Source of opportunity
We initiate China Huarong Asset Management (Huarong) at Buy, with a 12-month target price of HK$4.1, implying 34% upside. Huarong is China’slargest financial asset management company (AMC) in terms of total assets,as of 2014, with the highest net profit and ROAE among the four nationalAMCs. Leveraging its traditional strengths in the distressed assetmanagement (DAM) business and promoting group synergies, Huarong aimsto become a leading financial holding company. We believe it is wellpositionedto deliver strong earnings growth through the economic cycle onits comprehensive financial services platform and improving group synergies.
Catalyst
We forecast Huarong’s NPAT to grow 35%/24%/17% in 2015E/16E/17E, or at25% 2014-17E CAGR, driven by: (1) strong revenue growth from DAM at29% 2014-17E CAGR on the back of 32% distressed asset balance expansion,offsetting gradually lower returns, (2) stable revenue growth of 15% CAGR atfinancial services and asset management units as interest rate cuts andfinancial market conditions may result in slower growth in banking, leasingand securities business, and (3) lower impairment charges in 2016E/17E onrestructuring debts, factoring in gradual slowdown of restructuring debtsgrowth to a more sustainable level and stable provision/loan ratio at c.7%.
Valuation
Our 12-month SOTP-based target price of HK$4.1 implies 1.3X 2015E P/B.We see valuation as attractive with Huarong trading at 1.0X 2015E P/B given17%/2.5% ROE/ROA on average during 2015E-17E, stronger growth profileand less balance sheet risk than banks. Its closest comparable Cinda istrading at 0.81X 2015E P/B.
Key risks
A sharp GDP/property market slowdown could lead to higher credit risks forDAM, banking and leasing assets. Further, we see rising competition fromthe other 3 national AMCs, provincial AMCs, and other financial institutions.
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