China AMCs

27 Pages·2017·0.83 MB·English

Deutsche Bank
Markets Research

Asia Industry Date
China China AMCs 15 December 2017

Banking / Finance
Forecast Change
Banks

Jacky Zuo Hans Fan, CFA
2018 Outlook: current cycle still favors Research Analyst Research Analyst
(+852 ) 2203 6255 (+852 ) 2203 6353
e arnings [email protected] [email protected]

Decent earnings growth and attractive yield; we prefer Cinda over Huarong Key Changes
We think current macro/policy cycles still favor AMCs’ earnings and we remain
Company Target Price Rating
constructive on AMCs’ longer-term growth, given abundant distressed asset 1359.HK 3.50 to 3.75(HKD) -
supply. We expect Cinda and Huarong to deliver mid- to high-teen earnings 2799.HK 3.50 to 3.90(CNY) -
growth with 6-7% dividend yields. In this outlook report, we discuss 1) key
Source: Deutsche Bank
trends for AMC business lines; 2) distressed assets supply and demand; 3) the
impact of the PBOC’s new asset management guidance; and 4) capital and Top picks
IFRS 9 impact. Cinda remains our sector top pick with higher-quality earnings
China Cinda (1359.HK),HKD2.79 Buy
and less shadow banking exposure. The stock trades at 0.67x 2018E P/B and
Source: Deutsche Bank
4.8x P/E. We suggest investors accumulate Cinda before March 2018 results.
Companies Featured
Key trends in distressed asset management
We think the traditional NPL acquisition & disposal (TDA) and debt-to-equity China Cinda (1359.HK),HKD2.79 Buy
swap (DES) business will continue to benefit from elevated asset prices. A 2016A 2017E 2018E
neutral/tightening-biased monetary policy should also drive stable restructuring P/E (x) 5.2 5.9 4.5
distressed asset (RDA) earnings growth. On the margin side, TDA disposal EV/EBITDA (x) 3.4 3.1 2.7
return has been rising and RDA may finally see yield recovery in 2018 – as we Price/book (x) 0.8 0.7 0.6
saw for trust product yield. On the new round of market-driven DES, AMCs are
China Huarong (2799.HK),CNY3.57 Hold
not as active as banks and we think AMCs may set up DES funds rather than
2016A 2017E 2018E
use their own capital to invest. Also, IFRS 9, which starts in 2018, may
P/E (x) 5.9 6.2 5.8
potentially provide one-time revaluation gains for unlisted DES assets, leading
EV/EBITDA (x) 3.4 3.0 2.5
to large capital boosts (2.4-4.7% CET-1 boost for Cinda, per our estimate).
Price/book (x) 0.8 0.9 0.8
Distressed assets supply and demand dynamics Source: Deutsche Bank
We think supply and demand dynamics for distressed assets in China are likely

to maintain a tight balance as new NPL supply should be absorbed quickly by
various distressed asset players. We forecast a 15% CAGR in distressed asset
supply to Rmb1.9tr in 2019E, with more supply from shadow banking and
corporate instead of traditional banks (i.e., more RDA acquisition opportunities).
On the demand side, there are now 56 local AMCs with total registered capital
of Rmb118bn (>Cinda’s TDA balance), and many distressed funds have been
active in the secondary market, which should benefit AMCs’ NPL disposal.
Impact of PBOC’s new asset management rules
As asset management is an essential part of the shadow banking system in
China, the new rules are likely to squeeze shadow banking liquidity and
increase asset quality pressure. This creates distressed asset business
opportunities, but may also affect AMCs’ own shadow banking businesses,
especially the on-balance sheet non-standardized credit assets (NSCA)
investment. We think Huarong may be more impacted, given its large NSCA
exposure (28% of group assets vs. 6% for Cinda).
Sector top pick – Cinda (raising target price to HK$3.75); valuation and risks
Our sector top pick is Cinda. We see upside earnings potential, with 1) larger
TDA assets to benefit from rising NPL prices; 2) larger (unlisted) DES portfolio
to benefit from elevated commodity prices and IFRS 9; and 3) a turnaround
story in life and bank subsidiaries. We lift our target prices for Cinda (+7%) and
Huarong (+12%) by rolling over to 2018E. We adopt a sum-of-the-parts (SoTP)
valuation methodology. Key sector risks include property prices, investment
loss, and weaker-than-expected distressed asset supply (see page 18).
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong Distributed on: 14/12/2017 23:00:54 GMT
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.
7T2se3r0Ot6kwoPa
15 December 2017

