Investment positives
In a better position to capture growth opportunitiesamid China’s “new normal.” Huarong has a unique“through-the-cycle” business model via its comprehensivefinancial licenses. Therefore, it not only can benefit from China’seconomic restructuring, but can also grasp opportunities to fuelChina’s new growth engines. Huarong could ride the diversifyingfunding structure of the overall economy, as financial servicesaccount for 31.9% of its PBT vs. 22.2% for Cinda in 1H15, itsmain competitor. Its more balanced growth drivers broughtabout faster net profit growth, with a CAGR of 37% vs. 30% forCinda over 2012~14.
DAM business is more resilient. Huarong has a higherprovisioning ratio of 7.2% in its RDAM business vs. 3.7% forCinda in 1H15. Its pledge ratio is as low as 34% in 1H15. WithRDAM returns of 13.1% and funding costs of 5.6% in 2014, wethink the 7.5ppt spread is sufficient to deliver a ROAE in thehigh-teens, even after adjusting for inherent risks. Huarong’sDES portfolio is less exposed to the natural resources sector andits major holdings have a higher appraisal value multiple of 2.47xvs. ~1.50x for Cinda.
Higher profitability in non-DAM segments. Huarong has ahigher ROAE in this segment due to its banking business, whileCinda’s insurance operation is a drag on its profitability.Moreover, Huarong’s leasing and trust subsidiaries are strongerthan its counterparts in Cinda.
Financials
We expect Huarong to deliver fast net profit growth, with a CAGRof 25.4% over 2015~17e.
Valuation and recommendation
We initiate coverage with a BUY rating and 12-month TP ofHK$3.69, implying 1.04x 2016e P/B, compared with Cinda’s0.99x 2016e tangible P/B.
Risks
China’s property market suffers a hard landing.