Equity Research March 27, 2020

Legend Holdings Facing growth pressure under volatile market, cut TP to HK$14

Results Review Maintain NEUTRAL

2019 bottom lines misses market consensus Ticker 03396.HK CICC investment rating NEUTRAL Legend announced 2019 results: revenue rose 8.4% to Rmb389.2bn, Last close HK$10.10 in-line with market consensus; net profit declined 17.3% to CICC target HK$14.00 Rmb3.6bn, below market consensus by 27.7%, mainly due to a notable decrease in capital gains in 2H19. Legend raised its dividend 52wk price range HK$21.78~9.30 by 10.0% to Rmb0.33 per share. Market cap (bn) HK$24 Daily value (mn) HK$28.20 Trends to watch Shares outstanding (mn) 2,356 Free float (%) 54 Strategic investments continue to optimize structures. The company Daily volume (mn sh) 2.47 has enhanced diversification of its invested portfolio, to build a new Business sector Technology Hardware foundational business. Financial services contributed 58% of total net profits as the major growth engine, with revenue up 27.3%; this 03396.HK HSCEI segment improved its client base to control SMEs loan business. Net 115 profit from the IT segment rose 48% due to the effective execution of 100

Lenovo’s new strategies to narrow mobile business scale. Modern 85 service showed improvements on operational margins given fewer losses booked from Bybo after new investors were introduced. 70 Agriculture and food business retained strategic expansion, (%) Value Relative 55 strengthening advantages in the high-end fruits and animal protein 40 market; revenue rose 21.3% in 2019. Advanced materials and 2019-03 2019-06 2019-09 2019-12 2020-03 professional services concentrate on Lemiva and EAL, and adjusted its supply chain business from Zeny to raise profitability. (Rmb mn) 2018A 2019A 2020E 2021E

Financial investments recorded notable improvement. Net profit Revenue 358,920 389,218 381,587 394,101 from financial investments rose 67.8% as portfolio value of Legend (+/-) 13.5% 8.4% -2.0% 3.3% Star and Legend Capital increased with fair value impairment of Net profit 4,362 3,607 4,504 4,891 Wework amounted to about Rmb100mn. Legend star had about 60 (+/-) -13.6% -17.3% 24.9% 8.6% follow-up financing projects and 20 exited projects, while Legend EPS 1.85 1.54 1.92 2.08

Capital had about 29 new project investments and 40 exited projects. BPS 24.39 25.81 27.42 29.51 Capital return from financial investments was roughly Rmb5.0bn, DPS 0.30 0.33 0.39 0.42 enhancing Legend’s liquidity. We expect Legend to continue CPS 1.17 3.92 5.12 -7.66 improving liquidity and robust financial investments. P/E 4.8 5.9 4.5 4.2

P/B 0.4 0.4 0.3 0.3 Financials and valuation EV/EBITDA 6.1 5.7 6.0 7.1 Dividend yield 3.4% 3.6% 4.4% 4.8% We trim our 2020e revenue forecast 3.1% to Rmb382bn, and cut net profit 12.2% to Rmb4.5bn, on rising risks in the IT and modern service ROAA 1.0% 0.6% 0.7% 0.8% sectors amid a volatile market. We introduce our 2021e forecast: ROAE 7.8% 6.1% 7.2% 7.3% revenue to rise 3.3% and net profit growth of 8.6%. The stock trades at 4.5x 2020e P/E. We maintain a NEUTRAL rating but cut TP 30% to HK$14 based on 40% discount on 2020 NAV as average valuation level tumbled in current volatile market, implying 39% upside. Risks: Source: Wind, Bloomberg, Corporate filings, CICC Research Uncertainty in IT/Innovative consumption business; volatile capital market.