Banks
China AMCs

Model updated: 12 Dec 2017 Fiscal year end 31-Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Running the Numbers Data per share
Asia EPS (stated) (CNY) 0.25 0.30 0.33 0.39 0.43 0.47 0.53 0.61
Growth rate - EPS (stated) (%) -6% 17% 11% 18% 11% 9% 14% 15%
China BVPS (stated) (CNY) 1.82 2.14 2.58 2.81 3.09 3.44 3.83 4.29
Other Financial Services DPS (CNY) 0.05 0.03 0.10 0.12 0.12 0.14 0.16 0.18
Market cap (HKDm) 0 97,157 99,343 99,343 104,571 104,571 104,571 104,571
Share in Issue (m) 30,140 35,459 36,257 36,257 38,165 38,165 38,165 38,165
China Cinda Valuation Ratios & Profitability Measures
P/E (stated) na 7.33 6.73 5.93 5.74 5.23 4.73 4.27
Reuters: 1359.HK Bloomberg: 1359 HK P/E FD (DB adj.) na 7.33 6.73 5.93 5.74 6.02 4.73 4.27
Buy P/B (stated) na 1.01 0.86 0.82 0.79 0.71 0.66 0.61
P/B (DB adj.) na 1.01 0.86 0.82 0.79 0.71 0.66 0.61
Price (12 Dec 2017) HK$2.74 ROAE (stated) (%) 15.78% 13.81% 14.05% 14.38% 14.12% 14.29% 14.61% 15.07%
ROAA (stated) (%) 3.42% 2.83% 2.56% 2.23% 1.64% 1.38% 1.35% 1.37%
Target price HK$3.75 Dividend yield (%) 1.56% 4.46% 5.06% 4.97% 5.74% 6.35% 7.02%
52-week Range: HK$2.62 - 3.47 Payout ratio (%) 22% 13% 30% 30% 30% 30% 30% 30%
Profit & Loss (CNYm)
Market Cap HK$100,284m Income from DDA classified as receivables 3 ,518 1 0,144 1 8,114 1 8,884 1 5,539 1 7,460 2 1,336 2 4,240
Fair value changes on DDA 3 ,878 4 ,618 4 ,077 4 ,420 5 ,716 8 ,596 1 0,940 1 2,617
Investment income 6 ,529 7 ,044 9 ,116 1 3,552 1 7,991 1 8,542 1 9,696 2 1,352
Company Profile Net insurance premiums earned 5 ,325 5 ,772 7 ,443 1 2,912 1 6,636 2 1,668 1 0,427 1 1,470
Cindaisaleadingassetmanagementcompany(AMC)in Interest income 2 ,493 5 ,059 8 ,811 1 3,516 1 4,506 2 1,591 2 5,898 2 9,842
China, focusing ondistressed asset management witha Revenue from sales of inventories 3 ,924 4 ,322 4 ,341 7 ,637 1 0,955 1 2,922 1 4,856 1 6,340
market share of 35.5% in terms of distressed assets
Fee & commission 2 ,226 2 ,520 3 ,008 4 ,330 3 ,848 4 ,983 5 ,566 6 ,220
acquired.Establishedin1999,Cindahasbeendedicatingto
provide customized financial solutions and differentiated Other revenue 1 ,456 2 ,195 2 ,057 1 ,259 2 ,812 1 ,622 2 ,292 2 ,528
assetmanagementservicestoitsclients,leveragingonits Operating income 2 7,645 3 7,394 5 2,925 6 4,977 7 4,108 9 2,503 1 04,766 1 17,569
nationwidebranchnetworkanddiversifiedfinancialservice Operating expenses - 1 8,510 - 2 5,582 - 3 5,168 - 4 3,435 - 5 0,809 - 6 5,486 - 7 4,294 - 8 2,802
subsidiaries. Cinda went listed in December 2013. Operating profit 9 ,135 1 1,812 1 7,756 2 1,543 2 3,300 2 7,017 3 0,472 3 4,767
Taxes - 2 ,379 - 2 ,671 - 4 ,164 - 4 ,594 - 5 ,783 - 6 ,349 - 7 ,171 - 8 ,203
Minorities - 8 9 7 4 2 47 6 76 4 70 3 00 3 00 3 00
