1H20 attributable net profit preannounced to decline 25-30% YoYCinda preannounced that its 1H20 net profit attributable toshareholders may decline 25-30% YoY due to YoY drop in fair value offinancial assets and increased provision charges.
　　Trends to watch
　　Fair value gains of financial assets declines YoY, but we believeimprovement is likely in 2H20. Cinda’s earnings became morevolatile after adoption of IFRS9 in 2018. IFRS9 proposed morerequirements on disclosure of financial asset prices, and more assetswere measured at fair value with changes in fair value recognized inprofit and loss (when an asset has no fair value, it is determined byreferring to the market price of similar assets). We estimate that fairvalue of Cinda’s coal-related stocks declined in 1H20, as coal index fell17% YoY in 1H20 (vs. +19% YoY in 1H19) and lagged behind othersectors. However, we estimate that fair value of financial assets willimprove in 2H20, given that coal price rose 11% in 1H20 amidrecovering macroeconomic data (coal index went down 6% in 2H19).
　　Like other credit financial institutions, Cinda increased provisioncharges to prudently address future asset quality risks amidCOVID-19 and regulatory guidance. COVID-19 weighed on economicgrowth. China’s nominal GDP fell 5.3% YoY in 1Q20 and rose 3.1% YoYin 2Q20. As COVID-19 is still not under control in overseas marketsand economic uncertainties still linger, Cinda increased provisioncharges to cope with pressure of possible rising distressed assets.
　　Equity stake of Happy Life Insurance has been disposed of in July,and profit has not yet been recorded in 1H20. Cinda announced onJuly 7, 2020 that it had disposed of its equity stake in Happy LifeInsurance. According to the announcement on December 13th 2019,the transaction may contribute Rmb 4.42bn pre-tax profit whichwould be booked in 2H20.
　　Valuation and recommendation
　　We think that HoH recovery in macro economy in 2H20 may drivemild rebound in asset prices, but asset quality and provision chargesmay continue to weigh on earnings. We thus raise credit costassumption, and reduce 2020-2021 net profit forecast 8.5% and12.4% to Rmb13.2bn and Rmb13.8bn. We lower TP 3.5% to HK$2.22(0.5x 2020e P/B with 50% upside), but maintain OUTPERFORM ratingon Cinda. Cinda is trading at 0.3x 2020e P/B.
　　Risks
　　Disappointing asset quality.