Kai QIAN Liping ZHAO Zhenyang CHEN Analyst Analyst Analyst [email protected] [email protected] [email protected] SAC Reg. No.: S0080513050004 SAC Reg. No.: S0080516060004 SAC Reg. No.: S0080518070012 SFC CE Ref: AZA933 SFC CE Ref: BEH709 SFC CE Ref: BNE480

Please read carefully the important disclosures at the end of this report CICC Research: March 27, 2020

Financial summary

Financial statement (Rmb mn) 2018A 2019A 2020E 2021E Financial ratios 2018A 2019A 2020E 2021E Income statement Growth ability Revenue 358,920 389,218 381,587 394,101 Revenue 13.5% 8.4% -2.0% 3.3% COGS -303,814 -320,544 -314,809 -325,133 Operating profit 26.0% 23.1% -21.4% 6.5% Selling expenses -18,985 -22,377 -21,750 -22,070 EBITDA 19.0% 19.3% -8.3% 3.9% Administrative expenses -27,536 -33,231 -34,343 -35,469 Net profit -13.6% -17.3% 24.9% 8.6% Other ops income (expense) 4,031 2,461 1,526 1,576 Profitability Operating profit 12,616 15,528 12,211 13,005 Gross margin 15.4% 17.6% 17.5% 17.5% Finance costs -4,391 -5,480 -5,724 -5,912 Operating margin 3.5% 4.0% 3.2% 3.3% Other income (expense) 676 477 578 578 EBITDA margin 5.2% 5.7% 5.4% 5.4% Profit before income tax 8,901 10,524 7,065 7,672 Net margin 1.2% 0.9% 1.2% 1.2% Income tax -1,360 -1,894 -1,060 -1,151 Liquidity Minority interest -3,179 -5,023 -1,501 -1,630 Current ratio 0.74 0.75 0.76 0.78 Net profit 4,362 3,607 4,504 4,891 Quick ratio 0.66 0.67 0.68 0.71 EBITDA 18,708 22,312 20,463 21,258 Cash ratio 0.17 0.16 0.17 0.10 Recurrent net income 4,362 3,607 4,504 4,891 Liabilities / assets 85.1% 85.3% 84.4% 83.8% Balance sheet Net debt / equity 82.2% 82.3% 72.5% 93.7% Cash and bank balances 60,023 62,340 66,601 41,496 Return Trade and bill receivables 54,189 74,181 72,643 74,986 RoA 1.0% 0.6% 0.7% 0.8% Inventories 27,862 30,166 29,626 30,598 RoE 7.8% 6.1% 7.2% 7.3% Other current assets 126,483 126,727 123,731 165,512 Per-share data Total current assets 268,558 293,413 292,601 312,592 EPS (Rmb) 1.85 1.54 1.92 2.08 Fixed assets and CIP 21,213 23,928 25,588 26,948 BPS (Rmb) 24.39 25.81 27.42 29.51 Intangible assets and others 268,497 306,734 304,326 301,843 DPS (Rmb) 0.30 0.33 0.39 0.42 Total non-current assets 289,709 330,662 329,914 328,790 Cash flow per share (Rmb) 1.17 3.92 5.12 -7.66 Total assets 558,267 624,075 622,515 641,382 Valuation Short-term borrowings 59,677 52,201 51,267 52,948 P/E 4.8 5.9 4.5 4.2 Trade and bill payables 59,786 73,069 71,762 74,115 P/B 0.4 0.4 0.3 0.3 Other current liabilities 243,681 268,364 263,747 272,058 EV/EBITDA 6.1 5.7 6.0 7.1 Total current liabilities 363,144 393,633 386,775 399,121 Dividend yield 3.4% 3.6% 4.4% 4.8% Long-term borrowings 68,548 85,704 85,704 85,704 Other non-current liabilities 43,556 52,913 52,913 52,913 Total non-current liabilities 112,104 138,617 138,617 138,617 Total liabilities 475,249 532,251 525,393 537,739 Share capital 2,356 2,356 2,356 2,356 Retained profit 55,117 58,181 61,978 66,869 Shareholders' equity 57,473 60,537 64,334 69,225 Minority interest 25,545 31,287 32,788 34,419 Total liabilities & equity 558,267 624,075 622,515 641,382 Cash flow statement Pretax profit 8,901 10,524 7,065 7,672 Depreciation & amortization 6,093 6,785 8,252 8,252 Change in working capital 53,822 9,289 2,257 32,749 Others -66,054 -17,391 -5,574 -66,649 Cash flow from operations 2,761 9,207 12,000 -17,976 Capital expenditure -5,007 -7,899 -7,504 -7,129 Others 19,695 -2,669 471 0 Cash flow from investing 14,689 -10,568 -7,033 -7,129 Equity financing 0 0 0 0 Bank borrowings 5,630 -6,032 0 0 Others 3,827 8,939 -707 0 Cash flow from financing 9,457 2,907 -707 0 Foreign exchange gain (loss) 914 771 0 0 Net changes in cash 27,821 2,316 4,261 -25,105 Source: Corporate filings, CICC Research

