1H19 results miss our forecast
China Everbright announced 1H19 results: Net profit dropped 34%YoY, missing our expectation. AUM rose marginally, 1% year to date.
DPS dropped 4% to HK$0.25. Payout ratio was raised 10ppt to 30%.
Trends to watch
Profits misses our expectation; AUM growth still challenging. Netprofit dropped 34% YoY, missing our expectation mainly due to fallingunrealized valuations in invested programs dragging down profit inthe fund management business. If we exclude this impact, net profitgrowth would be 30% YoY. AUM rose marginally 1% year to date, stillfacing challenges amid a slowing private equity sector （total sector’sAUM raised in 1H19 down 89% YoY）。
Interim payout ratio increased 10ppt to 33%, which we believesupports management’s confidence in the company’s capital positionand makes the valuation more stable.
Business model more fund-management biased, which shouldincrease profit stability and lift valuation. New management saidthey will actively reduce the non-core principal investment businessand focus more on fund management. We believe the new strategywill increase profit stability, while lifting ROE and valuation. Assumingseed capital as a percentage of AUM remains at 24.1%, we think thereduced principal investment will increase AUM by roughlyHK$68.0bn in the long term （47% of current AUM）。
Financials and valuation
Due to 1H19 profits missing, we cut our 2019 and 2020 earningsforecasts by 27% and 30%.
The stock is trading at 0.3x 2019e P/B. Due to financial mark tomarket and pressure on AUM growth in 2H19, we cut our TP 14% toHK$12, implying 0.45x 2019e PB and 31% upside. MaintainOUTPERFORM.
Risks
Decline in AUM; major changes in corporate strategy.