out NPLs commercially for IPOs, and also to secular asset appreciation in China over the past decade (10% CAGR during 2003-13).
Figure 58: Cinda’s TDA business has generated decent Figure 59: TDA’s strong profitability was attributable to return on disposal over the past few years the asset appreciation over the past decade Rmb/sqm Return on disposal (LHS) TDA income as % of total income National residential property price yoy % (RHS) 8,000 40% 160% 30% 10% CAGR 2003-13 140% 6,000 30% 25% 24% 120% 4,000 20% 20% 100% 18% 2,000 10% 80% 15% 147% 12% 11% - 0% 60% 119% 112% 104% 10% 40% (2,000) -10% 5% 20% (4,000) -20%
0% 0% Jul-06 Jul-12 Apr-03 Apr-09 Jun-05 Jun-11 Oct-03 Oct-09 Feb-01 Feb-07 13 Feb Sep-02 Sep-08 Mar-02 Mar-08 Mar 14 Aug-01 Dec-05 Aug-07 Dec-11 13 Aug Nov-04 Nov-10
2010 2011 2012 2013 May-04 May-10
Source: Deutsche Bank, company data. Note: Return on disposal = disposal income acquisition cost - 1 Source: Deutsche Bank, NBS, Soufun
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Going forward, we expect Cinda’s TDA business to generate lower return on disposal, mainly premised on the below three factors:
1) 84 TDA resolution cases – Higher-return disposal means no longer workable We collected data on 84 Cinda’s TDA resolution cases from five books published by the company, with total NPL original value of Rmb63bn, or 6% of all NPLs acquired by Cinda during 1999-2012. These cases delivered an average NPL recovery rate of 36 cents in a dollar with 4.3 years on average to resolve.
More importantly, litigation (mainly through forced auction of collateral), auction of collateral and development of the land/property are the three means with the highest NPL recovery rate at 84-86 cents in a dollar, suggesting that the appreciation of land/property was the key driver to strong return on disposal in past years.
We believe that these higher-return disposal means will not likely be able to generate such a decent recovery rate going forward, as we believe the fast asset appreciation in China has largely come to an end due to slower economic growth (compared with the past decade) and elevated debt levels.
Figure 60: Our proprietary study into 84 NPL resolution cases by Cinda suggests that property price appreciation was the key driver of high return on NPL disposal (sorted by NPL recovery rate) By disposal mean No. of cases Average NPL Average NPL NPL recovery rate Average resolution amount (principal + recovery value [Rmb (cents in a dollar) time (years) accrued interest) m] [Rmb m] Litigation 3 52 45 86 3.9 Auction of collateral 7 1,193 1,013 85 2.7 Development of the land or property projects 5 120 101 84 5.1 Execution of guarantee 3 83 57 69 4.9 Debt restructuring 21 447 219 49 4.4 Multiple means 10 1,840 554 30 4.6 Repayment in real assets 2 402 83 21 5.0 Debt to equity swap 14 623 117 19 5.5 Sell to third-party buyers 19 922 153 17 3.6 TOTAL 84 764 272 36 4.3 Source: Deutsche Bank, NPL Disposal Case Selection of China Cinda Asset Management (Edited by Mr. TIAN Guoli, former President of the company)
2) Survey of listed banks – recently-sold NPLs may generate low return Our survey of listed banks suggests that the NPL packages recently sold by them were economically unfavorable to AMCs, given:
Sector wise, these packages are concentrated in overcapacity sectors, such as steel traders, and other manufacturing and wholesale & retail trade, pointing to potentially lower recovery rate. In FY13, new NPL formation was mostly concentrated in manufacturing (80% of total new NPLs) and wholesale & retail trade sectors (64%).
Banks are currently more inclined to dispose lower quality NPLs (mostly loss loans with 100% provision charged), as we are still at the early stages of an NPL uptrend cycle.
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Figure 61: Our survey of listed banks suggests that NPLs disposed in FY13 were largely located in overcapacity sectors at an average price of 30-40 cents in a dollar Banks NPL transfer amount % of NPL balance Avg. selling price Sector Region 2014 plan (Rmb bn) 2013 (cents in a dollar) ICBC 14.1 12.2% 30-40 N.A. N.A. Less transfer CCB 6.0 7.0% 33 wholesale & retail, manufacturing Yangtze River Delta More transfer ABC 4.1 4.7% 35 wholesale & retail, manufacturing Yangtze River Delta N.A. BOC 4.0 5.5% N.A. wholesale & retail, manufacturing Yangtze River Delta More transfer BoCom 12.0 35.0% N.A. Steel trade N.A. n.a. MSB N.A. N.A. N.A. Steel trade N.A. N.A. SPDB 1.9 14.5% Market average wholesale & retail, manufacturing Yangtze River Delta N.A. Source: Deutsche Bank, company data
Figure 62: NPL formations were mainly from manufacturing (80% of total new NPLs) and retail & wholesale trade sectors (64%) in FY13
New NPL formation breakdown by sector - FY13 170% 150% 2% More 8% 130% 11% concentrated in 13% 110% overcapacity 64% 13% sectors 90% 70% 50% 100% 80% 30% 10% -10% -30% Manufacturing Retail & Construction Property Others Power supply Transportation Total changes wholesale
Source: Deutsche Bank, company data
Similarly, the 84 TDA resolution cases reveal that manufacturing and wholesale & retail trade sectors generated lower NPL recovery rates at 38 and 26 cents in a dollar, respectively.
Figure 63: The same study breakdown by sector with public utility (recovered 76 cents in a dollar) and transportation (60 cents recovered) delivering the highest recovery rates By sector No. of cases Average NPL Average NPL NPL recovery rate Average resolution amount (principal + recovery value [Rmb (cents in a dollar) time (years) accrued interest) m] [Rmb m] Public utility 8 300 229 76 6.0 Transportation 3 104 63 60 4.8 Manufacturing 28 570 216 38 4.4 Others & mixed 24 1,440 512 36 2.8 Real Estate 11 355 106 30 4.8 Construction 3 494 135 27 4.8 Wholesale and retail trade 2 1,003 265 26 4.5 Mining 5 757 133 18 6.6 Grand Total 84 764 272 36 4.3 Source: Deutsche Bank, NPL Disposal Case Selection of China Cinda Asset Management (Edited by Mr. TIAN Guoli, former President of the company)
3) One Case One Approach – Constraints from human resources In our view, Cinda’s TDA cases are resolved in a “One Case One Approach” manner. As suggested by the 84 cases we collected, TDA is a labor-intensive and highly-specialized business as it took 4.3 years on average with harsh
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Other Financial Services China Cinda negotiations with dozens of stakeholders in order to achieve a recovery rate of 36 cents in a dollar for an average deal size of Rmb764m (much smaller than that of banks). Therefore, the fast growth of TDA or the entire DAM business needs the support from sufficient number of talents.
In contrast, with its DAM assets jumping 1.7 times during 2010-13, the company’s number of employees only rose by 19% during the same period. We think potentially Cinda might face constraints from human resources, which could lead to slower growth or weaker risk management.
Figure 64: While Cinda’s DAM assets jumped 1.7 times Figure 65: Hence, DAM assets per employee rose from during 2010-13, its number of employees has only Rmb5.59m in 2010 to Rmb12.71m in 2013, suggesting slightly increased by 19% potential constraints of human resources Rmb bn No. Rmb mn DAM assets (LHS) No. of employees (RHS) DAM assets per employee (Rmb mn) 250.0 25,000 14.00 228.6 12.71
19,429 12.00 200.0 18,982 20,000 17,980 10.00 15,108 150.0 140.3 15,000 8.00 7.39
5.59 91.6 6.00 100.0 84.5 10,000 4.71
4.00 50.0 5,000 2.00
0.0 - - 2010 2011 2012 2013 2010 2011 2012 2013 Source: Deutsche Bank, company data Source: Deutsche Bank, company data
Overall, we forecast Cinda’s TDA business to deliver lower recovery rates in coming years, hence dragging down its return on disposal, as shown in Figures 66 and 67.
On the other hand, we expect its TDA acquisition price to trend down slightly, mainly premised on increasing NPL supply from commercial banks, offset by intensifying competition from the other three AMCs, provincial AMCs and other distressed asset managers.
Figure 66: We expect Cinda’s TDA to deliver lower Figure 67: As a result, its return on disposal is expected recovery rate with largely stable acquisition price to decrease
Acquisition price (cents in a dollar) * Recovery rate (cents in a dollar) * Return on disposal 80 160% 147% 69 70 140% 61 59 57 119% 60 54 120% 112% 104% 47 50 45 100% 80% 40 80% 30 30 30 28 28 28 26 57% 30 60% 50%
20 40%
10 20%
- 0% 2010 2011 2012 2013 2014E 2015E 2016E 2010 2011 2012 2013 2014E 2015E 2016E
Source: Deutsche Bank estimates. * Note: Estimated by Deutsche Bank. Source: Deutsche Bank estimates, company data
Deutsche Bank AG/Hong Kong Page 33
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Other Financial Services China Cinda
Growth potential in NPL supply
We expect the supply of NPL transfer from commercial banks to grow strongly in coming years, given the modest asset quality of the entire banking sector and rising incentives for banks to sell off NPLs due to supportive policies and improving economics.
Firstly, we expect the asset quality of the entire Chinese banking sector to deteriorate modestly, with total NPL balance rising by 29% and 26% yoy to account for 1.92% and 2.15% in 2014E and 2015E, compared with 1.68% in 2013. Within the banking sector, commercial banks should deliver milder asset quality deterioration than other banking financial institutions (mostly rural credit cooperatives and village banks).
Figure 68: For the entire banking system, we expect the NPL balance to rise by 29% and 26% yoy to reach 1.92% and 2.15% in 2014E and 2015E
NPL balance - other banking FIs NPL balance - commercial banks Rmb bn NPL ratio - commercial banks (RHS) NPL ratio - other banking FIs (RHS)
3,000 NPL ratio - entire banking system (RHS) 7.00% 2,647 6.29% 6.00% 2,500 5.50% 2,096 5.00% 5.00% 2,000 4.50% 1,389 1,659 4.06% 4.00% 4.00% 3.78% 1,500 1,121 1,244 1,289 3.00% 1,053 1,075 891 2.43% 1,000 2.44% 2.15% 697 1.92% 1.81% 1.68% 2.00% 810 1.60% 625 582 1.30% 1.50% 1.15% 1,258 1.14% 500 1.00% 0.95% 1.00% 975 768 1.00% 592 434 428 493 - 0.00% 2010 2011 2012 2013 2014E 2015E 2016E
Source: Deutsche Bank estimates, PBOC, CBRC
For listed banks under our coverage, we forecast NPL balance to increase by 20.1% and 18.5% yoy to account for 1.04% and 1.10% of total loans in 2014E and 2015E, respectively.
Page 34 Deutsche Bank AG/Hong Kong
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Other Financial Services China Cinda
Figure 69: We forecast listed banks to grow their NPL balance by 20.1% and 18.5% yoy to account for 1.04% and 1.10% of total loans in 2014E and 2015E, respectively NPL balance (Rmb m) NPL balance yoy growth NPL ratio (%) 2012 2013 2014E 2015E 2012 2013 2014E 2015E 2012 2013 2014E 2015E ICBC 74,575 93,689 109,201 128,418 2.1% 25.6% 16.6% 17.6% 0.85% 0.94% 0.99% 1.05% CCB 74,618 85,264 102,609 121,850 5.2% 14.3% 20.3% 18.8% 0.99% 0.99% 1.06% 1.12% ABC 85,848 87,781 99,702 110,805 -1.7% 2.3% 13.6% 11.1% 1.33% 1.22% 1.22% 1.20% BOC 65,455 73,119 82,993 93,589 3.4% 11.7% 13.5% 12.8% 0.95% 0.96% 0.97% 0.99% BoCom 26,995 34,310 40,091 47,141 22.8% 27.1% 16.8% 17.6% 0.92% 1.05% 1.11% 1.18% CMB 11,694 18,332 25,650 32,729 27.5% 56.8% 39.9% 27.6% 0.61% 0.83% 1.02% 1.15% CNCB 12,255 19,966 25,467 31,635 43.5% 62.9% 27.6% 24.2% 0.74% 1.03% 1.15% 1.26% MSB 10,523 13,404 17,907 22,119 39.6% 27.4% 33.6% 23.5% 0.76% 0.85% 1.01% 1.10% CRCB 1,696 1,649 2,028 2,452 -18.6% -2.7% 23.0% 20.9% 0.98% 0.80% 0.85% 0.90% Huishang 949 1,051 1,600 2,104 45.1% 10.8% 52.2% 31.5% 0.58% 0.54% 0.70% 0.80% BOCQ 256 355 531 858 12.8% 38.5% 49.7% 61.6% 0.33% 0.39% 0.50% 0.70% SPDB 8,940 13,061 19,116 24,953 53.4% 46.1% 46.4% 30.5% 0.58% 0.74% 0.95% 1.10% INDB 5,286 10,331 13,669 17,704 42.3% 95.4% 32.3% 29.5% 0.43% 0.76% 0.90% 1.05% PAB 6,866 7,541 9,653 12,211 108.4% 9.8% 28.0% 26.5% 0.95% 0.89% 0.98% 1.08% BOBJ 2,931 3,788 5,459 7,793 37.3% 29.3% 44.1% 42.7% 0.59% 0.65% 0.80% 1.00% BONJ 1,044 1,308 2,033 2,685 30.0% 25.3% 55.4% 32.1% 0.83% 0.89% 1.20% 1.40% BONB 1,109 1,525 2,074 2,708 33.2% 37.6% 35.9% 30.6% 0.76% 0.89% 1.05% 1.20% CEB 7,613 10,029 12,566 16,275 32.8% 31.7% 25.3% 29.5% 0.74% 0.86% 0.95% 1.10% Sector 398,652 476,503 572,348 678,030 8.6% 19.5% 20.1% 18.5% 0.92% 0.98% 1.04% 1.10% Source: Deutsche Bank estimates, company data
Secondly, policies have been turned favorable for commercial banks to sell off NPL packages, as the CBRC and the MOF jointly issued a circular in June 2012 to encourage banks to transfer NPLs out in batches. This circular specifies the scope and procedures of NPL transfer in a commercial manner.