Company description

Legend Holdings Corporation operates through two principal business platforms – strategic investment platform and financial investment platform. The financial investments platform manages private equity and venture capital funds, and provides advisory services. The strategic investment platform invests in several sectors, including information technology (personal technology products and services), financial services (financing, credit guarantees, entrusted loans, finance lease, banking, insurance brokerage services, payment and Internet finance and trusts), modern services (dental care, logistics, senior care and car rental), agriculture and food (planting and sales of premium fruit and tea products), real estate (residential properties and office buildings, office rental services and property management services), and chemicals and energy materials.

Please read carefully the important disclosures at the end of this report 2 CICC Research: March 27, 2020

Legend Holdings saw stable growth with revenue up 8% YoY in 2019. Net profit in the strategic investment business declined 22% YoY, and that of financial investment rose 68% YoY.

► IT sector: profitability improved. Revenue rose 8% to Rmb357.2bn, and net profit increased 48% YoY to Rmb1.6bn, mainly due to ’s accelerated business transformation, leading PC and smart equipment business to enhance profitability.

► Financial service sector: BIL became growth engine. Revenue rose 27% YoY to Rmb8.8bn but net profit declined 19% YoY to Rmb2.07bn. Banque Internationale à Luxembourg (BIL) contributed about Rmb4.5bn revenue and Rmb833mn net profit. BIL retained stable upward momentum with assets under management up 10.3% YoY. However, the company is strategically shrinking subsidiaries Zhengqi and Kaola (revenue -31% and -3%), as both reduced their loan balances (mainly for SMEs) during a more volatile macro environment in 2019.

► Innovative consumption sector: facing headwinds amid business restructuring. Revenue declined 30% and realized an Rmb295mn net loss. Subsidiary CAR realized 19% revenue growth and -89% YoY growth on net profit, mainly due to dropped daily revenue per CAR along with rising depreciation and amortization as well as financing expenses.

► Agricultural and food sector: continued optimizing value chain. Revenue rose 21% YoY and net profit grew 10% in 2019. Subsidiary Joyvio has established advantages in imported fruits and seafood and has continuously gained market share. We expect its food business to enhance Joyvio’s competitiveness in the upstream supply chain after acquiring Australis, the third-largest salmon company in Chile.

► New materials: Revenue declined 6% YoY, due to subsidiary Zeny terminating its supply chain finance business to better control financial risks. Net profit rose 82% YoY, thanks to subsidiary Levima’s better-than-expected performance (net profit rose 147% YoY).

Financial investments improved thanks to efficient portfolio exit and cash inflow. Revenue rose 9% YoY and net profit rose 68% YoY, driven by recovery of the fair value of invested financial assets from Legend Star (AUM of Rmb2.5bn, 20 projects exited) and Legend Capital (newly raised funds totaled Rmb9.4bn and 40 projects exited), amid impairment of Rmb1bn from the Wework portfolio.

Please read carefully the important disclosures at the end of this report 3

eX9UpWvXgZkXjZeXzWqQrM7NcM9PtRoOsQpPjMqQnOeRtQnN7NpOuMNZmNrMvPmRoN CICC Research: March 27, 2020

Valuation

We apply a 30% discounted 2020 net asset value (NAV) methodology; in addition, we add a 10% discount as the average valuation has tumbled in the current volatile market.

