What's new
On December 24, China Cinda Asset Management (Cinda) announced that it plans to subscribe for shares newly issued by Chongqing Ant Consumer Finance. The company’s stock price gained 11.5% on the first trading day after the announcement, and cumulative share price increase during the first 5 trading days reached 14.6%, indicating that the market holds a positive view on this deal. Considering the increased stake in Chongqing Ant Consumer Finance could boost Cinda’s investment income and create synergies with its existing operations, and that the business transformation of asset management companies is on track, we believe Cinda could witness a re-rating to a certain extent.
Comments
According to Cinda’s announcement, the group1 will hold a 24% interest in Chongqing Ant Consumer Finance after completion of the deal. The shares will be reported using the equity method, which could increase the group’s investment income. This means the latter’s profit or loss each year will be recognized as investment income on Cinda’s consolidated balance sheet:
Impacts on income statement: In 3Q21, Chongqing Ant Consumer Finance recorded a net loss of Rmb525mn, possibly because it was founded not long ago. Given the promising prospects for China’s consumer credit market and Chongqing Ant Consumer Finance’s leading technological capability and user traffic, we believe the company will make profit. According to our calculation based on comparable companies’ ROE of 8.5-25.4%, Chongqing Ant Consumer Finance’s annual net profit will range between Rmb2.5bn and Rmb7.5bn, contributing Rmb451mn-1.3bn to Cinda’s net profit, or 3-10% of its 2022e net profit.
Impacts on valuation: Cinda was trading at a market cap of Rmb40.5bn before the announcement, corresponding to 0.2x 2022e P/B and 3.2x 2022e P/E. Its comparable consumer finance companies were trading at 0.8-6.5x 2022e P/B and 3.1-38.9x 2022e P/E. In our view, the expanded stake in Chongqing Ant Consumer Finance bodes well for Cinda’s valuation. 1) Referring to comparable companies’ P/E, net profit of Rmb2.5bn-7.5bn corresponds to a valuation of Rmb23.2bn-97.5bn. 2) Referring to comparable companies’ P/B, shareholders’ equity of Rmb7.1bn corresponds to a valuation of Rmb5.7bn-46bn.
Cinda and Chongqing Ant Consumer Finance’s medium- to long-term
synergies also merit attention. Cinda mentioned in its announcement that after completion of the deal, the two companies could draw on each other’s strengths and achieve win-win results in customer sharing, fintech, financial value chain services, etc. We believe synergies and cooperation between the two parties will benefit Cinda in: Expansion of retail customer base at the group's bank subsidiary, business digitalization, and exploration of the acquisition and disposal of non-performing consumer loans.
Since 2018, major asset management companies have focused on their core business and improved internal control. The implementation of industry overhaul is conducive to Cinda’s valuation restoration. Over 2020-2021, state-owned asset management companies accelerated disposal of financial assets that were not related to their core business. On December 30, 2021, China Huarong Asset Management announced it completed non-public issuance of shares under specific mandate.
Valuation and recommendation
We maintain our earnings forecasts, and introduce our 2023 earnings forecast of Rmb14.94bn. The stock is trading at 0.3x 2022e and 0.3x 2023e P/B. Maintain OUTPERFORM. Considering that the rise in investment income and possible synergies after it increases its stake in Chongqing Ant Consumer Finance’s may lift up Cinda’s valuation, we raise our TP 4.3% to HK$1.94, corresponding to 0.4x 2022e and 0.4x 2023e P/B, and implying 30.2% upside.
Risks
Disappointing investment income contribution and synergies from Chongqing Ant Consumer Finance.