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 BPS 24.39 25.81 27.42 29.51 Capital had about 29 new project investments and 40 exited projects. 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 We trim our 2020e revenue forecast 3.1% to Rmb382bn, and cut net Dividend yield 3.4% 3.6% 4.4% 4.8% ROAA 1.0% 0.6% 0.7% 0.8% profit 12.2% to Rmb4.5bn, on rising risks in the IT and modern service 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.