Net profit attributable to shareholders 7 ,306 9 ,027 1 1,896 1 4,027 1 5,512 1 7,799 2 0,265 2 3,362
Key Balance Sheet Items (CNYm) & Capital Ratios
TDA net balance 7 ,960 1 6,392 4 2,302 8 4,621 9 4,459 1 20,217 1 45,861 1 69,690
RDA net balance 4 8,068 9 7,971 1 62,109 1 63,145 1 84,447 2 13,260 2 45,178 2 76,363
DES book value 4 8,239 4 2,275 4 1,564 3 8,751 4 0,480 4 6,169 4 6,624 4 7,147
Loans and advances to customers - net 2 5,042 4 8,636 8 0,225 1 04,738 2 94,937 3 38,281 3 78,488 4 23,473
Total assets 2 54,614 3 83,785 5 44,427 7 13,975 1 ,174,481 1 ,396,783 1 ,598,755 1 ,799,505
Total liabilities 1 93,730 3 01,023 4 42,564 6 03,081 1 ,026,511 1 ,234,692 1 ,420,626 1 ,602,833
Total equity 6 0,885 8 2,762 1 01,863 1 10,894 1 47,970 1 62,091 1 78,130 1 96,672
CAR - company 20.96% 21.58% 18.08% 16.11% 19.38% 17.17% 16.09% 15.42%
Leverage ratio 39.94% 34.47% 28.96% 23.89% 17.01% 15.29% 14.53% 14.19%
Credit Quality
Impaired ratio of RDA 1.20% 1.00% 1.20% 1.77% 1.78% 2.00% 2.00% 2.00%
Credit cost of RDA (bps) 497 200 203 95 67 129 56 63
Provision to impaired loan ratio - RDA 248% 291% 267% 210% 205% 200% 185% 180%
Provision to loan ratio - RDA 2.99% 2.92% 3.19% 3.72% 3.66% 4.00% 3.70% 3.60%
Impaired ratio of RDA + loans 1.17% 1.02% 1.51% 2.58% 1.65% 2.06% 2.12% 2.18%
Credit cost of RDA + loans (bps) 369 178 180 149 43 86 47 51
Provision to impaired loan ratio - RDA + loans 219% 253% 190% 144% 154% 138% 132% 129%
Provision to loan ratio - RDA + loans 2.56% 2.58% 2.86% 3.72% 2.55% 2.84% 2.80% 2.82%
Growth Rates & Key Ratios
Growth in income from DDA classified as receivables 0% n.a. 1845% 188% 79% 4% -18% 12%
Growth in revenue 0% -4% 45% 35% 42% 23% 14% 25%
Growth in cost 0% 3% 73% 38% 37% 24% 17% 29%
Growth in net profit 0% -9% 8% 24% 32% 18% 11% 15%
Growth in DDA 228% 104% 79% 21% 13% 20% 17% 14%
Growth in DES -5% -12% -2% -7% 4% 14% 1% 1%
Growth in total assets 47% 51% 42% 31% 64% 19% 14% 13%
Growth in impaired loans (RDA+loans) 0% 0% 1099% 75% 145% 91% 13% 44%
Cost income ratio 33% 32% 34% 33% 31% 29% 29% 30%
By Segment
Revenue - DAM 14,392 21,850 31,495 32,552 32,069 36,024 42,546 47,493
Revenue - FIAM 7,911 8,977 12,167 19,274 27,303 33,348 36,635 41,657
Revenue - FS 10,553 12,134 17,534 28,972 34,165 47,868 38,466 42,399
PBT - DAM 6,234 8,314 11,496 12,126 14,425 13,734 18,013 19,372
PBT - FIAM 3,285 3,012 3,515 3,890 6,309 6,611 5,866 7,455
PBT - FS 164 515 1,857 4,265 2,106 6,123 5,877 7,059
Total assets -DAM 140,328 228,604 320,973 393,186 457,607 537,610 631,925 696,238
Total assets - FIAM 49,027 72,776 110,860 154,735 269,187 336,483 386,956 444,999
Total assets - FS 69,352 86,248 123,560 176,834 493,780 568,782 625,967 704,361
Jacky Zuo
[phone] [email protected]
Source: Company data, Deutsche Bank estimates