Thirdly, we believe the economics for banks to sell off NPLs are rising, given: (1) banks could free up capital and loan quota by selling off NPLs; and (2) banks could achieve higher return by selling NPLs than regular collection or write-off.
Therefore, under the backdrop of decreasing disposal margin and growing NPL supply, we believe Cinda will accelerate the turnover of its TDA business.
Figure 70: We expect Cinda to accelerate NPL Figure 71: As a results, we forecast the TDA income acquisition and disposal in coming years would grow by 62% and 13% in 2014E and 2015E Rmb bn NPLs disposed NPLs acquired NPL disposal % prior net balance (RHS) Income from TDA TDA income % group income (RHS) Rmb bn 10.0 30% 25.0 70% 9.0 58% 20.0 25% 47% 48% 60% 8.0 24% 52% 46% 15.0 7.0 43% 50% 20% 10.0 40% 18.5 19.3 6.0 18% 15.7 12.3 5.0 40% 5.0 15% 9.2 3.5 2.9 3.5 13% - 4.0 12% 13% 13% (2.9) (3.2) 30% 11% 7.7 (4.4) (4.1) 6.7 10% (7.5) 3.0 (5.0) (11.8) 5.9 (15.8) 20% 4.6 2.0 4.5 (10.0) 3.9 5% 10% (15.0) 1.0 (20.0) 0% - 0% 2010 2011 2012 2013 2014E 2015E 2016E 2010 2011 2012 2013 2014E 2015E 2016E
Source: Deutsche Bank estimates, company data Source: Deutsche Bank estimates, company data
Deutsche Bank AG/Hong Kong Page 35
15 May 2014
Other Financial Services China Cinda Jingu Trust – A higher-risk trust company
Jingu Trust – Rmb2.8bn high risk trust assets
Established in 2009, China Jingu International Trust (Jingu Trust) is 92.3% Figure 72: Summary of our collective owned by Cinda and contributed 3% of Cinda’s PBT in 2013. AUM of Jingu Trust amounted to Rmb93.8bn as of end 2013, with 24% as collective trust product sample for Jingu Rmb m Our sample Jingu Trust- assets, being the largest trust subsidiaries among big-4 AMCs. It ranked 43rd FY13 out of 68 trust companies in China in terms of trust AUM (down from 30th in No. of collective 65 N.A. 2012). product Collective trust asset 13,353 22,239 Our in-depth screening into 65 collective trust products issued by Jingu Trust bal. (Figure 72) identified Rmb2.8bn trust assets with higher default risks. Together Real estate exposure 17% 23% with Jingu’s unfavorable sector concentration in the real estate sector, recent Infrastructure 16% 39% exposure regulatory penalty and management changes, we think Jingu Trust is a higher- No. of high risk 7 N.A. risk trust company than peers and could pose potential event risk and earnings product impact for Cinda in the near future. High risk trust 2,798 N.A. product bal. Proprietary study into 65 collective trust products issued by Jingu Trust Source: Deutsche Bank, WIND, company data We collected a sample of 65 outstanding collective trust products issued by Jingu Trust with a total amount of Rmb13.4bn, accounting for 60% of its total collective product balance.
Out of this sample, we identified seven products carrying higher default risks amounting to a total of Rmb2.8bn, equivalent to 21% of our sample, or 87% of shareholders’ equity of Jingu. These higher-risk products mainly extended financing to property developers in undesirable locations (lower-tier cities), borrowers in coal sectors and risky SME loans.
In particular, there is one large-sized trust plan – named Longyuan No.2, maturing in September this year with a trust size of Rmb820m extended to a coal company in Shanxi – that we think is worth paying close attention to. Figure 73 summarize the seven higher-risk trust products.
Figure 73: 7 higher-risk trust products out of our sample of 65 collective trust products sample, totaling Rmb2.8bn Trust product Trust size Duration Maturity date Expected Type Investment Comment (Rmb m) (month) return (%) area Investment in a coal company in Inner Longyuan No. 4 999 36 2016-02-06 N.A. Equity investment Coal Mongolia Longyuan No. 2 820 24 2014-09-28 N.A. Equity investment Coal Investment in a coal company in Shanxi Investment in a coal company in Inner Yinhe No. 2 263 36 2016-02-04 N.A. Equity investment Coal Mongolia Loans to 13 SME in Guangxi Province, Xiangrikui No. 17 250 12 2014-07-05 N.A. Financing SME with high risk Real estate project in Wuxi, a tier 2 city, Xiexin Taike 250 30 2016-03-25 N.A. Financing Real estate with recent average price down 37% compared to last year Hebei Anlian 116 24 2015-11-28 9.50 Financing Real estate Real estate projects in tier 3/4 cities Loans to SME in Zhejiang Province, with Xiangrikui No. 5 100 12 2014-06-03 9.00 Financing SME some debtors facing difficulties Total 2,798 Source: Deutsche Bank, WIND, company data
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Other Financial Services China Cinda
In addition, as suggested by our sample, 2014 will be the peak repayment period for Jingu Trust’s collective trust products, with Rmb6.8bn due, or 51% of the total sampled trust assets. For the investment area breakdown of maturing products in 2014, real estate takes a major portion of 19%, followed by coal (14%) and SME loans (9%).
Figure 74: 2014 will be the repayment peak for Jingu – Figure 75: Sector breakdown of trust plans to mature by 51% products in our sample will mature this year 2014 with industry and commerce (53%) and real estate (19%) making up the majority Rmb mn Maturing amount - Jingu (LHS) % of total (RHS) Investment areas of maturing products in 2014 (Rmb mn) 8,000 60% 304, 5% 6,827 7,000 51% 50% Industry and 6,000 631, 9% commerce 40% 5,000 Real estate
4,000 30% 953, 14% Coal 2,812 3,000 3,615, 53% 21% 20% 1,782 SME 2,000 1,324, 19% 13% 1,150 10% 9% 1,000 654 Infrastructure 5% 128 1% 0 0% 2014 2015 2016 2017 >2017 Undated
Source: Deutsche Bank, WIND, company data Source: Deutsche Bank, WIND, company data
Higher concentration in real estate sector Total trust AUM of Jingu Trust declined by 8% yoy in 2013 (sector: up 46% yoy) to Rmb93.8bn, after a strong growth in 2012 of 41% yoy. In contrast, real estate exposure of Jingu Trust jumped 31% yoy to account for 23% of its total trust AUM, compared with a sector average of 9%.
Figure 76: Trust AUM of Jingu Trust grew by 41% yoy in Figure 77: Real estate exposure of Jingu Trust is 2012, but declined by 8% yoy in 2013, mainly due to significantly higher than sector average (23% vs. 9% in regulatory penalty and management change 2013) Others Financial institutions Jingu - Real estate trust outstanding (LHS) Rmb bn Rmb mn Industry and commerce Real estate Jingu - Real estate % of total AUM Infrastructure Total AUM yoy (RHS) Sector - Real estate % of total AUM 120 600% 25,000 25% 102 94 23% 100 517% 500% 21% 21 20,000 20% 17 80 72 400% 2 16% 3 22 17 15,000 14% 15% 60 300% 14% 36 16 21 13% 40 200% 21,239 10,000 9% 9% 10% 13 12 16,272 20 42 37 100% 9 41% 5,000 5% 12 -8% 9,427 0 6 0% 2,514 -20 -100% 0 0% 2010 2011 2012 2013 2010 2011 2012 2013
Source: Deutsche Bank, company data Source: Deutsche Bank, company data, China Trust Association, CEIC
Deutsche Bank AG/Hong Kong Page 37
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Other Financial Services China Cinda
Figure 78: Jingu has a high sector concentration in Figure 79: In contrast, sector average exposure of infrastructure and real estate (39% and 23% in 2013) infrastructure and real estate is 24% and 9% only in 2013 Others Financial institutions Industry and commerce Others Financial institutions Industry and commerce Real estate Infrastructure Real estate Infrastructure 100% 100% 4% 4% 90% 12% 21% 18% 90% 30% 33% 29% 80% 34% 80% 10% 1% 2% 70% 49% 18% 70% 22% 5% 11% 21% 60% 60% 12% 10% 18% 50% 50% 16% 23% 27% 20% 25% 40% 14% 40% 17% 30% 30% 14% 9% 53% 9% 20% 13% 41% 20% 39% 33% 10% 21% 22% 24% 10% 16% 0% 0% 2010 2011Jingu Trust 2012 2013 2010 2011Trust sector 2012 2013
Source: Deutsche Bank, company data Source: Deutsche Bank, China Trust Association, CEIC
Among the 65 collective trust products of Jingu that we sampled, there are ten real estate trust products, with 62% of trust assets located in tier 3/4 cities and 60% to mature in 2014. As we’ve highlighted earlier, we see two real estate Figure 80: Summary of real estate projects carrying higher default risks. Reflecting the emerging weaknesses in exposure of our collective product property sectors in lower-tiered cities, Jingu’s higher exposure to the real sample for Jingu estate sector could pose potential event risks for Cinda. Rmb m Our sample % of sample No. of real estate 10 15% Recent regulatory penalty and management change trust products Elsewhere, we see potential risks from internal control and management Total real estate 2,215 17% changes of Jingu Trust. After strong growth in 2011 and 2012 with AUM trust asset size jumping 517% yoy and 41% yoy, its trust AUM declined 8% yoy in 2013, most Location in tier 3/4 1,383 62% likely due to regulatory penalty on misconducts, as revealed in its annual report cities that the CBRC in February 2013 issued rectification notice to Jingu Trust, Maturing in 2014 1,324 60% Source: Deutsche Bank, WIND, company data requiring strengthening of internal governance and control. In addition, the recent management change could create uncertainties regarding the proper management of outstanding trust products issued previously.
Figure 81: Summary of 10 real estate collective trust products of Jingu Trust product Trust size Duration Maturity date Expected return Investment area City City tier Type (Rmb m) (month) (%) Juxin No.1 550 24 2014-08-03 9.20 Real estate Nantong 3 Debt investment Kunshan Yonghengsheng 350 24 2015-06-08 9.00 Real estate Kunshan 4 Equity investment Jiangsu Runao 297 24 2014-09-12 10.00 Real estate Nantong, Wuxi 2&3 Equity investment Xiexin Taike 250 30 2016-03-25 N.A. Real estate Wuxi 2 Financing Guanghui No.1 240 18 2014-08-07 9.00 Real estate N.A. N.A. Equity investment Yanhang No.1 137 24 2014-07-30 9.50 Real estate Chongqing 2 Others Hebei Anlian 116 24 2015-11-28 9.50 Real estate Xingtai 3 Financing Wuhan Shengtang 105 24 2015-11-26 9.80 Real estate Wuhan 2 Financing Hangsheng 100 24 2014-08-17 10.50 Real estate N.A. N.A. Equity investment Anshan Red Star Macalline 70 24 2015-10-31 N.A. Real estate Anshan 3 Financing Total 2,215 Source: Deutsche Bank, WIND, company data. Note: Highlight in blue refers to higher risk products.
Page 38 Deutsche Bank AG/Hong Kong
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Other Financial Services China Cinda
Potential earnings impact on Cinda
As the controlling shareholder of Jingu Trust, Cinda could potentially suffer from losses at Jingu Trust due to default cases in trust products, as we believe the government and the shareholders of trust companies have high incentives to intervene and bail out troubled trust products at the moment. Also stated in Circular No. 99 issued by the CBRC in April 2014, the shareholders of trust companies should provide liquidity support to trust companies in the case of liquidity crisis, and inject additional capital if needed.
Assuming that the Jingu Trust’s entire collective trust portfolio would have the same high risk ratio as our sample at 21%, and single trust portfolio shows 2% high-risk ratio, we estimate the total high risk trust assets of Jingu Trust could amount to Rmb5.4bn, or 6.5% of total trust outstanding of Jingu Trust. As shown in Figure 82, our sensitivity analysis demonstrates that a 30% loss of Jingu’s high risk trust assets would translate into a 13% and 2% negative impact on FY14E PBT and total equity, respectively, of Cinda.
Figure 82: 30% loss of high risk trust assets will translate into 12% and 1.6% negative impact on FY14E PBT and total equity of Cinda Rmb m % loss of high risk collective trust products 10% 20% 30% 40% 50% Losses (609) (1,218) (1,828) (2,437) (3,046) Impact on Cinda's FY14 PBT -4% -9% -13% -17% -22% Impact on Cinda's FY14 common equity -1% -1% -2% -2% -3% Impact on Jingu Trust's FY13 PBT -174% -348% -522% -695% -869% Impact on Jingu Trust's FY13 net assets -19% -38% -57% -75% -94% Collective trust products Jingu's collective trust balance - FY13 22,240 Our 65 collective trust sample 13,353 Our sample % FY13 total collective trust bal. 60% High risk collective trust of our sample 2,798 Total high risk collective trust for Jingu Trust 4,661 Single trust products Jingu's single trust bal. - FY13 71,571 High risk ratio for single trust products 2% High risk single trusts for Jingu Trust 1,431 Total Total high risk trust assets for Jingu Trust 6,092 As % of total trust AUM of Jingu Trust 6.5% Source: Deutsche Bank estimates, company data, WIND
Deutsche Bank AG/Hong Kong Page 39
15 May 2014
Other Financial Services China Cinda Business lines and forecasts
Company profile and business overview
Established in Beijing on 19 April 1999 and wholly-owned by MOF then, Cinda was the first AMC to be set up to acquire, manage and dispose NPLs from state-owned banks, mainly for CCB and CDB.