Figure 1: SOTP (In Rmb mn) Portfolio Legend Shareholder Equity Business sector Portfolio company Valuation methodology company Economic Value (Rmb) % of GAV loan Investment equity Interest IT Lenovo CICC TP of HK$6.2 per share 64,176 29.10% 18,675 17.3%

Total IT 18,675 17.3%

Financial Service Zhengqi 1.0x 2020e P/B 7,644 84.22% 6,438 6.0% JC Finance & Leasing 1.0x 2020e P/B 2,936 99.01% 2,907 2.7% Kaola Technology 1.0x 2020e P/B 2,700 51.00% 1,377 1.3% Union Insurance Investment 48.00% 608 608 0.6% Lakala 20x 2020e P/E 12,000 28.24% 3,389 3.1% Suzhou Trust 1.0x 2020e P/B 5,077 10.00% 508 0.5% Hankou Bank 1.0x 2020e P/B 20,416 15.33% 3,130 2.9% Banque Internationale à Luxembourg Investment 89.98% 11,741 11,741 10.9% PIC Investment 5.30% 963 963 0.9%

Total Financial Service 31,060 28.8%

Innovative Consumption and Service CAR Market Cap 9,073 26.59% 2,412 2.2% Bybo 1.5x 2020e P/S 3,011 36.47% 1,098 1.0% Shanghai Neuromedical Center 1.5x 2020e P/S 498 58.00% 289 0.3% HCC convertible bonds Investment 100.00% 700 700 0.6% Better Education 10x 2020e P/E 500 51.00% 255 0.2%

Total Innovative Consumption and Service 4,754 4.4%

Agriculture & Food Joyvio SOTP 81.72% 6,725 6.2% including: Golden Wing Mau 30x 2020e P/E 10,500 44.13% 4,634 4.3% Laobaigan Market Cap 11,200 6.11% 684 0.6% KB Food 10x 2020e P/E 417 90.00% 375 0.3% Liquor Easy Investment 26.80% 226 226 0.2% Guoshuhao 1.5x 2020e P/S 1,440 15.00% 216 0.2% Jiucheng Investment 99.99% 290 290 0.3% Huawen Food Investment 20.00% 300 300 0.3%

Total Agriculture & Food 6,725 6.2%

New Materials Levima 15x 2020e P/E 7,845 60.44% 4,742 4.4% EAL 15x 2020e P/E 12,000 20.10% 2,412 2.2% Zeny Market fair value 99.20% 300 300 0.3%

Total New Materials 7,454 6.9%

Financial Investment GP P/AuM = 5% 4,000 20.00% 800 0.7% Legend Capital GP P/AuM = 5% 2,500 20.00% 450 0.4% Legend Star Investment *100% (estimated RoE) 3,140 100.00% 3,610 3.3% Hony & Legend Capital LP FV*100% (estimated RoE) 17,835 18,080 16.8% Other investments FV*100% (estimated RoE) 4,730 4,730 4.4% Investment properties Market fair value 11,530 10.7%

Total Financial Investment 39,200 36.3%

Total Value 107,868 100.0% discount 40%

Net Asset Value 64,721 Minus: net debt 36,200

Legend Valuation 28,521 No. of shares (mn) 2,356 Price (Rmb) 12 Price (HK$) 14 Source: Corporate filings, CICC Research Figure 2: Earnings revision

Please read carefully the important disclosures at the end of this report 4 CICC Research: March 27, 2020

Before After Change (in Rmb mn) 2020E 2020E 2020E 2021E YoY Revenue 393,850 381,587 -3.1% 394,101 3.3% Strategic investments IT 361,899 346,496 -4.3% 356,891 3.0% Financial service 3,949 4,030 2.1% 4,433 10.0% Innovative consumption & service 811 815 0.4% 733 -10.0% Agriculture & food 14,439 17,801 23.3% 18,691 5.0% New materials 7,180 6,423 -10.5% 6,937 8.0% Financial investments 657 712 8.5% 727 2.0% Interest income-net 5,222 5,309 1.7% 5,687 7.1% Gross profit 65,036 66,778 2.7% 68,968 3.3% Operating profit 12,416 12,211 -1.7% 13,005 6.5% Net income attributable to owners 5,132 4,504 -12.2% 4,891 8.6% EPS (Rmb) 2.18 1.92 -11.9% 2.08 8.6% Gross margin 16.5% 17.5% 1 ppt 17.5% 0 ppt Operating margin 3.2% 3.2% 0.1 ppt 3.3% 0.1 ppt Net margin 1.3% 1.2% -0.1 ppt 1.2% 0.1 ppt Source: Corporate filings, CICC Research

