2019 bottom lines misses market consensus
Legend announced 2019 results: revenue rose 8.4% to Rmb389.2bn, in-line with market consensus; net profit declined 17.3% to Rmb3.6bn, below market consensus by 27.7%, mainly due to a notable decrease in capital gains in 2H19. Legend raised its dividend by 10.0% to Rmb0.33 per share.
Trends to watch
Strategic investments continue to optimize structures. The company has enhanced diversification of its invested portfolio, to build a new foundational business. Financial services contributed 58% of total net profits as the major growth engine, with revenue up 27.3%; this segment improved its client base to control SMEs loan business. Net profit from the IT segment rose 48% due to the effective execution of Lenovo’s new strategies to narrow mobile business scale. Modern service showed improvements on operational margins given fewer losses booked from Bybo after new investors were introduced.Agriculture and food business retained strategic expansion, strengthening advantages in the high-end fruits and animal protein market; revenue rose 21.3% in 2019. Advanced materials and professional services concentrate on Lemiva and EAL, and adjusted its supply chain business from Zeny to raise profitability.
Financial investments recorded notable improvement. Net profit from financial investments rose 67.8% as portfolio value of Legend Star and Legend Capital increased with fair value impairment of Wework amounted to about Rmb100mn. Legend star had about 60 follow-up financing projects and 20 exited projects, while Legend Capital had about 29 new project investments and 40 exited projects.
Capital return from financial investments was roughly Rmb5.0bn, enhancing Legend’s liquidity. We expect Legend to continue improving liquidity and robust financial investments.
Financials and valuation
We trim our 2020e revenue forecast 3.1% to Rmb382bn, and cut net profit 12.2% to Rmb4.5bn, on rising risks in the IT and modern service sectors amid a volatile market. We introduce our 2021e forecast: revenue to rise 3.3% and net profit growth of 8.6%. The stock trades at 4.5x 2020e P/E. We maintain a NEUTRAL rating but cut TP 30% to HK$14 based on 40% discount on 2020 NAV as average valuation level tumbled in current volatile market, implying 39% upside. Risks: Uncertainty in IT/Innovative consumption business; volatile capital market.