1H profit more than tripled. Value Partners’ 1H15 net profitmore than tripled from 1H14’s HK$141m to HK$446m, whichwas slightly above our expectation. The positive surprise camefrom managed accounts’ performance fees, which offsetworse-than-expected distribution and staff costs. Thecompany’s upbeat growth was underpinned by AUMexpansion from US$10.1bn to US$17.8bn since June 2014.AUM growth was most significant from retail and high networthclients (pg 3). China AUM also saw fast growth.
AUM is still resilient. We believe net subscriptions arepositive in 3Q even with the market turmoil. The fund sizes ofVP’s SFC authorized funds have only declined 3% since Junecompared to 9-15% declines for HK/China equities .Most of the fund inflows were to the VP high dividend fundand the VP high yield fund. We do not expect VP’s AUM toshrink materially, as market valuations are already low to limitde-rating risk. New distribution to China and ASEAN also help.
Rmb depreciation is a complication. Value Partner’s fundsmostly invest in Chinese companies listed in Hong Kong ,whose earnings in HKD terms will take a hit and cap shareprice upside. Secondly, currency depreciation can shave AUMgrowth from China and A-share based products in USD terms.We expect VP’s re-rating potential to be limited because ofthis, but we also believe VP’s 9% share price decline sinceMonday already captured this complication.
We still like the stock. VP is trading at 11.3% P/AUM, whichis near trough levels of 10.1% (pg 11). The downside risk onVP’s share price should be limited as AUM decline risk is small.Meanwhile, upside potential is large as the company is still ina performance fee cycle. When market sentiment turns, weexpect meaningful P/AUM re-rating. VP’s two largest fundsare 4-5% above watermark levels, while three smaller fundsare 9-14% above . We have tweaked down ourforecasts by 3-5% for cost considerations, leading to a slightdrop in our DDM-based TP of HK$14.2 (mid 2016F P/AUM of16.8%).