Figure 3: Financial data

(in Rmb mn) 2016A 2017A 2018A 2019A 2020E 2021E Total Revenue 294,745.7 316,262.9 358,919.7 389,218.3 381,587.0 394,100.7 Growth(YoY) -1.6% 7.3% 13.5% 8.4% -2.0% 3.3% Cost of sales (249,641.0) (269,706.4) (303,813.7) (320,544.1) (314,809.2) (325,133.1) Growth(YoY) 84.7% 85.3% 84.6% 82.4% 82.5% 82.5% Gross profit 45,104.7 46,556.5 55,106.0 68,674.2 66,777.7 68,967.6 Gross margin 15.3% 14.7% 15.4% 17.6% 17.5% 17.5% Growth(YoY) -0.8% 3.2% 18.4% 24.6% -2.8% 3.3% SG&A expense (41,455.0) (44,549.8) (46,521.6) (55,607.9) (56,093.3) (57,538.7) As % of sales 14.1% 14.1% 13.0% 14.3% 14.7% 14.6% Growth rate -2.4% 7.5% 4.4% 19.5% 0.9% 2.6% Administrative expenses (23,580.5) (24,020.4) (27,536.1) (33,231.0) (34,342.8) (35,469.1) As % of sales 8.0% 7.6% 7.7% 8.5% 9.0% 9.0% Growth(YoY) -10.2% 1.9% 14.6% 20.7% 3.3% 3.3% Selling and marketing expenses (17,874.5) (20,529.4) (18,985.5) (22,377.0) (21,750.5) (22,069.6) As % of sales 6.1% 6.5% 5.3% 5.7% 5.7% 5.6% Growth(YoY) 10.2% 14.9% -7.5% 17.9% -2.8% 1.5% Investment income & gains 2,832.2 7,667.7 4,648.2 2,766.1 2,289.5 2,364.6 As % of sales 1.0% 2.4% 1.3% 0.7% 0.6% 0.6% Growth(YoY) -45.9% 170.7% -39.4% -40.5% -17.2% 3.3%

Other income & gains/(losses) 3,360.5 335.1 (617.0) (304.8) (763.2) (788.2) As % of sales 1.1% 0.1% -0.2% -0.1% -0.2% -0.2% Growth rate -216.4% 0.0% 0.0% 0.0% 0.0% 0.0% Operating profit 9,842.4 10,009.5 12,615.6 15,527.6 12,210.8 13,005.3 Operating margin 3.3% 3.2% 3.5% 4.0% 3.2% 3.3% Growth(YoY) 84.9% 1.7% 26.0% 23.1% -21.4% 6.5% Finance costs (2,770.2) (3,652.2) (4,391.0) (5,480.3) (5,723.8) (5,911.5) As % of sales 0.9% 1.2% 1.2% 1.4% 1.5% 1.5% Growth(YoY) 9.6% 31.8% 20.2% 24.8% 4.4% 3.3% Shares of associated companies 1,066.5 1,074.7 676.2 476.7 577.8 577.8 Profit before taxation 8,138.8 7,431.9 8,900.8 10,524.0 7,064.7 7,671.6 Margin 2.8% 2.3% 2.5% 2.7% 1.9% 1.9% Growth(YoY) 124.0% -8.7% 19.8% 18.2% -32.9% 8.6% Income tax (expense) benefit (476.3) (2,574.2) (1,359.8) (1,894.5) (1,059.7) (1,150.7) Effective tax rate 5.9% 34.6% 15.3% 18.0% 15.0% 15.0% Net Income 7,662.5 4,857.7 7,541.0 8,629.5 6,005.0 6,520.8 Net margin 2.6% 1.5% 2.1% 2.2% 1.6% 1.7% Growth(YoY) 141.1% -36.6% 55.2% 14.4% -30.4% 8.6% Net profit contributed to shareholders 4,858.9 5,047.8 4,361.5 3,606.9 4,503.8 4,890.6 Net margin 1.6% 1.6% 1.2% 0.9% 1.2% 1.2% Growth(YoY) 4.3% 3.9% -13.6% -17.3% 24.9% 8.6% Source: Corporate filings, CICC Research