As the leading AMC in China, Cinda focuses on three principal business lines, including: (1) Distressed Asset Management (DAM); (2) Financial Investment and Asset Management (FIAM); and (3) Financial Services (FS). Among these three principal businesses, DAM contributed the largest share (51.5% in 2013) to revenue, followed by FS (28.6%) and FIAM (21.2%). In terms of pre-tax profit, DAM contributed 70.6% of total, while FS and FIAM contributed 4.4% and 25.6%, respectively.
Figure 83: Overview of Cinda’s business lines – Three key businesses: Distressed Asset Management (DAM, 71% of group net profit), Financial Investment and Asset Management (FIAM, 26%) and Financial Services (FS, 4%)
Traditional Distressed Assets (TDA) 4% • NPLs sourced from banks 104 Mostly concentrated in: 11% 49% • Acquire at discount (c.30%) % • Overcapacity manufacturing sectors: steel • Dispose to recover cash traders, shipbuilders • Wholesale and retails trade sectors Restructuring Distressed Assets (RDA) • NPAs sourced from banks, non-bank 26% I. Distressed FIs and non-financial enterprises Mining, RDA sector breakdown 1% Asset • Restructure the debt or accounts Transporta Others, 24% 29% 218% Management receivable with higher interest rates tion, 3% 9% (13-15%), longer duration (~2 yr) and Constructi (DAM) more collateral (LTV < 40%) on, 5% • Recovery through repayments Manufact 11% uring, 6% Debt-to-Equity Swap (DES) Public • 81% unlisted vs. 19% listed utilities, 12% -9% -9% • Exit through IPOs, M&A and 6% Real repurchases Leasing & estate Key business lines: commerci al, 10% , 60% II. Financial • Principal investments (including equity 19% Investment and investment, real estate investment and debt investment) 21% 9% 43% Asset • Asset management (including private DES sector breakdown – 1H13 Management equity funds) • (FIAM) Property development (Cinda Real Others, Estate, 600657 CH) Metals, 13% Coal, 22% 9% 62%
Key subsidiaries:
• Cinda Securities Chemical, III. Financial • Jingu Trust 29% 16% • Cinda Leasing 3% 32% Services (FS) • First State Cinda Fund • Cinda P & C 18% • Happy Life
4% Asset CAGR Income FY13 Assets FY13 ROAE FY13 Sector breakdown FY11-13
Source: Deutsche Bank, company data
Page 40 Deutsche Bank AG/Hong Kong
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Other Financial Services China Cinda
Figure 84: Revenue breakdown by business lines Figure 85: Pre-tax profit breakdown by business lines (Rmb m) (Rmb m) DAM FIAM FS CAGR DAM FIAM FS CAGR 50,000 14,000 6% 20% 11,772 45,000 42,413 12,000 4% 42% 40,000 9,956 10,000 9,058 9,596 29% 16% 2% 2% 26% 35,000 9% 32,335 23% 8,000 27% 30,000 34% 24,260 24,382 33% 8% 25,000 21% 6,000 4% 32% 38% 20,000 4,000 71% 24% 75% 80% 15,000 65% 29% 24% 31% 2,000 10,000 52% 45% 0 -2% 5,000 40% 41% 0 -2,000 2010 2011 2012 2013 2010 2011 2012 2013
Source: Deutsche Bank, company data. Note: Due to the internal elimination, the sum up of proportions Source: Deutsche Bank, company data. Note: Due to the internal elimination, the sum up of proportions may not equal to 100%. may not equal to 100%.
Figure 86: Summary of financial results of Cinda’s key business lines – We expect DAM to remain the key earnings driver with net profit contribution rising from 71% in 2013 to 78% in 2015E
Rmb mn 2010 2011 2012 2013 2014E 2015E 2016E 2010 2011 2012 2013 2014E 2015E 2016E Revenue % total DAM 9,813 9,957 14,392 21,850 28,667 34,846 40,352 40% 41% 45% 52% 55% 57% 57% FIAM 7,043 5,946 7,911 8,977 10,274 11,376 12,593 29% 24% 24% 21% 20% 18% 18% FS 7,718 9,231 10,553 12,134 14,008 15,936 18,077 32% 38% 33% 29% 27% 26% 26% Elimination (313) (751) (521) (547) (547) (547) (547) -1% -3% -2% -1% -1% -1% -1% Total 24,260 24,382 32,335 42,413 52,402 61,610 70,475 100% 100% 100% 100% 100% 100% 100% Profit before tax % total DAM 7,465 7,202 6,234 8,314 9,812 12,213 15,270 75% 80% 65% 71% 72% 77% 81% FIAM 2,333 2,488 3,285 3,012 3,213 3,346 3,571 23% 27% 34% 26% 24% 21% 19% FS 180 (207) 164 515 605 375 191 2% -2% 2% 4% 4% 2% 1% Elimination (22) (425) (87) (69) (69) (69) (69) 0% -5% -1% -1% -1% 0% 0% Total 9,956 9,058 9,596 11,772 13,561 15,865 18,963 100% 100% 100% 100% 100% 100% 100% Net profit % total DAM 5,625 5,396 4,689 6,428 7,555 9,404 11,758 76% 80% 64% 71% 73% 78% 81% FIAM 1,758 1,864 2,470 2,328 2,474 2,576 2,750 24% 28% 34% 26% 24% 21% 19% FS 136 (155) 124 398 466 289 147 2% -2% 2% 4% 4% 2% 1% Elimination (120) (342) 24 (127) (134) (142) (151) -2% -5% 0% -1% -1% -1% -1% Total 7,399 6,763 7,306 9,027 10,361 12,127 14,504 100% 100% 100% 100% 100% 100% 100% Total assets % total DAM 84,476 91,551 140,328 228,604 285,643 331,401 365,026 56% 53% 55% 60% 62% 62% 61% FIAM 32,147 35,387 49,027 72,776 81,618 92,881 104,043 21% 20% 19% 19% 18% 17% 17% FS 36,418 49,786 69,352 86,248 99,254 113,707 130,416 24% 29% 27% 22% 21% 21% 22% Elimination (2,340) (3,600) (4,092) (3,843) (3,843) (3,843) (3,843) -2% -2% -2% -1% -1% -1% -1% Total 150,701 173,124 254,614 383,785 462,671 534,146 595,642 100% 100% 100% 100% 100% 100% 100% Net assets % total DAM 17,350 14,990 24,778 39,237 44,005 48,778 55,559 41% 35% 41% 47% 47% 46% 47% FIAM 15,314 17,492 21,662 28,998 32,521 37,009 41,457 36% 41% 36% 35% 35% 35% 35% FS 8,687 9,635 13,802 14,555 16,750 19,189 22,009 20% 22% 23% 18% 18% 18% 18% Elimination 1,151 726 643 (28) (28) (28) (28) 3% 2% 1% 0% 0% 0% 0% Total 42,502 42,843 60,885 82,762 93,248 104,948 118,996 100% 100% 100% 100% 100% 100% 100% ROAA DAM 6.1% 4.0% 3.5% 2.9% 3.0% 3.4% FIAM 5.5% 5.9% 3.8% 3.2% 3.0% 2.8% FS -0.4% 0.2% 0.5% 0.5% 0.3% 0.1% Total 4.2% 3.4% 2.8% 2.4% 2.4% 2.6% ROAE DAM 33.4% 23.6% 20.1% 18.2% 20.3% 22.5% FIAM 11.4% 12.6% 9.2% 8.0% 7.4% 7.0% FS -1.7% 1.1% 2.8% 3.0% 1.6% 0.7% Total 18.1% 15.8% 13.8% 12.8% 13.3% 14.0% Leverage (Asset/equity) DAM 4.9x 6.1x 5.7x 5.8x 6.5x 6.8x 6.6x FIAM 2.1x 2.0x 2.3x 2.5x 2.5x 2.5x 2.5x FS 4.2x 5.2x 5.0x 5.9x 5.9x 5.9x 5.9x Total 3.5x 4.0x 4.2x 4.6x 5.0x 5.1x 5.0x
Source: Deutsche Bank estimates, company data
Deutsche Bank AG/Hong Kong Page 41
15 May 2014
Other Financial Services China Cinda
Distressed asset management – Cinda’s core business
As the core business of Cinda, distressed asset management (DAM) mainly includes: (1) distressed debt assets management (DDA); (2) debt-to-equity swap (DES) assets management; and (3) custody, liquidation and restructuring of distressed entities & entrusted distressed asset management.
Distressed debt asset management (DDA) Cinda has grown its DDA assets strongly over the past years. As end of 2013, the net balance of DDA rose by 13.3x from that in 2010, due to the fast growth of DDA acquisition from Rmb3.5bn in 2010 to Rmb88.8bn in 2013.
Figure 87: The net balance of DDA has risen sharply at a Figure 88: DDA acquisition has also grown strongly at a 2010-13 CAGR of 143% CAGR of 193% from 2010 to 2013 (Rmb mn) Net balance of DDA yoy (Rmb mn) 140,000 250% 100,000 88,813 Non-Financial 90,000 120,000 219% 114,755 enterprises 200% 80,000 Other banks* 100,000 70,000
150% 60,000 80,000 52,191 Non-bank FIs 50,000 119% 56,090 105% 60,000 100% 40,000 City/rural banks
40,000 30,000 20,000 Joint-stock 17,600 50% 12,460 20,000 banks 8,030 10,000 3,532 0 0% 0 2010 2011 2012 2013 2010 2011 2012 2013
Source: Deutsche Bank, company data Source: Deutsche Bank, company data; Note: Other banks include policy banks, Postal Saving Bank of China and foreign banks
Given the different business natures, we further divide Cinda’s DDA business into two sub categories, i.e. traditional distressed debt assets (TDA) and restructuring distressed debt assets (RDA).
Figure 89: Distressed debt assets – Traditional vs. Restructuring Acquisition source Income model Arrangement for the rights & obligation TDA Primarily from banks Disposal gains, depending on the margins Assume the existing rights and obligations btw between acquisition cost and recovery rate banks and debtors RDA Non-financial enterprises, banks, and non-bank Fixed interest income Entered restructuring agreement with debtor financial institutions (e.g. trust cos.) and related parties Source: Deutsche Bank, company data
Traditional distressed debt assets (TDA) Cinda acquires traditional distressed debt assets primarily from banks. After the acquisition, Cinda will assume the pre-existing rights and obligations between banks and debtors, and collect the debt based on the disposal of distressed assets. Cinda has realized relatively high returns on TDA disposal, ranging from 111% to 146% between 2010 and 2013.
Prior to 2012, Cinda’s traditional distressed debt asset was primarily from the commercial banks’ NPL carve-out before their IPOs. In February 2012, MOF and CBRC approved the packaged sale of distressed assets by PRC financial institutions, which provided a more market-driven source of distressed asset for Cinda. While the net balance of Cinda’s TDA remained largely stable during 2010-1H13, the TDA balance doubled in 2H13 to Rmb16.8bn, which was in line with the pace of commercial banks’ NPL disposal.
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Figure 90: Traditional distressed debt assets (company-level) data RMB m 2010 2011 2012 2013 Net balance of TDA 8,030 7,919 8,022 16,784 Acquisition cost of TDA for the period 3,532 2,867 2,942 12,279 Carrying amount of TDA disposed 4,261 3,189 3,205.9 3,810 Income from TDA 5,396 4,851 3,974 4,534 including - realized disposal gain 5,384 4,640 3,606 4,241 unrealized disposal gain 12 211 368 293 Return on disposal 126.4% 145.5% 112.5% 111.3% Source: Deutsche Bank, company data
Looking ahead, we estimate Cinda to further grow the net balance of TDA at a CAGR of 32% during 2013-16, thanks to the acceleration of NPL disposal from Chinese banks offset by Cinda’s lower market share. We expect revenue to post a GAGR of 26%. Key assumptions include:
Growing NPL supply from banks – This is due to the rising pressure on asset quality deterioration of Chinese banks. As such, we expect the NPL ratio of the entire Chinese banking system to rise from 1.7% in 2013 to 2.4% in 2016. Meanwhile, we expect banks to dispose of an increasing portion of NPLs from 6.5% of total NPL balance in 2013 to 8% of 2016.
Narrowing market share in TDA business – We expect Cinda’s current leading market share in TDA (c.50%) to trend down given the rising competition from the other three AMCs and local provincial AMCs. On our estimate, Cinda’s TDA market share should fall at a gradual pace from currently around 50% to 35% in 2016.
Lower recovery rate – While Cinda realized a collection rate of approximately 60-70 cents in a dollar during 2010-13 on our estimates, we expect lower the collection rate in the future, reflecting the slowed asset appreciation and lower-quality NPLs sold off by banks.
Dipping acquisition cost – We assume the TDA acquisition cost will decline modestly from the current 30% of original value to 26% in 2016 given the massive supply.