Page 2 Deutsche Bank AG/Hong Kong
15 December 2017

Banks
China AMCs

Model updated: 12 Dec 2017 Fiscal year end 31-Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E
Running the Numbers Data per share
Asia EPS (stated) (CNY) 0.23 0.34 0.38 0.43 0.50 0.58 0.62 0.68
Growth rate - EPS (stated) (%) 45% 14% 12% 17% 15% 7% 10%
China BVPS (stated) (CNY) 1.32 1.62 2.12 2.51 2.95 3.38 3.80 4.31
Other Financial Services DPS (CNY) 0.05 0.07 0.07 0.04 0.15 0.17 0.17 0.20
Market cap (HKDm) 90,684 90,684 114,763 137,136 137,136 137,136 161,337 161,337
Share in Issue (m) 25,836 25,836 32,696 39,070 39,070 39,070 45,965 45,965
China Huarong Valuation Ratios & Profitability Measures
P/E (stated) 12.33 8.31 7.42 6.85 6.26 5.40 5.19 4.91
Reuters: 2799.HK Bloomberg: 2799 HK P/E FD (DB adj.) 12.33 8.31 7.42 6.85 6.26 5.40 5.19 4.91
Hold P/B (stated) 2.16 1.71 1.33 1.17 1.07 0.93 0.85 0.78
P/B (DB adj.) 2.16 1.71 1.33 1.17 1.07 0.93 0.85 0.78
Price (12 Dec 2017) CNY3.51 ROAE (stated) (%) 19.40% 22.75% 19.14% 17.29% 18.39% 18.29% 17.16% 16.82%
ROAA (stated) (%) 1.87% 2.39% 2.11% 1.97% 1.72% 1.42% 1.37% 1.42%
Target price CNY3.90 Dividend yield (%) 1.7% 2.4% 2.3% 1.3% 4.8% 5.6% 5.3% 6.1%
52-week Range: CNY2.56 - 3.87 Payout ratio (%) 21% 20% 20% 10% 30% 30% 30% 30%
Profit & Loss (CNYm)
Market Cap CNY87,904m Income from DDA classified as receivables 4 ,645 8 ,918 1 5,662 2 3,095 2 5,140 2 8,477 3 5,667 4 1,600
Fair value changes on DDA 2 50 5 09 8 86 1 ,637 3 ,852 5 ,050 6 ,267 7 ,473
Investment income 5 ,328 8 ,179 9 ,804 1 9,167 2 4,678 4 2,254 5 3,373 6 3,859
Company Profile Net insurance premiums earned na na na na na na na na
ChinaHuarongAssetManagement(Huarong)isthelargest Interest income 9 ,687 1 0,076 1 2,048 1 4,067 1 6,444 1 8,192 2 1,672 2 5,199
financial assetmanagementcompany(AMC)inChinain Revenue from sales of inventories na na na na na na na na
termsoftotalassetsasof1H15.Huarongisoneofthebig
Fee & commission 5 ,244 6 ,785 7 ,986 1 0,398 1 2,920 1 1,346 1 2,615 1 4,001
four state-owned AMCs in China and distressed asset
management(DDM)isitscorebusiness.Inaddition,the Other revenue 5 10 1 ,897 3 ,258 3 ,247 4 ,363 4 ,817 5 ,448 6 ,172
companyhasfinancialservice(FS)andassetmanagement& Operating income 2 6,063 3 7,319 5 1,061 7 5,386 9 5,208 1 18,093 1 43,947 1 68,278
investment(AMI)segments.HuarongrecordedRmb9.9bnof Operating expenses - 1 6,480 - 2 3,126 - 3 3,051 - 5 0,939 - 6 1,457 - 7 8,546 - 9 7,341 - 1 11,942
NPATin1H15,withtotalassetsofRmb735bnasofJune Operating profit 9 ,584 1 4,194 1 8,010 2 4,447 3 3,751 3 9,547 4 6,606 5 6,336
2015. Huarong was listed in HKEx in Oct 2015. Taxes - 2 ,123 - 3 ,547 - 3 ,744 - 5 ,295 - 7 ,401 - 8 ,537 - 1 0,046 - 1 2,223
Minorities - 1 ,094 - 1 ,434 - 2 ,374 - 2 ,295 - 3 ,039 - 3 ,544 - 4 ,170 - 5 ,073
