Sell China Cinda
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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. 15 May 2014 Other Financial Services China Cinda 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 Page 2 Deutsche Bank AG/Hong Kong 15 May 2014 Other Financial Services China Cinda 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