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Figure 91: Financial overview and forecasts on traditional distressed debt assets (TDA)
Rmb mn 2010 2011 2012 2013 2014E 2015E 2016E NPL acquisition System loan balance 50,922,595 58,189,250 67,287,461 76,632,664 86,594,910 97,419,274 109,109,587 Commercial banks 38,035,088 42,790,000 51,884,211 59,210,000 66,788,880 75,003,912 83,854,374 Other banking Fis 12,887,507 15,399,250 15,403,250 17,422,664 19,806,030 22,415,361 25,255,213 System NPL ratio 2.44% 1.81% 1.60% 1.68% 1.92% 2.15% 2.43% Commercial banks 1.14% 1.00% 0.95% 1.00% 1.15% 1.30% 1.50% Other banking Fis 6.29% 4.06% 3.78% 4.00% 4.50% 5.00% 5.50%
% of NPLs sold from banks 2.0% 2.0% 2.5% 6.5% 7.0% 7.5% 8.0% NPLs sold from banks - original value 24,874 21,067 26,866 83,785 116,154 157,186 211,748 Market share of Cinda in buying NPLs (%) 51% 49% 43% 49% 45% 42% 35% NPLs purchased by Cinda - original value 12,668 10,335 11,520 40,932 52,269 66,018 74,112 NPLs purchased by Cinda - acquisition cost 3,547 2,894 3,456 12,280 15,681 18,485 19,269 Acquisition price (cents in a dollar) 28 28 30 30 30 28 26
NPL disposal NPL disposed - at carrying value 4,446 2,934 3,209 4,148 7,540 11,838 15,764 Unrealized fair value change 571 162 298 300 656 1,008 1,314 Beginning balance - TDA 7,622 7,294 7,415 7,960 16,392 25,188 32,842 Net balance - TDA 7,294 7,415 7,960 16,392 25,188 32,842 37,661
Income from TDA 5,851 4,463 3,878 4,618 6,688 7,716 9,196 Return on disposal 118.8% 146.6% 111.6% 104.1% 80.0% 56.7% 50.0% Implied collection rate (cents in a dollar) 61 69 59 57 54 47 45 TDA income as % of total Group income 24% 18% 12% 11% 13% 13% 13%
Source: Deutsche Bank, company data
Restructuring distressed debt assets (RDA) Cinda acquires restructuring distressed debt assets primarily from non- Figure 92: 60% of RDA from real financial enterprises (over 60%) as well as financial institutions (e.g. banks and estate sector trust companies). Unlike TDA, RDA is a quasi-loan business. Cinda enters into Mining, 1% Transportation, a restructuring agreement with the debtor and related parties to fix the Others, 3% 9% restructuring returns and payment schedule for each RDA deal. The typical Construction, 5% underlying asset of RDA is account receivable assets, and the debtors of these Manufacturing, 6% receivables are mainly from real estate sector (60% of gross balance). Public utilities, Real estate, 6% 60% Leasing & commercial, Cinda started its RDA business after Cinda received CBRC’s approval to 10% acquire distressed assets (account receivables and other receivables) from non-financial enterprises (NFE) in June 2010. The net balance of RDA has grown from Rmb9.68bn as of 2011 to Rmb97.97bn as of 2013 to account for Source: Deutsche Bank, company data; Note: as of 2013 25.5% of total assets. More than 60% of RDA was acquired from non-financial enterprises. Since Cinda is the only AMC who has the license for NFE RDA business until now, Cinda should be able to continue to grow its RDA via asset acquisition from NFE at a fast pace.
Compared with bank loans, the yield of Cinda’s RDA was relatively high given the higher risk nature of the business. Cinda’s average monthly yield of RDA was 17.2%, 16.0% and 13.5% for 2011, 2012 and 2013, respectively. Meanwhile, Cinda’s impaired RDA rate remained low at 1% as of 2013, which was similar the NPL ratio of commercial banks, but much less than the NPL ratio of non-commercial banks (4% as of 2013 on our estimate). As of 2013, Cinda’s gross RDA coverage ratio was 2.9%, which looks light given the high- risk nature of RDA business amid challenging macro economy.
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Figure 93: Cinda charges a high yield on RDA given the Figure 94: Gross RDA coverage ratio of 2.9% looks high-risk nature of the business insufficient given the high-risk nature of the business
Annualized yield of RDA PBOC 3Y lending rate Impaired RDA coverage ratio (LHS) Gross RDA coverage ratio (RHS) 20.0% 600% 3.5% 17.2% 18.0% 3.0% 16.0% 500% 2.9% 16.0% 13.5% 2.5% 14.0% 400% 12.0% 2.1% 2.0% 291% 300% 10.0% 248% 1.5% 8.0% 6.65% 6.15% 6.15% 200% 6.0% 1.0% 4.0% 100% 0.4% 0.5% 2.0% 27% 0.0% 0% 0.0% 2011 2012 2013 2011 2012 2013
Source: Deutsche Bank, company data Source: Deutsche Bank, company data
We expect the net RDA balance would continue to grow at CAGR of 31% from 2013 to 2016, contributing to RDA revenue CAGR of 34% during the same period. Our key assumptions on RDA include:
Enlarging RDA market – Given the rising pressure of asset quality deterioration, we expect Chinese banks and other non-bank financial institutions to seek more financial restructuring for their non- performing assets. Meanwhile, reflecting the slower economic growth, we see rising cash flow pressure and rising burden on receivables for non-financial enterprises. Hence, Cinda should be able to further grow its RDA balance given the enlarging market size.
Declining market share in RDA from non-financial enterprise – While Cinda is the only AMC approved to engage in acquiring receivables from non-financial enterprises as of now, we expect the other three AMCs to receive regulatory approval soon to step into the business, leading to reduced market share for Cinda.
Declining yield on RDA – Its average yield of RDA lending fell from 17.2% in 2011 to 13.5% in 2013. We expect the yield to make further modest declines given the rising competition in the business.
Rising impaired RDA ratio with high credit cost – We expect the impaired RDA ratio will rise from the current low level of 1.0% to 3.2% in 2016 to reflect its heavy exposure on the real estate sector and the higher-risk nature of RDA business compared with bank loans. On our estimates, gross RDA coverage ratio will rise to 7.4% in 2016 from 2.9% currently, with impaired RDA coverage ratio at 230%. As a result, Cinda should charge higher credit cost on RDA business of 2.94%, 2.87% and 2.57% for 2014-16, respectively.
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Figure 95: Financial overview and forecasts on restructuring distressed debt assets (RDA) Rmb mn 2011 2012 2013 2014E 2015E 2016E RDA from FIs Total trust AUM 4,811,438 7,470,555 10,907,111 13,088,533 15,051,813 16,556,994 yoy 58% 55% 46% 20% 15% 10% Non-performing trust ratio 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Non-performing trust assets 24,057 74,706 163,607 261,771 376,295 496,710 % of non-performing trust assets purchased by Cinda 5% 11% 7% 6% 6% 5% RDA acquired from non-bank FIs 1,184 8,045 12,135 15,706 20,696 22,352
System NPL balance 1,053,340 1,074,630 1,289,007 1,659,343 2,095,819 2,646,852 % of system NPLs refinanced by Cinda 0.17% 1.03% 1.39% 1.50% 1.60% 1.70% RDA acquired from banks 1,745 11,020 17,917 24,890 33,533 44,996
RDA acquired from Fis (Banks + non-bank FIs) 2,928 19,065 30,053 40,596 54,229 67,348 RDA balance from Fis 2,920 18,322 39,467 66,565 96,900 128,505
RDA from NFE Total account receivables from industrial enterprises 7,050,200 8,404,314 9,569,344 10,909,052 12,218,138 13,439,952 Troubled account receivables % total account receivables 1.0% 1.0% 1.5% 1.8% 2.0% 2.2% % of troubled account receivables purchased by Cinda 9% 36% 32% 25% 20% 15% RDA acquired from NFE 6,665 30,185 46,482 49,091 48,873 44,352 RDA balance from NFE 6,781 31,229 61,446 88,588 104,151 108,277
TOTAL RDA RDA acquired by Cinda - FIs + NFE 9,593 49,250 76,534 89,687 103,102 111,700 Aggregate repayment 73 12,909 35,316 50,457 77,577 100,525 Accured interest 181 3,509 10,144 15,009 20,372 24,556 Total RDA assets - FIs + NFE 9,701 49,550 100,913 155,153 201,051 236,782 Allowance for impairment losses (20) (1,482) (2,943) (6,703) (11,812) (17,427) Net RDA balance 9,681 48,068 97,971 148,450 189,239 219,355
Income from RDA 181 3,518 10,144 15,009 20,372 24,556 Income from FI RDA 15 1,363 3,871 6,235 9,388 12,707 Income from NFE RDA 166 2,155 6,273 8,774 10,984 11,850 Annualized return on monthly average balance 17.2% 16.0% 13.5% 13.0% 12.7% 12.5%
Asset quality Impaired RDA 73 597 1,011 2,793 5,026 7,577 Impaired RDA ratio 0.75% 1.20% 1.00% 1.80% 2.50% 3.20% Allowance for impairment losses 20 1,482 2,943 6,703 11,812 17,427 Impaired RDA coverage ratio 27.4% 248.4% 291.1% 240.0% 235.0% 230.0% Gross RDA coverage ratio 0.2% 3.0% 2.9% 4.3% 5.9% 7.4% Credit cost 0.41% 4.94% 1.94% 2.94% 2.87% 2.57%
Source: Deutsche Bank estimates, company data
DES asset management Cinda obtains DES assets primarily via debt-to-equity swaps, receipt of equity in satisfaction of debt, and other distressed asset-related transactions. As at the end of 1H13, DES assets amounted to Rmb43.7bn (down 9.5% hoh), or 15.4% of total assets. The majority of Cinda’s DES assets were obtained before 2010, while during the period from 2010 to 1H13, Cinda only acquired additional DES worth Rmb1.71bn, or 4% of total DES asset as of 1H13. In 2H13, Cinda further compressed its DES asset to Rmb42.3bn (down 3.2% hoh) by disposing DES through capital market or issuer repurchase, or 11% of total assets.
Cinda’s DES assets concentrated on some sectors with overcapacity, including coal (61.5% of total book value as of 1H13), chemicals (16.2%) and metals industry (9.1%).
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Figure 96: Cinda has reduced its DES assets by disposing Figure 97: Over 60% of DES assets were allocated to the them through capital market and other means coal sector (1H13)
(Rmb bn) BV of DES assets (LHS) As % of total assets (RHS) BV mix of DES assets (1H13) 60.0 40% 35% 35% Others, 50.0 13.2% 29% 30% Metal industry, 40.0 25% 9.1% 19% 30.0 20% 52.3 15% 50.6 Chemicals, 48.2 15% Coal, 61.5% 20.0 43.7 42.3 16.2% 10% 11% 10.0 5%
0.0 0% 2010 2011 2012 1H13 2013
Source: Deutsche Bank, company data Source: Deutsche Bank, company data
As at the end of 1H13, Cinda had total DES assets in 249 DES companies, including 182 unlisted companies (book value of Rmb34.4bn) and 67 listed companies (Rmb9.3bn). Although Cinda divested in 41 listed DES companies in 2H13, and added five unlisted DES companies to its DES asset portfolios during the same period, the book value of listed and unlisted portfolio remained largely stable in 2H13.
Figure 98: Book value of DES assets Figure 99: Book value mix of DES Figure 100: Number of DES assets investees (Rmb bn) Listed Unlisted Listed Unlisted Listed Unlisted 60.0 100% 300 274 52.3 50.6 90% 21% 19% 255 25% 23% 24% 240 249 50.0 48.2 250 43.7 80% 70 13.3 11.8 42.3 25 69 213 11.8 70% 67 40.0 200 26 9.3 8.1 60% 30.0 50% 150 40% 81% 75% 77% 76% 79% 215 204 20.0 39.0 38.8 100 187 36.4 34.4 34.1 30% 186 182 20% 10.0 50 10% 0.0 0% 0 2010 2011 2012 1H13 2013 2010 2011 2012 1H13 2013 2010 2011 2012 1H13 2013 Source: Deutsche Bank; company data Source: Deutsche Bank; company data Source: Deutsche Bank; company data
Both unlisted and listed DES assets are highly concentrated in the top-20. As at the end of 1H13, the top-20 unlisted DES assets had a book value of Rmb27.7bn, accounting for 80.5% of total BV of unlisted DES asset. For listed DES assets, the top-20 made up 98% of book value of listed DES assets as of 1H13.
The revenue of DES assets management is mainly comprised of the dividend income and net gains from DES assets disposal. For FY13, the dividend income and net disposal gains of DES assets amounted to Rmb3.6bn and Rmb1.35bn, accounting for 8.6% and 3.2% of total revenue, respectively. Historically, while the dividend income of DES assets was largely stable, the net disposal gain of DES assets varied, with the exit multiple ranging from 2.1-2.7x on average (listed: 1.1-6.2x; unlisted: 2.1-2.9x).