Net profit attributable to shareholders 5 ,892 8 ,660 1 0,656 1 4,482 1 9,613 2 2,612 2 6,322 3 1,374
Key Balance Sheet Items (CNYm) & Capital Ratios
TDA net balance 3 ,126 8 ,134 2 3,612 6 5,564 6 8,436 1 05,643 1 50,524 2 02,698
RDA net balance 5 1,322 8 4,886 1 57,239 2 02,051 2 70,072 3 34,924 3 89,486 4 28,614
DES book value 2 1,483 2 1,587 2 4,389 2 4,203 1 9,129 1 7,914 1 6,735 1 5,592
Loans and advances to customers - net 3 7,646 4 8,176 6 3,239 8 1,625 1 18,406 1 53,136 1 75,563 1 92,522
Total assets 3 15,034 4 08,367 6 00,521 8 66,546 1 ,411,969 1 ,783,712 2 ,063,133 2 ,357,111
Total liabilities 2 72,462 3 55,833 5 16,989 7 47,746 1 ,261,888 1 ,590,953 1 ,807,366 2 ,077,471
Total equity 4 2,571 5 2,534 8 3,532 1 18,801 1 50,081 1 92,760 2 55,767 2 79,641
CAR - company 13.70% 13.50% 13.60% 14.75% 12.86% 12.54% 15.64% 15.26%
Leverage ratio 17.4% 16.8% 18.2% 18.8% 15.0% 15.0% 17.6% 16.7%
Credit Quality
Impaired ratio of RDA 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Credit cost of RDA (bps) 708 787 680 873 880 720 792 912
Provision to impaired loan ratio - RDA 2% 5% 2% 2% 2% 0% 0% 0%
Provision to loan ratio - RDA 811.18% 290.83% 416.53% 587.15% 444.35% 360.00% 360.00% 380.00%
Impaired ratio of RDA + loans 0.75% 1.65% 1.31% 1.29% 1.61% 1.84% 2.05% 2.22%
Credit cost of RDA + loans (bps) 193 219 206 272 284 200 263 265
Provision to impaired loan ratio - RDA + loans 485% 272% 347% 461% 347% 286% 286% 301%
Provision to loan ratio - RDA + loans 3.66% 4.48% 4.56% 5.93% 5.58% 5.26% 5.86% 6.70%
Growth Rates & Key Ratios
Growth in income from DDA classified as receivables 1384819% 0% 92% 76% 47% 9% 13%
Growth in revenue 5728633% 0% 43% 37% 48% 26% 24%
Growth in cost -4331285% 0% 40% 43% 54% 21% 28%
Growth in net profit 902891% 0% 47% 23% 36% 35% 15%
Growth in DDA 71% 94% 48% 26% 30% 23% 17%
Growth in DES 0% 13% -1% -21% -6% -7% -7%
Growth in total assets 30% 47% 44% 63% 26% 16% 14%
Growth in impaired loans (RDA+loans) -485020% -622560% -1260380% -1671704% -1730392% -2274583% -2591567%
Cost income ratio 54% 49% 53% 51% 47% 52% 52%
By Segment
Revenue - DAM 11,337 19,807 28,647 40,648 50,696 61,659 74,641 86,519
Revenue - FIAM 4,206 4,327 5,050 12,003 21,702 29,811 38,923 47,382
Revenue - FS 11,437 13,793 17,915 23,463 24,450 28,263 32,023 36,017
PBT - DAM 4,067 7,636 9,340 11,940 15,891 18,918 18,611 22,463
PBT - FIAM 2,118 1,940 1,910 3,089 7,679 9,242 15,383 20,016
PBT - FS 3,028 4,065 5,524 7,247 6,987 7,459 7,909 8,496
Total assets -DAM 103,001 155,964 283,339 370,131 628,713 831,398 935,581 1,052,346
Total assets - FIAM 22,559 22,189 42,101 138,764 302,716 408,666 510,833 612,999
Total assets - FS 191,805 232,692 280,307 370,651 515,151 587,559 660,629 735,676
Jacky Zuo
[phone] [email protected]
Source: Company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 3
15 December 2017

