2018 results in line with January 23 profit warning
Cinda announced 2018 results, in line with a profit warningannounced on January 23. Revenue declined 10.8% YoY toRmb107bn. Net profit attributable to common equity shareholdersfell 36% YoY to Rmb11bn.
Trends to watch
We attribute the weakened 2018 performance mainly to: 1） asignificant unrealized loss in fair value changes of other financialassets amid flagging 2018 capital markets after implementation ofIFRS9. Fair value changes on other financial assets and investmentincome declined by 53% YoY; 2） a 53% drop in net insurance premiumearnings, attributable to subsidiary Happy Life; and 3） one-off gainsfrom selling P&C insurance in 2017.
TDA business performs well and FS sector makes negativecontribution; proportions of DAM and I&AM PBT rise 0.8ppt and15ppt YoY to 58% and 49%, while that of financial service declines16ppt to -7%. TDA income grew 28% YoY, with the balance growing27%, while return on disposal rose 3ppt YoY to 31.9%. RDA incomegrew 9% YoY, but the higher impaired ratio merits attention （up1.3ppt YoY to 3.13%）。 I&AM income grew 3% on contributions fromCinda Investment and Cinda HK. Meanwhile, we expect the financialservice segment to be cleaned up. The company announced plans tosell Jingu Trust November 2018.
CET-1 capital ratio up 54bp HoH to 10.21%; payout ratio holds at30%. After CET-1 CAR hit a low of 9.67% in 1H18, Cinda optimized itscapital structure. Assets grew 2.4% HoH and RWA fell 1%.
Earnings forecast
Given: 1） the lagging performance of the financial services sector in2018; 2） the worse-than-expected fair value loss; and 3） increasedprovision charges for the higher impaired RDA ratio and otherfinancial assets, we lower our 2019 earnings forecast 35% toRmb11.6bn, and introduce a 2020 earnings forecast of Rmb13.1bn,implying YoY growth rates of 5% and 12%.
Valuation and recommendation
Cinda trades at 0.5x 2019e PB. Maintain TP at HK$2.60, implying 0.6x2019e PB and 20% upside. Maintain BUY on a stable 5% dividendyield （30% payout ratio maintained in 2018 even under capitalpressure） and asset management companies’ （AMC） unique status inthe Chinese market. Risks: Credit asset quality deterioration worsethan expected; tighter regulations on AMCs drag profit in short term.