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Figure 101: Net disposal gains of DES assets Figure 102: Dividend income of DES assets
Net disposal gain As % of revenue (RHS) Dividend income As % of revenue (RHS) (Rmb mn) (Rmb mn) 6,000 16.0% 2,000 7.0% 14.5% 14.0% 6.0% 5,000 12.8% 6.0% 12.0% 1,500 10.6% 5.0% 4,000 10.0% 4.0% 3,000 8.6% 8.0% 1,000 3.2% 3.0% 4,683 6.0% 1,469 3.0% 2,000 1,351 3,645 1.9% 2.0% 3,111 4.0% 500 2,589 965 1,000 1.0% 2.0% 451 0 0.0% 0 0.0% 2010 2011 2012 2013 2010 2011 2012 2013
Source: Deutsche Bank, company data Source: Deutsche Bank, company data
Figure 103: Summary of DES assets disposal – listed vs. unlisted Number of DES companies Acquisition costs of DES assets Net gain on DES assets disposed Exit multiples (x) disposed disposed (Rmb m) (Rmb m) 2010 2011 2012 1H13 2010 2011 2012 1H13 2010 2011 2012 1H13 2010 2011 2012 1H13 Unlisted 17 47 32 8 1,373 2,149 2,499 2,369 2,369 2,401 4,650 2,525 2.7 2.1 2.9 2.1 Listed 10 7 11 4 1,086 77 328 26 743 188 33 135 1.7 3.4 1.1 6.2 Total 27 54 43 12 2,458 2,227 2,827 2,395 3,111 2,589 4,683 2,660 2.3 2.2 2.7 2.1 Source: Deutsche Bank, company data. Note: exit multiple = (net gain + acquisition costs) / acquisition cost of DES asset disposed
Figure 104: Summary of DES assets disposal by sector Number of DES companies Acquisition costs of DES assets Net gain on DES assets disposed Exit multiples (x) disposed disposed (Rmb m) (Rmb m) 2010 2011 2012 1H13 2010 2011 2012 1H13 2010 2011 2012 1H13 2010 2011 2012 1H13 Coal 5 7 7 1 709 1,028 977 1,804 1,784 1,011 2,565 1,996 3.5 2.0 3.6 2.1 Chemicals 3 2 5 1 504 116 197 229 459 63 244 208 1.9 1.5 2.2 1.9 Metals 1 4 3 1 876 462 439 4 362 435 395 0 1.4 1.9 1.9 1.0 Others 18 41 28 9 370 620 1,215 358 506 1,081 1,479 456 2.4 2.7 2.2 2.3 Total 27 54 43 12 2,458 2,227 2,827 2,395 3,111 2,589 4,683 2,660 2.3 2.2 2.7 2.1 Source: Deutsche Bank, company data. Note: exit multiple = (net gain + acquisition costs) / acquisition cost of DES asset disposed
We expect Cinda to continue to divest its DES assets. The book value of DES would further decline from Rmb42.3bn to Rmb14.8bn in 2016. The revenue contribution of DES would also decline from 12% in 2013 to 5% in 2016. Key assumptions include:
Acceleration in DES disposal – We expect Cinda to accelerate the divestment in DES given the lower profitability of the business compared with other businesses such as TDA and RDA.
Lowered exit multiple – Although Cinda achieved exit multiples for DES as high as 2.66x in 2012, the multiple declined to 1.85x in 2013. We expect the exit multiple to further decline to 1.37x, 1.36x, and 1.36x for 2014-16E given the challenging industry outlook for coal sectors.
Relatively stable dividend yield for DES asset – We expected the dividend yield for the DES asset would be largely stable at 2.82%- 2.91% during the next three years.
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Figure 105: Financial overview and forecasts on DES portfolio Rmb mn 2010 2011 2012 2013 2014E 2015E 2016E DES a sse t disposa l DES disposed - acquisition cost 2,458 2,227 2,827 4,274 9,545 9,074 7,871 Unlisted 1,373 2,149 2,499 2,000 7,510 7,286 6,438 Listed 1,086 77 328 2,274 2,035 1,788 1,433 Net gain from DES disposal 3,111 2,589 4,683 3,645 3,572 3,250 2,857 Unlisted 2,369 2,401 4,650 2,400 3,165 3,071 2,714 Listed 743 188 33 1,245 407 179 143 Exit multiple of DES disposed 2.27 2.16 2.66 1.85 1.37 1.36 1.36 Unlisted 2.73 2.12 2.86 2.20 1.42 1.42 1.42 Listed 1.68 3.44 1.10 1.55 1.20 1.10 1.10 Book value 52,312 50,595 48,239 42,275 31,982 22,489 14,881 Unlisted 39,007 38,840 36,449 34,135 26,021 18,395 12,172 Listed 13,306 11,755 11,789 8,140 5,961 4,095 2,709 Fair value change & new acquisitions 755 3,811 2,317 2,000 1,500 1,500 Unlisted - - - 1,615 1,220 1,227 Listed - - - 385 280 273 Impairment losses on DES assets (454) (246) (3,340) (4,007) (2,748) (1,919) (1,237) % of beginning book value 0.5% 6.6% 8.3% 6.5% 6.0% 5.5% DES income Dividend income 451 1,469 965 1,351 930 634 419 Unlisted 442 1,432 913 1,024 781 552 365 Listed 10 38 52 327 149 82 54 Dividend yield 0.86% 2.90% 2.00% 3.20% 2.91% 2.82% 2.82% Unlisted 1.13% 3.69% 2.50% 3.00% 3.00% 3.00% 3.00% Listed 0.07% 0.32% 0.44% 4.01% 2.50% 2.00% 2.00% Total DES income 3,562 4,059 5,648 4,995 4,502 3,884 3,276 Unlisted 2,810 3,833 5,563 3,424 3,946 3,623 3,079 Listed 752 226 85 1,571 556 261 197 DES income as % of total Group income 15% 17% 17% 12% 9% 6% 5%
Source: Deutsche Bank, company data
Restructuring services for distressed asset/entities By the end of 1H13, Cinda had been commissioned by government agencies to conduct the custody, liquidation and restructuring of eight distressed non-bank financial institutions including securities, trust and leasing companies. In addition, Cinda was entrusted by a large commercial bank to provide custody, liquidation and disposal services for its investments in 2,400 commercial enterprises and nearly 1,000 investment projects. While the revenue contribution is relatively small (less than 0.03% of total revenue from 2010- 1H13), custody, liquidation and disposal services enhanced Cinda’s business relationship with government agencies and corporate clients, risk management capabilities, and accumulation of industry experience.
Financial investment and asset management business
Cinda’s financial investment and asset management business (FIAM) is the extension of its DDA business and serves as an important functional platform to maximize the value appreciation potential achieved in DDA business. FIAM contributed 21% of total revenue and 26% of pre-tax profit in 2013.
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Figure 106: Revenue from FIAM contributed 21% of Figure 107: Profit before tax from FIAM contributed 26% group revenue of group profit before tax
(Rmb mn) Revenue from FIAM As % of total (Rmb mn) PBT from FIAM As % of total 10,000 35% 3,500 3,285 40% 8,977 3,012 9,000 29% 35% 7,911 30% 3,000 8,000 34% 7,043 24% 2,488 30% 7,000 25% 2,500 2,333 5,946 24% 6,000 27% 25% 20% 2,000 26% 21% 23% 5,000 20% 15% 1,500 4,000 15% 3,000 10% 1,000 10% 2,000 5% 500 5% 1,000 0 0% 0 0% 2010 2011 2012 2013 2010 2011 2012 2013
Source: Deutsche Bank, company data Source: Deutsche Bank, company data
While FIAM business is highly related to its distressed asset management, Cinda’s FIAM businesses include: (1) principal investment in equity, real estate, and other financial products through its parent-level company, Cinda Investment, Well Kent International, and Zhongrun Development; (2) asset management (primarily PE funds) through Cinda Capital (controlled by Cinda Investment); and (3) others business including consulting and advisory business.
Principal investment The outstanding amount of Cinda’s principal investment rose by 42% yoy to Rmb19.7bn, or 5.1% of its total asset as of 2013. 55% of principal investment asset went for equity investment, 9% for real estate investment, 18% for fund investment (primarily PE fund), and 17% for others.
Figure 108: Outstanding amount of principal investment Figure 109: Mix of principal investment
The outstanding amount of principal investment yoy (Rmb mn) 100% 9% 8% 11% 25,000 45.0% 17% 42% 90% 1% 6% Other investments 11% 40.0% 80% 19,670 23% 21% 20,000 18% 35.0% 70% 15% Fund investments
30.0% 60% 9% 15,000 13,871 Real estate investments 25.0% 50% 11,178 10,173 24% 20.0% 40% Equity investments 10,000 67% 66% 15.0% 30% 63% 55% 5,000 10.0% 20% 10% 5.0% 10% 0 0.0% 0% 2010 2011 2012 2013 2010 2011 2012 2013
Source: Deutsche Bank, company data Source: Deutsche Bank, company data
1) Equity investment. The four investment entities (parent-level company, Cinda Investment, Well Kent International, and Zhongrun Development) all engaged in equity investment, but with a different focus.
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Figure 110: Equity investment overview Entities Business focus Outstanding equity investment Parent-level company Primarily focuses on minority financial investments (usually less than 20% stake in a company); Rmb3.76bn Targets companies with rich experience in mining, energy, construction and environmental protection industries. Cinda Investment Primarily invests in real estate projects related to Cinda’s distressed asset management Rmb2.51bn business. Well Kent Invests in oversea distressed assets in relation to Cinda's distressed asset management. Rmb2.84bn Zhongrun Development Equity investments closely related to its custody, liquidation and restructuring business. Rmb650m Source: Deutsche Bank, company data; Note: outstanding amount of equity investment was as of 2013.
2) Real estate investment & development. Cinda integrates the real estate investment and real estate development businesses with its distress asset management business. Cinda acquired real properties in satisfaction of debt through the distressed asset management business, and in order to maximize the returns in disposal of the properties, Cinda may make additional investments to support the restructuring of the real estate company and the development of the property.
Real estate investment – Cinda Investment is the platform for real estate investment. The value of real estate investment has declined from Rmb2.4bn in 2011 to Rmb1.86bn in 2013. The main property investments are commercial buildings and hotels.
Real estate Development – Cinda Real estate, an A-share listed company controlled by Cinda Investment (58.5% stake), handles the real estate development business for Cinda. The total asset of Cinda Real Estate reached Rmb24.4bn, or 6.4% of total Cinda’s consolidated assets as of 2013. We show the key financials for Cinda Real Estate in Figure 111.
Figure 111: Key financial summary of Cinda Real Estate Rmb m 2010 2011 2012 2013 Revenue 4,133 3,307 4,007 4,480 As % of Group assets 17.0% 13.6% 12.4% 10.6% Contracted sales value 3,173 2,878 3,765 5,139 NPAT 418 563 614 704
Asset 13,938 15,081 19,564 24,410 As % of Group assets 9.2% 8.7% 7.7% 6.4% Liabilities 7,678 8,355 12,439 16,800 Shareholders' equity 5,747 6,159 6,600 7,150
DuPont Analysis Net profit margin 10.1% 17.0% 15.3% 15.7% Asset turnover (Year) 0.30 0.22 0.20 0.18 Leverage ratio (Asset / SH equity) (x) 2.43 2.45 2.96 3.41 ROE 7.28% 9.14% 9.30% 9.84% Source: Deutsche Bank, company data
3) Fund investment & other investment. The fund investment is primarily made as seed capital in funds managed by Cinda, in order to attract third-party funds and to support the development of the asset management business. The outstanding fund investment reached Rmb3.58bn in 2013 (2010: Rmb84m).
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Other investment reached Rmb3.43bn, which primarily included debt securities (Rmb528m), and WMPs (issued by banks and brokers) and trust products (Rmb2.21bn) as of 2013.
Forecast for principal investment. The major income of principal investment includes investment gain/income, and interest income from the financial products. Going forward, we expect the income generated from principal investment to grow at a stable pace, up by 20% yoy, 9% yoy, and 8% yoy for 2014-16E, respectively.
Figure 112: Financial summary and forecasts for principal investment RMB, m 2010 2011 2012 2013 2014E 2015E 2016E Principal investment Balance Equity investments 6,792 7,339 8,691 10,798 11,877 13,659 15,708 Real estate investments 2,364 2,339 2,100 1,858 1,765 1,765 1,765 Fund investments - - 1,582 3,585 4,301 4,947 5,441 Other investments 1,016 1,499 1,498 3,430 4,115 4,733 5,206 Total 10,173 11,178 13,871 19,670 22,059 25,103 28,120 yoy growth Equity investments 8% 18% 24% 10% 15% 15% Real estate investments -1% -10% -12% -5% 0% 0% Fund investments 127% 20% 15% 10% Other investments 48% 0% 129% 20% 15% 10% Total 10% 24% 42% 12% 14% 12% Income from principal investment Investment income 535 643 407 770 1,043 1,179 1,198 Investment income as % of average investment balance 6.0% 3.3% 4.6% 4.5% 4.5% 4.5% Interest income 114 105 297 1,494 1,669 1,769 1,996 Average interest rate 1.0% 2.4% 8.9% 7.5% 7.5% 7.5% Total income (investment income + interest income) 649 748 705 2,264 2,712 2,948 3,193 yoy growth 15% -6% 221% 20% 9% 8%
Source: Deutsche Bank estimates, company data
Asset management The asset management business under FIAM business primarily includes the private equity fund management, which is managed by Cinda Capital. By the end of 2013, 25 private equity funds had been established under the management of Cinda. The total AUM reached Rmb61.2bn as of 2013, up by 4.3x from 2012. We believe it will be some time before the PE fund investment/management bears fruit, so the asset management business will likely have limited revenue contribution in the near future.
Figure 113: Summary of Cinda’s PE fund management 2012 2013 Number of funds 9 25 Total committed capital AUM (Rmb m) 11,500 61,170 Total paid-in capital (Rmb m) 4,780 23,070 Paid-in capital from third parties (Rmb m) 3,890 20,080 Fund management income (Rmb m) 18 85 Fund management fee rate 0.46% 0.71% Accumulated number of projects invested 20 59 Number of third-party investors 79 102 Source: Deutsche Bank, company data
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Financial service business
Cinda conducts the financial service business (FS), including securities & futures, trust, mutual fund, financial leasing, and insurance business, via controlled subsidiaries. Most of these subsidiaries were acquired from restructuring distressed financial entities.