Banks
China AMCs

2018 outlook for AMCs
Still in a pro-earnings cycle; we prefer Cinda to Huarong
Despite the business nature of distressed asset management with less
predictable earnings – we think current macro/policy cycles are still favorable
for AMCs to release core earnings given: 1) elevated asset prices (including
NPLs); 2) rising inflation expectations; 3) neutral/tightening-biased monetary
policy; and 4) manageable macro and policy risks. We also remain positive on
the sector over the longer term, given abundant distressed asset supply (15%
CAGR, DBe) especially those from shadow banking and corporate channels
where big AMCs would have an edge. We forecast Cinda and Huarong to
deliver 14%-19% net profit growth in 2017E-19E with attractive dividend yields
of 6%-8% (assuming 30% payout).
Figure 1: We expect mid-to-high-teen profit growth for Figure 2: Both Cinda and Huarong offer attractive
Cinda and Huarong dividend yields
Net profit growth - Cinda Net profit growth - Huarong Dividend yield - Cinda Dividend yield - Huarong
50% 47% 9.0%
7.8%
45% 8.0%
40% 36% 35% 7.0% 6.7% 6.8%
35% 6.0% 5.9% 5.7% 5.7%
32%
30% 5.0%
23%
25%
19% 4.0%
20% 24% 16%
15% 3.0%
15% 18%
10% 15% 14% 15% 2.0%
11% 1.0%
5%
0.0%
0%
2018E 2019E 2020E
2013 2014 2015 2016 2017E 2018E 2019E
Source: Deutsche Bank estimate, company data Source: Deutsche Bank estimate, company data
Note: price data are as of 13 December 2017
Stock pick: prefer Cinda (Buy) over Huarong (Hold)
We maintain our sector preference for Cinda over Huarong. Given its less
aggressive balance sheet expansion and smaller shadow banking exposure,
we see better quality earnings and more sustainable growth at Cinda than at
Huarong. In particular, we see earnings upside potential for Cinda from:
 Larger TDA stock to benefit from rising NPL prices and higher disposal
returns;
 Large (unlisted) coal mining exposure in DES portfolio to benefit more
from elevated commodity prices and IFRS 9 (discussed below);
 Turnaround story in life insurance (Happy Life) and bank subsidiary
(NCB). We expect the life business to return to profitability and the
bank business ROE to continue rising.
For Huarong, we are still concerned about its large investment in shadow
banking credit (NSCA accounted for 28% of group assets as at 1H17),
especially after the recent policy tightening towards the asset management
industry. Huarong also needs to deleverage by issuing preferred shares and A-
share shares in an A-share IPO in 2018, which would be earnings dilutive.

Page 4 Deutsche Bank AG/Hong Kong
15 December 2017

Banks
China AMCs

Cinda’s 1H17 results disappointed some investors, prompting a negative share
price reaction. However, we argued that its core pre-provision profit actually
grew strongly by 29% yoy after stripping out one-offs (see our report: China
Cinda – 1H17 results not as bad as they appear dated 31 August 2017). We
suggest investors accumulate Cinda before the March 2018 results.
Figure 3: Cinda’s tangible P/B (excluding NCB goodwill) historically trades
above Huarong’s P/B and we expect Cinda to outperform Huarong in 2018
(x) 1-yr forward tangible P/B - Cinda 1-yr forward P/B - Huarong
1.00
0.95
0.90
0.85
0.80
0.80
0.74
0.75
0.70
0.65
0.60

Source: Deutsche Bank estimates, company data, Bloomberg Finance LP; Price as of Dec 13, 2017
In the sections below, we include discussion about: 1) key trends for each
AMC business line; 2) supply & demand dynamics in distressed assets; 3)
impact of PBOC’s new asset management guidance; and 4) capital and IFRS 9
impact.
Key trends for AMC business lines
Our overall thinking is that the current cycle still favors big AMCs as they could
release earnings from existing asset stock whose price has appreciated,
especially for TDA and DES business. A neutral/tightening-biased monetary
policy would also drive stable RDA earnings growth. However, the growth
outlook for the asset management businesses and various financial
subsidiaries may be affected by financial regulation tightening.
 Traditional distressed asset (TDA), or the NPL acquisition & disposal
business, is on fire, as disposal returns are rising. Given the slowdown
in NPL supply from banks, we expect major AMCs to focus on NPL
disposal and squeeze the greatest return from the existing portfolio,
rather than bidding NPLs aggressively. The active NPL secondary
market also helps AMCs to realize decent IRR in TDA business. We
forecast TDA income to account for 14-15% of PBT at Cinda and 7% at
Huarong.
 Restructuring distressed asset (RDA) business is likely to maintain
decent growth under a neutral or tightening-biased environment. More
distressed asset supply from corporate and shadow banking channels
provide RDA opportunities as well. RDA faces less competition as
most local AMCs have not started such businesses yet. On the margin