Please read carefully the important disclosures at the end of this report 5 CICC Research: March 27, 2020

Figure 4: Valuations of comparable companies Trading Last Target P/E P/B ROE (%) Reporting Ticker Company Rating currency price price 2020e 2021e 2020e 2021e 2020e 2021e currency 03396.HK LEGEND* HKD 10.10 14.00 NEUTRAL 4.5 4.2 0.3 0.3 7.2 7.3 CNY

00267.HK CITIC* HKD 7.97 10.10 OUTPERFORM 3.8 3.5 0.4 0.3 10.0 10.0 HKD 00656.HK FOSUN INTL* HKD 8.76 12.00 OUTPERFORM 4.2 3.8 0.5 0.4 12.2 12.2 CNY Note: CICC covers the companies marked * and we use our estimates; as of the market close on March 26, 2020 ( time) Source: Wind Info, Bloomberg, Corporate filings, CICC Research

Figure 5: P/E band Figure 6: P/B band

P/E band P/B band 03396.HK 3x 8x 13x 18x 03396.HK 0.3x 0.7x 1.1x 1.5x 50 60 HKD HKD 45 50 40 35 40 30 25 30 20 20 15 10 10 5 0 0 Jan-2017 Oct-2017 Aug-2018 May-2019 Mar-2020 Jan-2017 Oct-2017 Aug-2018 May-2019 Mar-2020

Source: Wind Info, Bloomberg, CICC Research Source: Wind Info, Bloomberg, CICC Research

Please read carefully the important disclosures at the end of this report 6 CICC Research

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CICC does and seeks to do business with companies covered in CICC Research. As a result, investors should be aware that CICC and/or its associated persons may have a conflict of interest that could affect the objectivity of this report.

CICC or its associates have had an investment banking client relationship with, or within the past twelve months have provided investment banking services to Legend Holdings-H .

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China International Capital Corporation Limited 28th Floor, China World Office 2, 1 Jianguomenwai Avenue, Beijing 100004, P.R. China Tel: (+86-10) 6505 1166 Fax: (+86-10) 6505 1156

United States United Kingdom CICC US Securities, Inc China International Capital Corporation (UK) Limited 32th Floor, 280 Park Avenue 25th Floor, 125 Old Broad Street New York, NY 10017, USA London EC2N 1AR, United Kingdom Tel: (+1-646) 7948 800 Tel: (+44-20) 7367 5718 Fax: (+1-646) 7948 801 Fax: (+44-20) 7367 5719

Singapore Hong Kong China International Capital Corporation (Singapore) Pte. China International Capital Corporation (Hong Kong) Limited Limited 6 Battery Road,#33-01 29th Floor, One International Finance Centre Singapore 049909 1 Harbour View Street Central, Hong Kong Tel: (+65) 6572 1999 Tel: (+852) 2872 2000 Fax: (+65) 6327 1278 Fax: (+852) 2872 2100

Shanghai Shenzhen China International Capital Corporation Limited – China International Capital Corporation Limited – Shanghai Branch Shenzhen Branch 32nd Floor Azia Center 72th Floor,PingAn Finance Center 1233 Lujiazui Ring Road 5033 Yitian Road, Futian District Shanghai 200120, P.R. China Shenzhen, 518048, P.R. China Tel: (+86-21) 5879 6226 Tel: (+86-755) 8319 5000 Fax: (+86-21) 5888 8976 Fax: (+86-755) 8319 9229