While the revenue contribution of these subsidiaries was as high as 28.6% in 2013, these subsidiaries only contributed to 4.4% of total pre-tax profit of the group, indicating unrealized potential profitability of the segment. The drag comes mainly from the less developed insurance business, which realized only Rmb3m pre-tax profit for P&C insurance and Rmb780m pre-tax loss for life insurance. We believe it may still take some time to unfold selling opportunities and synergies cross the different financial service subsidiaries in addition to providing a wide range of financial products for its clients.
Figure 114: Business overview of Cinda’s Financial Service business
Financial Service Platform
Securities & Trust Mutual Fund Financial Leasing P&C Insurance Life Insurance Futures
Cinda Securities Jingu Trust (92.29%) First State Cinda Cinda Leasing Cinda P&C (51%) Happy Life (61.59%) (Stake: 99.33%) Fund (54%) (99.56%) Trust AUM: Rmb Focus on motor Cinda Futures (100% 102bn as of 2013 Fund AUM: Rmb Net leasing vehicle insurance held by Cinda 5.31bn as of 2013 receivables: Rmb Securities) 25.16bn as of 2013
Cinda Int’l (63.87%)
Aggregate contribution to asset - 22.9% Aggregate contribution to revenue - 28.6% Aggregate contribution to pre-tax profit - 4.4%
(Rmb mn) (Rmb bn) Asset - 2013 (Rmb bn) Revenue - 2013 Pre-tax profit - 2013 35.00 4.50 4.05 600 450 479 30.76 29.81 350 30.00 4.00 400 3.50 3.07 200 25.00 15 3 3.00 - 17.65 20.00 2.50 2.08 1.76 (200) 15.00 2.00 (400) 1.50 1.00 10.00 6.05 (600) 3.52 1.00 5.00 (800) 0.26 0.50 0.17 (780) - - (1,000) Securities Jingu Cinda Mutual Cinda Happy Securities Jingu Cinda Mutual Cinda Happy Securities Jingu Cinda Mutual Cinda Happy & Futures Trust Leasing Fund P&C Life & Futures Trust Leasing Fund P&C Life & Futures Trust Leasing Fund P&C Life
Source: Deutsche Bank, company data
Going forward, we expect Cinda will slow the growth in its FS business with revenue up by 15%, 14% and 13% yoy for 2014-16E, respectively. With relatively high cost-to-income ratio (over 90%), the profit contribution should remained limited. We summarize our earnings forecast in Figure 115.
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Figure 115: Financial summary and forecasts for FS business
RMB mn 2010 2011 2012 2013 2014E 2015E 2016E Revenue of FS business 7,718 9,231 10,565 12,143 14,008 15,936 18,077 yoy growth 20% 14% 15% 15% 14% 13% Cinda Securities 1,884 1,539 1,691 2,084 2,357 2,618 2,914 yoy growth -18% 10% 23% 13% 11% 11% Jingu Trust 187 441 946 1,004 1,079 1,208 1,329 Total trust AUM 11,743 72,406 101,835 93,811 107,883 120,829 132,911 yoy growth 517% 41% -8% 15% 12% 10% Revenue % average AUM 0.00% 1.05% 1.09% 1.03% 1.00% 1.00% 1.00% Financial leasing 130 623 1,317 1,760 2,467 2,887 3,331 Total finance lease receivables 1,565 8,441 18,003 25,701 30,841 37,009 44,411 yoy growth 439% 113% 43% 20% 20% 20% Revenue % average receivbales 12.5% 10.0% 8.1% 8.0% 7.8% 7.5% Cinda P & C 169 838 1,755 3,072 3,491 4,137 4,900 Original premium income - P & C 351 1,216 2,422 3,043 3,591 4,237 5,000 yoy growth 247% 99% 26% 18% 18% 18% Other income/expenses (182) (378) (668) 29 (100) (100) (100) Happy Life 5,219 5,673 4,762 4,053 4,427 4,879 5,377 Original premium income - Life 4,491 5,046 5,707 4,115 4,527 4,979 5,477 yoy growth 12% 13% -28% 10% 10% 10% Other income/expenses 728 627 (945) (62) (100) (100) (100) First State Cinda Fund 129 118 93 170 187 206 227 yoy growth -8% -21% 83% 10% 10% 10%
Operating expense (7,506) (9,230) (9,940) (11,167) (12,882) (14,964) (17,202) Impairment losses on assets (32) (207) (448) (469) (540) (618) (709) Share of results of associates 0 0 0 17 19 22 25 Profit before tax 180 (207) 164 515 605 375 191 Net profit 136 (155) 124 398 466 289 147 As % of group's net profit 1.8% -2.3% 1.7% 4.4% 4.5% 2.4% 1.0%
Pre-tax ROAA -0.48% 0.28% 0.66% 0.65% 0.35% 0.16% Pre-tax ROAE -2.26% 1.40% 3.63% 3.87% 2.09% 0.93% ROAA -0.36% 0.21% 0.51% 0.50% 0.27% 0.12% ROAE -1.69% 1.05% 2.81% 2.98% 1.61% 0.71%
Source: Deutsche Bank, company data
Page 54 Deutsche Bank AG/Hong Kong
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Other Financial Services China Cinda Appendix A – AMC Industry in China
A bit of history
Historically, most SOEs in China did not establish sound risk management and internal control, and NPL disposal policy was very strict for Chinese banks. As a result, banks accumulated large amounts of NPLs in the late 1990s, after SOE reforms and the Asian financial crisis. In 1999, the PRC government founded four AMCs, i.e. Cinda, Huarong, Orient and Great Wall, to help carve NPLs from state-owned commercial banks. As of 31 December 2012, the four AMCs had acquired distressed assets with an Original Value of more than Rmb3.1tr (46% were policy distressed assets).
The four big AMCs have undergone a structural change in the past 14 years, transforming from policy distress asset management business to commercialized business and expanding to comprehensive financial services. Figure 116 shows the three-stage development of the distressed asset management industry in China over the past 14 years.
Figure 116: Historical development of the AMC industry
Commercial banks' NPL outstanding (LHS) NPL ratio (RHS) 2,500 2,343 2,279 30% 25% 2,104 24% 25% 2,000 1,718 18% 20% 1,500 1,313 13% 1,255 1,268 15% 1,000 9% 7% 6% 560 592 10% 497 434 428 493 500 2% 2% 1% 5% 1% 1% 1% - 0% 1999 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
1999-2000 2001 2002 2004-20052006 2007-2008 2010-2011 2012 2012 - 2013 The MOF allowed The 4 AMCs started Cinda and Huarong to record their Policy As 2012, the 4 AMCs Big 4 AMCs were set AMCs to conduct Cinda was the first Cinda became the Huarong for the first first met the MOF's Business and had cumulatively up commerical AMC to complete the 1st AMC to complete time sold NPA performance Commercial Business acquired distressed Cinda was acquisition of NPA conversion into a introduction of packages to overseas evaluation on separate accounts assets of more than entrusted by MOF to and make follow-up joint stock company strategic investors 1st round of NPA investors; set up JVs benchmark as required by the Rmb 3.1tr carve-outs from big 4 with Morgan Stanley liquidate China Trust investments MOF and Investment banks and CDB, and Goldman Sachs Corporation for Cinda was the 1st totaling Rmb1.4tr 2nd round of NPA Orient issued the 1st Cinda was the only AMC Economic Huarong also AMC to complete carve-outs from ABS backed by ABC carved out Rmb permitted to acquire Orient completed Development BoCom, BOC, CCB, NPA from non-financial complete conversion IPO Huarong became the distressed assets, 816bn NPA to the 220 debt-to-equity and ICBC prior to their enterprises, and the 1st into a joint stock 1st AMC to named Dongyuan MOF swap deals, totalling listings, with book AMC borrowing from company Huarong issued Rmb underwrite IPO 2006-1 interbank Rmb 63bn value of Rmb 1.0tr 12bn financial bond
Policy phase Transition phase Commercial phase
Source: Deutsche Bank, company websites, Cinda prospectus
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From distressed asset managers to financial holding companies
Figure 117: Multi-financial platforms help to generate synergies Cinda Huarong Orient Great Wall Bank N.A. Huarong Xiangjiang Bank N.A. N.A. Insurance Cinda P&C, Happy Life N.A. China Insurance Nissay-Great Wall Life Brokers Cinda Securities, Cinda Futures Huarong Securities, Huarong Dongxing Securities Great Wall Xinsheng Trust Futures Trust Jingu Trust Huarong International Trust Daye Trust N.A. Leasing Cinda Leasing Huarong Financial Leasing China National Foreign Trade Great Wall Guoxing Financial Financial & Leasing Leasing Fund management First State Cinda Fund Huarong Yufu Capital Bangxin Asset Management Great Wall Fund Management Investment & advisory Cinda Investment, Zhongrun Huarong Huitong Asset China Orient Bangxin Great Wall Goldenbridge Development, Cinda Capital, Management, Huarong Rongde Management Co. Financial Consulting, Great Wall Sino-Rock Investment Asset Management Guorong Investment, Great Management, Shanghai Tongda Wall (Ningxia) Asset Venture Capital Management Real estate Cinda Real Estate Huarong Real Estate, Huarong Great Wall Guofu Real Estate N.A. Zhiyuan Investment & Management Credit rating N.A. N.A. Golden Credit Rating N.A. International Small loans N.A. N.A. Banghui Holding N.A. Guarantee N.A. N.A. N.A. Great Wall Guarantee Asset exchange N.A. N.A. N.A. Tianjin Financial Assets Exchange Overseas subsidiaries Well Kent International, Cinda Huarong (Hong Kong) Dong Yin Development, China Great Wall Pan Asia Int'l International International Orient Asset Management Investment International Source: Deutsche Bank, company websites
Figure 118: Four AMCs’ business licenses Trust Financial Future Mutual Securities Microfina Bank Life Property Private Property Financial Total leasing brokerage fund nce Insurance insurance equity develop’t guarantee Cinda √ √ √ √ √ √ √ √ √ 9 Huarong √ √ √ √ √ √ √ √ 8 Orient √ √ √ √ √ √ √ √ 8 Great Wall √ √ √ √ √ √ 6 Source: Deutsche Bank, company websites
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Financial overview of big-four AMCs
Figure 119: Big 4 AMCs' total assets – Group level Figure 120: Big 4 AMCs' total assets – Company level Rmb bn Great Wall Orient Huarong Cinda Rmb bn Great Wall Orient Huarong Cinda 1,000 921 600 864 528 900 501 116 800 107 500 81 81 700 198 193 400 600 543 140 301 139 500 55 404 300 74 324 240 39 400 23 309 14 119 251 78 60 116 300 242 200 159 57 200 63 152 90 58 68 53 284 100 46 255 100 188 151 173 35 165 89 22 102 112 0 43 2009 2010 2011 2012 1H13 0 2009 2010 2011 2012 1H13
Source: Deutsche Bank, company data, Chinabond.com.cn Source: Deutsche Bank, company data, Chinabond.com.cn Note: Orient AMC’s data is estimated based on its 1Q13 numbers Note: Orient AMC’s data is estimated based on its 1Q13 numbers
Figure 121: Big 4 AMCs' ROAE – Company level Figure 122: Big 4 AMCs' ROAA – Company level Cinda Huarong Orient Great Wall Total Cinda Huarong Orient Great Wall Total 35.0% 12.0% 30.0% 10.0% 25.0% 8.0% 20.0% 20.2% 15.5% 6.0% 15.0% 14.6% 12.8% 4.4% 4.8% 10.0% 4.0% 4.1% 3.9% 5.0% 5.7% 2.0% 1.9% 0.0% 0.0% -5.0% -10.0% -2.0%
-15.0% -4.0% 2009 2010 2011 2012 1H13 2009 2010 2011 2012 1H13
Source: Deutsche Bank, company data, Chinabond.com.cn Source: Deutsche Bank, company data, Chinabond.com.cn Note: Orient AMC’s data is estimated based on its 1Q13 numbers Note: Orient AMC’s data is estimated based on its 1Q13 numbers
Figure 123: Big 4 AMCs' NPAT – Group level Figure 124: Big 4 AMCs' NPAT – Company level
Rmb mn NPAT - group yoy Rmb mn NPAT - company yoy 25,000 100% 18,000 200% 93.2% 21,209 15,650 90% 16,000 176.4% 180% 20,000 80% 14,000 160% 16,831 12,431 70% 12,030 140% 15,609 12,000 15,000 60% 120% 58.7% 10,000 11,089 50% 8,281 100% 40.8% 8,000 10,000 35.9% 40% 80% 6,000 5,739 30% 58.9%60% 45.3% 5,000 20% 4,000 2,996 40% 30.1% 10% 2,000 20% 0 0% 0 0% 2009 2010 2011 2012 1H13 2009 2010 2011 2012 1H13
Source: Deutsche Bank, company data, Chinabond.com.cn Source: Deutsche Bank, company data, Chinabond.com.cn Note: Orient AMC’s data is estimated based on its 1Q13 numbers Note: Orient AMC’s data is estimated based on its 1Q13 numbers
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Figure 125: Big 4 AMCs' total funding – Company level Figure 126: Big 4 AMCs' leverage (D/E) – Company level Rmb bn Great Wall Orient Huarong Cinda Cinda Huarong Orient Great Wall Total 450 12.00 387 397 400 10.00 59 350 61
300 8.00 116 127 250 213 6.00 200 163 24 86 50 150 1 85 4.00 107 48 3.40 63 3.02 100 2.44 47 47 2.11 136 2.00 2.02 50 27 115 4 67 76 28 0 0.00 2009 2010 2011 2012 1H13 2009 2010 2011 2012 1H13
Source: Deutsche Bank, company data, Chinabond.com.cn Source: Deutsche Bank, company data, Chinabond.com.cn Note: Orient AMC’s data is estimated based on its 1Q13 numbers Note: Orient AMC’s data is estimated based on its 1Q13 numbers
Figure 127: Big 4 AMCs' funding source – Company level Figure 128: Each AMC's funding source (1H13) – Company level Other liabilities Bonds Due to central banks Other liabilities Bonds Due to central banks Long-term borrowing Short-term borrowing Long-term borrowing Short-term borrowing 100% 100% 5% 4% 18% 90% 21% 18% 90% 12% 22% 28% 28% 3% 80% 80% 1% 42% 40% 3% 2% 2% 5% 2% 50% 70% 70% 8% 28% 28% 60% 5% 60% 35% 22% 24% 10% 50% 17% 50% 40% 2% 15% 40% 35% 83% 30% 30% 49% 49% 46% 46% 49% 20% 41% 20% 40% 35% 10% 10% 24% 0% 1% 0% 2009 2010 2011 2012 1H13 Cinda Huarong Orient Great Wall Total
Source: Deutsche Bank, company data, Chinabond.com.cn Source: Deutsche Bank, company data, Chinabond.com.cn Note: Orient AMC’s data is estimated based on its 1Q13 numbers Note: Orient AMC’s data is estimated based on its 1Q13 numbers
Figure 129: Share holding structure of 4 AMCs
Cinda Huarong Orient & Great Wall China Life, 1.9% H-share, 16.9%
Strategic investors, MOF , 100% 15.3% MOF, 67.8% MOF, 98.1%
Source: Deutsche Bank, company data
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Funding mix shifting towards bank loans and bonds
Figure 130: We expect Cinda’s funding mix to continue Figure 131: As a result, interest expenses would be to shift towards bank borrowings and bonds dominated by bank borrowing costs
100% 3 2 22 100% 1 1110 8 4 4 3 5 3 3 3 Others 8 7 7 6 Others 21 9 90% 16 8 7 8 11 7 90% 1 3 8 13 0 6 9 12 14 3 1 01 8 9 0 80% 11 4 0 80% 0 Interbank Interbank 27 70% 70% 30 60 60% 60% 59 59 Bonds issued Bonds issued 50% 50% 74 85 85 83 40% 78 80 77 40% 72 78 Amount due to Amount due to 30% 30% the MOF & 60 50 the MOF & 20% central bank 20% central bank 33 25 Borrowings 30 10% 10% Borrowings 9 0% 0% 2010 2011 2012 2013 2014E 2015E 2016E 2010 2011 2012 2013 2014E 2015E 2016E Source: Deutsche Bank, company data Source: Deutsche Bank, company data
Figure 132: Sensitivity suggests Cinda is more sensitive to bank lending rate, with 30bps increase in bank rate to knock off 6.8% FY14E net profit Interest rate change NPAT impact +/- bps Bank rate Bond rate Interbank rate Overall 30 -5.4% -0.6% -0.5% -6.8% 20 -3.6% -0.4% -0.3% -4.6% 10 -1.8% -0.2% -0.2% -2.3% 0 0.0% 0.0% 0.0% 0.0% -10 1.8% 0.2% 0.2% 2.3% -20 3.6% 0.4% 0.3% 4.6% -30 5.4% 0.6% 0.5% 6.8% Source: Deutsche Bank estimates, company data
Synergies
Cinda achieved cross-selling income of Rmb1.5bn from synergies between segments and subsidiaries in 2013, accounting for 3.5% of total income, with financing leasing subsidiary contributing c.80%. We expect the synergies between the DAM and FIAM to be the strongest, while synergies elsewhere within the group should remain limited, given relatively weaker subsidiaries in terms of market positions.
