ORD Daily Insight

Results slightly miss. China Cinda released 1H17 results yesterday. Total revenue reachedRmb60.6bn, representing 33% YoY growth. Attributable net profit arrived at Rmb8.9bn,representing 11% YoY growth, 3% lower than our expectation. Its traditional distressed assetsgrowth reached 27% in 1H17 as compared to 97% YoY in 2015 and 13% in 2016, while itsrestructuring distressed assets growth increased from 0.1% YoY in 2015 and 12% in 2016 to34% in 1H17. Its yield on traditional distressed assets disposal reached 16.7% in 1H17 ascompared to 20.4% in 2015, 16.2% in 1H16 and 19.2% in 2016, while its yield on restructuringdistressed assets disposal slightly decreased to 8.7% as compared to 11.7% in 2015, 10.6% in1H16 and 9.9% in 2016. The impaired ratio of restructuring assets increased to 2.12% from1.78% in 2015 and 2016, while coverage ratio slightly decreased from 210% in 2015 and 205%in 2016 to 203%.

    Traditional distressed asset management business may suffer. Cinda is a procyclical player, asin economic downturn, its fast NPL acquisition and slow NPL disposal will hurt its capital levelsand earnings growth, but in economic upturn, its moderate NPL acquisition and acceleratingNPL disposal will significantly boost its capital position and earnings momentum. Lookingforward into 2H17, we believe the ongoing MPA system, stricter loan quota guidance andstrengthening non-standardized investments will lead to declining loans, bonds and nonstandardizedfinancing availability and rising funding cost for the real economy. This may leadto decelerating disposal speed and yield for Cinda’s traditional distressed assets, which will inturn lead to declining capital levels and earnings growth.

    Restructuring distressed asset management will remain solid. We believe Cinda couldmaintain solid restructuring distressed asset growth in coming years due to its strong fundingcapability in the liability and equity side as well as large asset growth potential in the assetside. In terms of liabilities side, the acquisition of Nanyang bank could enhances Cinda’sfunding capability. The proportion of bank borrowings in total liabilities declined from 68% in2015 to 45% in 1H17, while deposit proportion increased from 0% in 2015 to 19% in 1H17. Interms of equity side, thanks to continuous capital replenishment from subordinated capitalbonds, preferred shares and private placement, its core tier 1 CAR and total CAR reached10.6% and 17.2% in 1H17, as compared to regulatory minimum of 9% and 12.5%. In the assetside, as Cinda’s restructuring asset management business involves acquiring accountsreceivables from the creditor and enters into payment agreement with the debtor, it serves asa supplement and substitute for traditional financial channels. So its restructuring distressedasset management could gain larger market share and enjoy higher asset yield amid thedeclining loans, bonds and non-standardized financing availability and rising interest rate curvein 2H17.

    Downgrade to Outperform. We slightly revise down our EPS forecast to Rmb0.46 in 17E(+14% YoY), Rmb0.54 in 18E (+16% YoY) and Rmb0.63 in 19E (18% YoY). We maintain itstarget PB at 0.9x and revise down our TP from HK$ 3.72 to HK$3.69. With 15% upside, werevise its rating from Buy to Outperform.