Investment Highlights:
　　An investing/stake-controlling vehicle redirecting the focus ontothe asset management business. China Everbright （0165.HK） is adiversified financial company mainly engaging in trans-border assetmanagement and passively holding stakes in Everbright Bank （601818;3.37%） and Everbright Securities （601788; 24.71%）。 The stakes areequivalent to market caps of HK$7.4bn and HK$20.60bn. On the front ofits asset management and proprietary investment businesses, as of 30Jun 2016, net assets for these two businesses amounted to HK$16.6bnwith the size of managed funds offered at HK$67.80bn.
　　Possible changes: spinning off passively held stakes in EverbrightBank （601818） and Everbright Securities （601788）。 On 16 Jan 2017,Mr TANG Shuangning, board chairman of the Everbright Group putforward on the 2017 Work Conference of the group, “make headways inlisting the entire Everbright group opportunely by achieving swiftdevelopment in the fields where we are well-positioned when conditionsare ripe”。 One can see that whole-group listing is the next strategic goalof the Everbright Group. As per its business breakdown, banking andsecurities are the core businesses that contribute the most to the group’sprofit while the Group holding stakes in Everbright Bank （601818） andEverbright Securities （601788） via China Everbright （0165.HK） mainlyaccounts for the complicated equity structure within the group. As aresult, simplifying the equity structure among its subsidiaries isconducive to the whole-group listing of the Everbright Group.
　　Goal: to become the leading trans-border asset managementplatform in China. The Company has made remarkable achievementsin its strategy of expanding the size of its managed fund business 1）backed by a） the Everbright Group’s background in the diversifiedfinancial universe and b） the model of seed fund and 2） to meet theneeds of medium/large institutional investors such as insurers andbanks, among others, for allocating to alternative assets. The Companyoffered managed funds worth of HK$20.80bn for 1H2016 and isexpected to raise HK$30.60bn for 2016. In Jun 2016, China Everbright（0165.HK） and IDG Capital sponsored together an industrial investmentfund with registered capital of no less than Rmb10bn, to which theCompany has committed to contributing Rmb10bn and the remainderRmb8bn will be raised from other large/medium institutions. We expectthe Company’s AUM to expand to Rmb100bn over the short term.
　　Valuation re-rating conducive to the take-off of the Company’sasset management business. Having traded below 1x PBcontinuously, the Company can’t replenish its capital via refinancing,which has constrained it from seeking further development. Theconstraints can be seen in the following aspects. 1） The Company’sneed for seeding funds to underpin the sustained growth of its asset management business can’t be met.
　　As of 30 Jun 2016, the size of managed funds offered by the Company stood at HK$67.80bn, whichentails seeding funds totaling c. HK$15bn; 2） The Company can’t undergo M&As via the equity market.
　　Seen from the development trajectory of BlackRock Inc. （NYSE: BLK）， organic growth （M&As） via thesupport from the capital market has been one of the major measures to achieve development of scale inthe asset management business; 3） The Company couldn’t carry out stock ownership incentive scheme.
　　Potential risks: uncertainties in progress of assigning the stakes in Everbright Bank （601818） andEverbright Securities （601788）， the decline in return from investment projects A and more difficulties inexiting from those projects that may result from the decline of the A share market.
　　Earnings forecast and investment advice: The Company could potentially embrace a valuationre-rating （which implies a potential annualized return of 24%） if it divests its passive stakes in ChinaEverbright Bank and Everbright Securities. Based on the conservative P/B valuation approach, we valuethe Company at HK$40.4bn, assuming: （i） 0.7x P/B for its stake in Everbright Bank; （ii） 1x P/B for itsstake in Everbright Securities, funds management business and direct investments; （iii） based onforecasts made by the Company for 2016. This translates into a target price of HK$24.0. Assuming aholding period of two years, a valuation re-rating implies a potential annualized return of 24%.
　　Nevertheless, due to the uncertainties surrounding the progress of the divestments, we initiate coveragewith OVERWEIGHT.