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Figure 133: We expect the synergies between the DAM and FIAM to be the strongest, while synergies elsewhere within the group should remain limited, given relatively weaker subsidiaries in terms of market positions
Strong synergies: Modest synergies: - DAM provides extensive - DAM provides extensive network and client base network client base - FIAM makes value-appreciation - FS provies value-added services investment and enhances total Distressed Asset to DAM clients and enables them return from distressed assets Management to get access to capital market - Cinda Real Estate helpes DAM (DAM) - cross selling opportunities to manage real estate related including insurance products, and assets trust and leasing projects - Well Kent Int'l provides overseas services
Common synergies: - Business network synergy: Financial 31 Company branches, 300 Investment & insurance branches and 70 Financial Service brokerage branches Asset (FS) - Client synergy: 1.5mn retail Management client base from FS; (FIAM) Company's cooperation agreements with 343 local governments, financial institutions, enterprises and Weak synergies: other entities - Share client and branch network - Branding, talent & experties - FS provides customized sharing, and information financial solutions to portfolio system synergies companies in PE funds - Well Kent Int'l provides overseas services
Source: Deutsche Bank, company data
Figure 134: Compared with CITIC Group, Cinda’s subsidiaries are generally weaker in terms of market positions and have made lower profit contribution to the group Cinda Group CITIC Group Subsidiaries Industry PBT - 2013 PBT Subsidiaries Industry PBT - 2013 PBT ranking (Rmb m) contribution ranking (Rmb m) contribution to group to group Broker Cinda Securities 32 450 3.8% CITIC Securities 1 6,846 9.7% Trust Jingu Trust 43 350 3.0% CITIC Trust 1 4,194 6.4% Fund First State Cinda 57 15 0.1% China AMC 1 1,285 2.3% Insurance Cinda P&C 21 3 0.0% CITIC-Prudential 24 261 0.6% Happy Life 25 780 -6.6% Bank N.A. CITIC Bank 9 52,549 73.8% Leasing Cinda Leasing N.A. 479 4.1% N.A. Source: Deutsche Bank, company data, company websites
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Cinda’s history
Figure 135: Key milestones for Cinda over different development stages
Sold 3 batches distressed Entrusted to dispose of Incorporated in Beijing; assets to overseas investors with a total amount of distressed assets of 12 acquired Rmb250bn NPLs Acquired Rmb14bn NPLs Rmb12.3bn; entrusted by the subsidiaries of one of the from CCB and Rmb100bn from CDB Policy MOF to liquidate China Trust largest telecom NPLs from CDB phase and Investment Corporation operators in China for Economic Development
1999 2001 2002 2003
Acquired Rmb64bn NPLs from Expanded into businesses Became the 1st AMC to meet Expanded into fund BoCom before its listing; acquired including onshore/offshore the MOF's performance management business; Rmb278.7 NPLs from CCB and BOC securities, trust, life/P&C evaluation benchmarks on issued the first batch of through bidding; entrusted by insurance, futures, PE and disposal of Policy Distressed distressed assets regulators to take over 2 securities real estate; advised CCB on Transition Assets; acquired Rmb58.1bn firm and dispose Rmb56.9bn NPLs securitization product of issuing subordinated asset- phase NPLs from ICBC from CCB Rmb3bn in the PRC backed securities
2004 2005 2006 2007-2009
Approved by State Council to Became the 1st AMC to 1st AMC to issue offshore become the 1st AMC to completed introduction of RMB bonds in HK with complete joint-stock reform; Participated in interbank strategic investments by total amount of Rmb2bn; expanded into financial leasing borrowing market with NSSF, UBS, CITIC Capital 1st AMC to complete IPO, Commercial business; approved to start approval of PBOC and SCB; 1st AMC to issue raising HK$18.5bn in HK in phase distressed assets acquisition financial bonds with total from non-financial enterprises amount of Rmb10bn Dec 2013
2010 2011 2012 2012-2013
Source: Deutsche Bank, company data
Corporate structure of Cinda
Figure 136: Cinda’s shareholding structure post Global Offering after over-allotment option was exercised
Standard Public: H MOF NSSF UBS CITIC Capital Chartered Shareholders
67.8% 8.2% 4.2% 1.7% 1.3% 16.9%
Cinda
99.3% 92.3% 99.6% 54% 51% 61.6% 100% 100%
Cinda Cinda First State Cinda Well Kent Jingu Trust Cinda P&C Happy Life Securities Leasing Cinda Investment International 63.9% indirect holding 100% 90% 10% 54.8% 40.7%
Cinda Zhongrun Cinda Real Shanghai Cinda Futures Development Estate Tongda International
Source: Deutsche Bank, company data Note: 9 principal subsidiaries of Cinda are in dark blue boxes and 4 indirect controlled financial companies are in light blue boxes
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Cinda management profile
A large proportion of Cinda’s senior management team is from CCB and many of them have worked in Cinda for more than 10 years.
Figure 137: Directors and senior management profile – Cinda Name Age Position/Title Key profile HOU Jianhang 57 Chairman of the Board, Joined in 1999, and has been the Chairman of Board since May 2011. Mr. Hou had held Executive Director various positions with CCB before joining Cinda including general manager of Credit Risk Management Department. He graduated from Liaoning Finance and Economics College in 1979. ZANG Jingfan 58 Executive Director, President Joined in 2000, and has been ED and President since May 2011. Mr. Zang served as various roles in PBOC, SAFE and CBRC before joining Cinda including director of Cooperative Finance Supervision Department of the CBRC from 2005-10. He graduated from Shaanxi Institute of Finance and Economics in 1990. XU Zhichao 53 Executive Director, Vice Joined in 2000, and has been ED and VP since June 2010. Mr. Xu worked as deputy director President of the Macro-economy Research Institute of China Society of Economic Reform in 1987-91. He graduated from Huazhong University of Science & Technology in 2003 with a doctoral degree. WANG Shurong 58 Non-executive Director Joined in 2010 as non-executive Director. Ms. Wang served various roles in 1985-2010 in the MOF and was accredited as an economist and a senior accountant by the MOF. She graduated from Tianjin College of Finance & Economics in 1980. YIN Boqin 57 Non-executive Director Joined in 2010 as non-executive Director. Mr. Yin served as various senior roles in Department of Taxation of the MOF in the past and was the Vice Mayor of Longkou City, Shandong Province in 1997-1998. He graduated from Shanghai College of Finance and Economics in 1983. XIAO Yuping 53 Non-executive Director Joined in 2010 as non-executive Director. Ms. Xiao served various roles in the PBOC in 1986-2010, and was accredited as a senior economist by PBOC in 1999. She graduated from Peking University in 1986 with a Bachelor's degree in law. YUAN Hong 49 Non-executive Director Joined in 2013 as non-executive Director. Ms. Yuan served various roles in PBOC, SAFE, CBRC, ADBC etc. before joining Cinda. She graduated from Nankai University in 1987 with an economics degree. LU Shengliang 46 Non-executive Director Joined in 2012 as non-executive Director. Mr. Lu served various roles in CASS, NSSF, China UnionPay, etc. before joining Cinda. He graduated from CASS Graduate School with a doctoral degree in economics in 1999. LI Xikui 69 Independent non-executive Joined in 2010 as independent non-executive Director. Mr. Li served various senior roles in Director CCB, Shougang Group, Huaxia Bank, China Galaxy Securities Galaxy Fund Management, etc. before joining Cinda. He graduated from the Finance Science Institute of the MOF with a Masters degree in 1982. QIU Dong 56 Independent non-executive Joined in 2010 as independent non-executive Director. Mr. Qiu served as professor in Director Dongbei University of Finance and Economics and Central University of Finance and Economics in 1985-2009. He is currently an independent non-executive director of ABC and distinguished guest professor of Changjiang Scholars Program. Mr. Qiu graduated from Dongbei University of Finance and Economics with a doctoral degree in 1990. CHANG Tso Tung, 65 Independent non-executive Joined in 2013 as independent non-executive Director. Mr. Chang was the deputy chairman Stephen Director of Ernst & Young HK and China until 2003 and has about 30 years extensive experience in accounting, auditing and financial management. Mr. Chang graduated from University of London in 1973. XU Dingbo 50 Independent non-executive Joined in 2013 as independent non-executive Director. Mr. Xu served as independent non- Director executive director and chairman of the audit committee for various companies in the past including The People's Insurance Company of China. Mr. Xu is a member of the American Accounting Association and graduated from University of Minnesota in 1996 with a doctoral degree in accounting. CHEN Xiaozhou 51 Member of the senior Joined in 1999, and has been a member of the senior management of Cinda since 2000, management responsible for the investment and asset management business. Before joining Cinda, Mr. Chen had held various positions in CCB including deputy general manager of the Business Department of Head Office. He graduated from Graduate School of Finance Research Institute of PBOC in 1988 and from University of new South Wales in 2002 with a Master's degree in business. YANG Junhua 56 Member of the senior Joined in 1999, and has been a member of the senior management since 2005, responsible management for the general affairs of the Head Office. Mr Yang had held various positions in CCB before joining Cinda, including vice general manager of Shaanxi Provincial Branch. He graduated from the University of International Business and Economics in 2005 with an EMBA degree and from University of Science and Technology of China in 2011 with a doctoral degree in management. Source: Deutsche Bank, company data
