What's new
China Cinda Asset Management announced it had finished the listingfor the transfer of equity interests in Happy Life to ChampionInsurance and DCIG1. The price is Rmb7.5bn, the same as previouslyannounced. The deal is now awaiting approval from the ChinaBanking and Insurance Regulatory Commission. We think that thedisposal of non-NPA business will help enhance valuation.
Comments
Impact on earnings: In 2018 Happy Life incurred losses of Rmb6.8bn,equivalent to 36% of Cinda’s other pretax profit, and its average lossover 2008-2017 was Rmb300mn. Sales of the stake in Happy Life, ifcompleted in 2020, will generate Rmb7.5bn cash for Cinda and theproceeds will be used as general working capital or to fund potentialinvestments. Since Happy Life will no longer be consolidated intofinancials upon the completion of the equity transfer, Cinda will likelyrecord an unaudited pretax profit of Rmb4.42bn, 19% of our 2020forecast.
Impact on valuation: We believe that the disposal of its stake inHappy Life is part of Cinda’s efforts to better focus on non-performingassets (NPA) business, and that the spinoff of non-NPA assets willdrive up Cinda’s valuation.
Valuation and recommendation
As of December 16, Cinda is trading at 0.41x 2019e P/B and 0.39x2020e P/B. We believe the valuation is at a historical low and marketworries over economic downturn and falling asset quality have beenfully priced in. Given increasing risk appetite, and disposal ofnon-NPA business may push up valuation, we raise our TP 9% toHK$2.30, implying 0.52x 2020e P/B, offering 32% upside. Wemaintain earning forecast and OUTPERFORM rating.
Potential catalysts: Revenue and profit growth recover from -11%and -37% in 2018 to 9% and 21% in 2019. Dividend ratio stays at 30%,implying 2020 dividend yield of 7.4%. Disposal of non-NPA assetssmoothly proceeds. Cinda improves its information disclosure. Risks:Asset quality disappoints on economic downturn.