What's new
Chengfang Huida signed an agreement with Bank of Jinzhou （BOJZ） to subscribe for 5.27bn shares of the latter at Rmb1.95/sh. The deal is pending regulatory approval. Chengfang Huida is wholly owned by Huida Asset Management, which is in turn 90% held by Cinda.
Comments
BOJZ announced on March 10 that its board of directors signed an agreement with Chengfang Huida and Liaoning Financial on January 23, 2020. BOJZ stated that although all equity interests in Huida Asset Management are directly held by China Cinda and indirectly held as a nominal shareholder, both Huida Asset Management and Chengfang Huida are managed by the PBoC, which also holds all economic benefits and controls voting rights.
While Chengfang Huida is only nominally held by Cinda, the deal signals that AMCs will play an active role in restructuring financial institutions. On January 3, 2020, the China Banking & Insurance Regulatory Commission issued a document calling for stricter management and resolution of risks related to troubled financial institutions and encouraging assets management companies （AMC） to strengthen treatment of their non-performing assets.
The offering price implies 0.33x 1H19 P/B; likely in line with expectation. The price discount is close to the average for the acquisition of non-performing assets. In addition, the price is 10.9% lower than the latest close at BOJZ before trading was suspended, given fluctuations in H-share market amid economic uncertainties in China and globally. Thus, we believe the price is fair and in line with expectation.
Valuation and recommendation
We see broad room for business growth at Cinda, amid macroeconomic uncertainties and regulatory guidance on risk resolution. We maintain our earnings forecasts, TP and OUTPERFORM rating. Cinda is trading at 0.42x 2020e P/B and our TP implies 0.50x 2020e P/B with 37% upside. If Cinda maintains payout ratio at 30%, we estimate 2020e dividend yields at 8.0%.
Risks
Additional provision charges and fair value changes from disappointing asset quality hurt earnings; falling payout ratio.