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Figure 137: Directors and senior management profile – Cinda (cont’d) Name Age Position/Title Key profile XIAO Lin 58 Vice President Joined in 1999, and has been VP since 2013, responsible for labor union. Mr. Xiao had held various positions in CCB prior to joining Cinda, including deputy general manager of Staff Education Department and was accredited as a senior political engineer by CCB in 1997. He graduated from the University of International Business and Economics in 2006 with an EMBA degree. ZHUANG Enyue 52 Vice President Joined in 2003, and has been VP since 2007, responsible for the custody, liquidation and restructuring business. Mr. Zhuang had held various positions in the National Audit Office in 1990-2001, and ICBC in 2001-2003. He graduated from Renmin University of China in 1990 with a Master's degree in economics. LI Yuejin 55 Vice President Joined in 1999, and has been VP since 2011, responsible for DES Asset management and information technology. Mr. Li had held various positions in CCB prior to joining Cinda, including branch general manager of Tai'an Branch. He graduated from Peking University in 2007 with an EMBA degree. WU Songyun 49 Vice President Joined in 1999, and has been VP since 2013, responsible for distressed debt asset management. Mr. Wu had held various positions in CCB prior to joining Cinda, including deputy director of Credit Risk Management Department. He graduated from Tsinghua University in 2012 with an EMBA degree. GU Jianguo 51 Vice President Joined in 2011, and has been VP since 2013, responsible for asset/liability management and financial/accounting. Mr. Gu had held various positions in China Cinda Trust Investment, CCB, and Well Kent International prior to joining Cinda. He received a doctoral degree in economics from the Research Institute for Fiscal Science of the MOF in 1994. ZHANG Weidong 46 Assistant to President, Board Joined in 1999, and has been Assistant to President since 2011, responsible for investor Secretary relationship management. Mr. Zhang served as officer of the Real Estate Credit Department in CCB in 1992-1999. He graduated from Remin University in 1992 with a Master's degree in economics. LUO Zhenhong 48 Chief Risk Officer Joined in 1999, and has been the Chief Risk Officer since 2013, responsible for risk management. Mr. Luo had worked in various positions in CCB in 1988-99. He received a Master's degree in Law in 2002 and an EMBA degree in 2012 from Peking University. Source: Deutsche Bank, company data
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The list of the 74 listed comparables to Cinda’s top-20 unlisted DES companies
Figure 138: The list of the 74 listed comparables to Cinda’s top-20 unlisted DES companies – Part 1
Item Comparable companies Ticker BBG ticker Market cap (RMB mn) as of 6/28/2013 12/31/2013 hoh chg 5/14/2014 Ytd chg Coal production for trade and power generation 1 China Shenhua Energy Co Ltd. 1088 HK 1088 HK Equity 332,608 325,750 -2.1% 298,963 -8.2% 2 China Coal Energy Co., Ltd. 1898 HK 1898 HK Equity 57,960 57,619 -0.6% 53,858 -6.5% 3 Yanzhou Coal Mining Co., Ltd. 1171 HK 1171 HK Equity 36,448 37,100 1.8% 32,789 -11.6% 4 Shanxi Lu'An Environmental Energy Development Co., Ltd. 601699 CH 601699 CH Equity 27,521 24,553 -10.8% 19,329 -21.3% 5 Shanxi Xishan Coal and Electricity Power Co., Ltd. 000983 CH 000983 CH Equity 25,714 22,374 -13.0% 17,710 -20.8% 6 Yangquan Coal Industry (Group) Co., Ltd. 600348 CH 600348 CH Equity 21,741 16,979 -21.9% 14,815 -12.7% 7 Jizhong Energy Resources Co., Ltd. 000937 CH 000937 CH Equity 20,423 17,162 -16.0% 14,432 -15.9% 8 Guizhou Panjiang Refined Coal Co., Ltd. 600395 CH 600395 CH Equity 15,144 12,016 -20.7% 13,224 10.1% 9 DaTong Coal Industry Co., Ltd. 601001 CH 601001 CH Equity 9,590 9,674 0.9% 10,394 7.4% 10 Huolinhe Opencut Coal Industry Corp Ltd. 002128 CH 002128 CH Equity 11,595 10,640 -8.2% 9,618 -9.6% 11 Shougang Fushan Resources Group Limited 639 HK 639 HK Equity 12,628 11,257 -10.9% 10,439 -7.3% 12 Mongolian Mining Corporation 975 HK 975 HK Equity 4,222 2,979 -29.4% 1,787 -40.0% 13 Hidili Industrial International Development Ltd. 1393 HK 1393 HK Equity 2,282 1,884 -17.4% 1,512 -19.7% 14 Inner Mongolian Yitai Coal Co., Ltd. 3948 HK 3948 HK Equity 48,103 34,708 -27.8% 27,346 -21.2% Subtotal 625,979 584,694 -6.6% 526,216 -10.0% Sales and production of phosphate compounds and fertilizer 1 Jiangsu Chengxing Phosph-chemicals Co., Ltd. 600078 CH 600078 CH Equity 3,903 3,850 -1.4% 3,664 -4.8% 2 Hubei Xingfa Chemicals Group Co., Ltd. 600141 CH 600141 CH Equity 4,876 5,434 11.4% 4,332 -20.3% 3 Anhui Liuguo Chemical Co., Ltd. 600470 CH 600470 CH Equity 3,051 3,390 11.1% 3,004 -11.4% 4 Shandong Kingenta Ecological Engineering Co., Ltd. 002470 CH 002470 CH Equity 9,856 14,910 51.3% 13,041 -12.5% 5 Hubei Yihua Chemical Industry Co., Ltd. 000422 CH 000422 CH Equity 6,061 5,630 -7.1% 4,732 -15.9% 6 Sichuan Lutianhua Co., Ltd. 000912 CH 000912 CH Equity 2,381 2,668 12.0% 2,586 -3.1% 7 Shenzhen Batian Ecotypic Engineering Co., Ltd. 002170 CH 002170 CH Equity 4,590 5,433 18.4% 4,684 -13.8% 8 Luxi Chemical Group Co., Ltd. 000830 CH 000830 CH Equity 5,347 6,050 13.2% 5,200 -14.0% Subtotal 40,064 47,364 18.2% 41,243 -12.9% Sale and production of coking chemicals 7/19/2013 1 Shanxi Coking Co., Ltd. 600740 CH 600740 CH Equity 4,487 4,594 2.4% 4,181 -9.0% 2 Taiyuan Coal Gasification Co., Ltd. 000968 CS 000968 CS Equity 3,740 4,197 12.2% 3,802 -9.4% 3 Inner Mongolia Yuan Xing Energy Co., Ltd. 000683 CH 000683 CH Equity 3,209 3,064 -4.5% 2,803 -8.5% 4 Huscoke Resources Holdings Limited 704 HK 704 HK Equity 376 282 -24.8% 207 -26.6% 5 Qitaihe Baotailong Coal & Coal Chemicals Public Co., Ltd. 601011 CG 601011 CG Equity 2,844 3,878 36.3% 3,967 2.3% Subtotal 14,657 16,015 9.3% 14,959 -6.6% Provision of cement equipment and engineering services, production and sales of cement 1 Anhui Conch Cement Co., Ltd. 914 HK 914 HK Equity 75,127 96,981 29.1% 97,496 0.5% 2 Asia Cement China Holdings Corp. 743 HK 743 HK Equity 3,916 5,940 51.7% 7,054 18.7% 3 China Shanshui Cement Group. Ltd. 691 HK 691 HK Equity 7,777 7,320 -5.9% 6,880 -6.0% 4 West China Cement Ltd. 2233 HK 2233 HK Equity 4,138 4,082 -1.4% 3,070 -24.8% 5 Dongwu Cement International Ltd. 695 HK 695 HK Equity 478 508 6.2% 531 4.6% 6 TCC International Holdings Ltd. 1136 HK 1136 HK Equity 4,773 9,775 104.8% 7,628 -22.0% 7 China Resources Cement Holdigns Ltd. 1313 HK 1313 HK Equity 20,120 26,568 32.1% 27,511 3.5% 8 China Tianrui Group Cement Co., Ltd. 1252 HK 1252 HK Equity 4,275 4,498 5.2% 4,091 -9.1% 9 China National Building Material Co., Ltd. 3323 HK 3323 HK Equity 29,693 35,148 18.4% 31,935 -9.1% 10 China National Material Co., Ltd. 1893 HK 1893 HK Equity 4,070 4,656 14.4% 4,334 -6.9% Subtotal 154,366 195,474 26.6% 190,528 -2.5% Sale and production of non-ferrous metals 1 Jiangxi Copper Co., Ltd. 358 HK 358 HK Equity 47,100 44,581 -5.3% 39,974 -10.3% 2 Xinjiang Xinxin Mining Industry Co., Ltd. 3833 HK 3833 HK Equity 2,221 2,001 -9.9% 2,682 34.0% 3 MMG Ltd. 1208 HK 1208 HK Equity 8,497 6,771 -20.3% 8,119 19.9% 4 China Nonferrous Mining Corp. Ltd. 1258 HK 1258 HK Equity 7,537 6,046 -19.8% 5,047 -16.5% 5 China Daye Non-ferrous Metals Mining Ltd. 661 HK 661 HK Equity 2,715 2,638 -2.9% 1,796 -31.9% 6 Yunnan Copper Industry Co., Ltd. 000878 CH 000878 CH Equity 13,739 12,337 -10.2% 10,779 -12.6% 7 Shengda Mining Co., Ltd. 000603 CH 000603 CH Equity 6,454 6,509 0.9% 5,615 -13.7% 8 Tongling Nonferrous Metals Group Co., Ltd. 000630 CH 000630 CH Equity 15,325 14,244 -7.1% 13,676 -4.0% 9 Sichuan Western Resources Holdings Co., Ltd. 600139 CH 600139 CH Equity 3,978 4,885 22.8% 7,671 57.0% 10 Western Mining Co. Ltd. 601168 CH 601168 CH Equity 12,892 12,844 -0.4% 12,844 0.0% Subtotal 120,459 112,857 -6.3% 108,205 -4.1%
Source: Deutsche Bank, Bloomberg Finance LP, company data
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Figure 139: The list of the 74 listed comparables to Cinda’s top-20 unlisted DES companies – Part 2
Item Comparable companies Ticker BBG ticker Market cap (RMB mn) as of 6/28/2013 12/31/2013 hoh chg 5/14/2014 Ytd chg Sale and production of steel pipes 1 Shandong Molong Petroleum Machinery Co., Ltd. 568 HK 568 HK Equity 4,940 6,315 27.8% 6,132 -2.9% 2 Zhejiang Jiuli Hi-Tech Metals Co., Ltd. 002318 CH 002318 CH Equity 5,345 5,585 4.5% 5,292 -5.3% 3 Zhejiang Kingland Pipeline and Technologies Co., Ltd. 002443 CH 002443 CH Equity 2,881 3,288 14.1% 3,097 -5.8% 4 Jiangsu Changbao Steel Tube Co., Ltd. 002478 CH 002478 CH Equity 3,341 4,081 22.2% 3,761 -7.8% 5 Inner Mongolian Baotou Steel Union Co., Ltd. 600010 CH 600010 CH Equity 32,811 34,491 5.1% 30,890 -10.4% 6 Chu Kong Petroleum & Natural Gas Steel Pipe Holding Ltd. 1938 HK 1938 HK Equity 1,760 2,139 21.5% 1,910 -10.7% 7 Shengli Oil& Gas Pipe Holdings Ltd. 1080 HK 1080 HK Equity 1,610 1,046 -35.0% 787 -24.7% 8 Anhui Tianda Oil Pipe Co., Ltd. 839 HK 839 HK Equity 981 967 -1.4% 1,223 26.4% Subtotal 53,668 57,912 7.9% 53,092 -8.3% Railway construction and management 1 Daqin Railway Co., Ltd. 601006 CH 601006 CH Equity 88,309 109,866 24.4% 100,351 -8.7% 2 China Railway Tielong Container Logistics Co., Ltd. 600125 CH 600125 CH Equity 6,919 7,428 7.4% 6,723 -9.5% 3 Aurizon Holdings Ltd. AZJ AU AZJ AU Equity 49,773 56,353 13.2% 61,951 9.9% 4 Asciano Ltd. AIO AU AIO AU Equity 27,411 30,355 10.7% 33,127 9.1% 5 CSX Corp. CSX US CSX US Equity 145,457 176,509 21.3% 184,760 4.7% 6 Genesee& Wyoming Inc. GWR US GWR US Equity 27,725 31,092 12.1% 32,152 3.4% 7 Norfolk Southern Corp. NSC US NSC US Equity 140,497 173,560 23.5% 188,226 8.5% 8 Canadian Pacific Railway Ltd. CP US CP US Equity 130,192 160,579 23.3% 174,896 8.9% 9 Canadian National Railway Ltd. CNR CN CNR CN Equity 252,997 288,297 14.0% 305,720 6.0% 10 Union Pacific Corporation UNP US UNP US Equity 441,997 468,308 6.0% 544,251 16.2% 11 Kansas City Southern KSU US KSU US Equity 71,656 82,598 15.3% 70,273 -14.9% 12 Providence and Worcester Railroad Co. PWX US PWX US Equity 470 574 22.0% 549 -4.3% Subtotal 1,383,401 1,585,518 14.6% 1,702,980 7.4% Engineering and construction of nuclear power plants and other infrastructure projects 1 China Communication Construction Co., Ltd. 1800 HK 1800 HK Equity 68,856 69,045 0.3% 63,384 -8.2% 2 Sinohydro Group Ltd. 601669 CH 601669 CH Equity 27,648 29,472 6.6% 26,784 -9.1% 3 China Railway Group Ltd. 390 HK 390 HK Equity 53,625 58,945 9.9% 57,766 -2.0% 4 China Railway Construction Corp. Ltd. 1186 HK 1186 HK Equity 54,183 60,624 11.9% 58,888 -2.9% 5 China National Chemical Engineering Co., Ltd. 601117 CH 601117 CH Equity 46,962 39,464 -16.0% 29,253 -25.9% 6 China Gezhouba Group Co., Ltd. 600068 CH 600068 CH Equity 13,741 13,810 0.5% 17,728 28.4% 7 China State Construction Engineering Corporation Ltd. 601668 CH 601668 CH Equity 98,100 94,200 -4.0% 89,700 -4.8% Subtotal 363,115 365,560 0.7% 343,503 -6.0%
Source: Deutsche Bank, Bloomberg Finance LP, company data
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