1H19 faced margin headwinds
Legend reports 1H19 results: Revenue rose 15% YoY to Rmb179bn, ofwhich, revenue of strategic investment rose 15% YoY to Rmb179bnand revenue of financial investment rose 7% YoY to Rmb325mn; netprofit fell 6% YoY to Rmb2,665mn, affected by a 34% YoY drop in thestrategic investment business, though financial investment profit rose187% YoY.
Trends to watch
Strategic investment business faces temporary headwinds. Its netprofit declined 34%, mainly due to visible decrease in one-off capitalgains on business restructuring. Margins in the IT sector improvedsignificantly, as Lenovo saved costs in its mobile business. However,we expect Lenovo’s server business to face rising growth pressure onweak market demand and falling component prices. The financialservice sector remained more or less stable, as BIL bank reportedsteady growth but its SME loan business met strong headwinds givenits lower loan balance during a more volatile market. We expectfinancial services in the domestic SME market may need time torecover due to continued trade friction.
The modern service sector optimized its business structure to expandin the education and healthcare industries. Declines in revenue andprofit were mainly caused by the spin-off of Bybo dental. Theagriculture & food sector retained healthy momentum. Joyviocontinued to integrate its value chain in high-end fruits and animalprotein, enhancing its advantages in imported food.
Financial investment business sees visible improvement. Revenuegrew 7% YoY and net profit rose 187% YoY, with the strong growthdriven by a significant recovery in the fair value of invested financialassets. As of 1H19, Legend Star AUM was Rmb2.0bn and the fundhad exited about 20 projects. Legend Capital raised Rmb8bn in newfunds, and exited around 22 projects. And Hony exited 14 projects.
Legend adjusted its strategy and saw accelerated cash inflows duringmarket fluctuations.
Financials and valuation
We maintain our 2019 and 2020 revenue forecasts, and cut our 2019and 2020 net profit forecasts 10.3% and 7.9% on market volatilitypressuring strategic investment’s margin. The stock trades at 7.7x2019e P/E. Maintain NEUTRAL but cut target price 17% to HK$20（14% upside） based on our 2019 SOTP valuation. Risks: Uncertainty inmacro economy and regulations.