Deutsche Bank AG/Hong Kong Page 5
15 December 2017

Banks
China AMCs

side, we may finally see an RDA yield recovery – as we saw for trust
product yields.
 Debt-to-equity swap (DES) business is a moving part. The exit of
existing DES book depends on capital market conditions and the pace
of IPO approvals. For the new round of market-driven DES, we have
not seen major AMCs being as active as banks. Cinda has conducted
three new DES deals: China Shipbuilding Industry Corporation,
Chongqing Steel Xishan Mining and Aluminum Corporation of China
(Chalco). Huarong also participated in the Chalco deal. We think AMCs
would prefer to conduct new DES by setting up DES funds rather than
using their own capital. For example, Huarong set up a wholly owned
subsidiary – Huarong Ruitong – in Jan 2017 with Rmb300m capital,
and plans to raise Rmb50bn DES fund (Rmb10bn so far). In addition,
the implementation of IFRS 9 in 2018 may provide one-time
revaluation gains for unlisted DES assets, leading to a capital boost for
AMCs (2.4-4.7% CET-1 boost for Cinda per our estimate).
 Expanding investment book and overseas business: Cinda is focusing
on investing private funds initiated by its own subsidiary (Rmb98bn
balance in 1H17, up 160% yoy), while Huarong continues to expand its
overseas business (international assets Rmb195bn in 1H17, up 120%
yoy). We have not seen any signs of a slowdown and we expect the
investment business to continue to drive profit growth going forward.
 Tightening regulation to impact on financial subs: Preventing systemic
risk is now top of the central government’s agenda, and the recent
PBOC guidance on the asset management industry shows its
determination. We believe business growth at AMCs’ various financial
subsidiaries such as bank, trust, broker, insurer etc. may be less rosy
than in previous years. We discuss the impact of the asset
management new rule in a later section.
Given the complex AMC business model, we highlight our profit forecasts by
business line in the below chart and provide a chart on asset breakdown. We
also provide charts to show the operating trends of different distressed asset
management businesses.

Page 6 Deutsche Bank AG/Hong Kong
15 December 2017

Banks
China AMCs

Figure 4: AMCs’ PBT growth by business lines – we expect AMCs to maintain relatively fast profit growth going
forward
(Rmb bn) PBT growth -Cinda + Huarong
90 84
Financial services
80 2013-16 CAGR:27% 2016-19E CAGR: 17%
19%
70
26% 20% Investment &
asset mgmt
60
52
41% 25% 33%
50 Other DAM
17%
29% 18%
40
27% DES
25 18%
30
75% -8%
18% 18% 4%
20
19% 8% RDA
17% 12% 7% 17%
10 22%
32%
10%
0 11% 18% 9% 23% TDA
2013 2016 2019E

Source: Deutsche Bank estimates, company data
Note: Financial services’ PBT CAGR is affected by Cinda’s acquisition of Nanyang Commercial Bank in May 2016, leading to a lower CAGR for 2013-16 and an inflated CAGR for 2016-19E
TDA = traditional distress asset management, or the NPL acquisition-and-disposal business
RDA = restructuring distressed asset management business
DES = debt-to-equity swap
Other DAM = other distressed asset management business other than TDA, RDA and DES
Investment & asset management: this mainly includes proprietary investment, HK subsidiary operations and asset management business
Financial services: this includes operations of a wide range of financial subsidiaries such as bank, broker, insurance, leasing etc.

Figure 5: Changing AMC model from asset growth perspective
(Rmb bn) Asset growth -Cinda + Huarong
3,500
2013-1H17 CAGR:45% 2,937 Bank subs: Financial
3,000 c Rmb646b services
or 22%
42% Investment &
2,500 asset mgmt
37%
71%
2,000 Other DAM
Overseas sub:
53%
1,500 21% c.Rmb270b or
10% DES
792 -0.4%
1,000 16%
40% 2% RDA
34%
500
12% 17%
14%
23% 80% 6% TDA
0
2013 1H17

Source: Deutsche Bank estimates, company data
Note: Financial services’ asset CAGR is affected by Cinda’s acquisition of Nanyang Commercial Bank in May 2016
TDA = traditional distress asset management, or the NPL acquisition-and-disposal business
RDA = restructuring distressed asset management business
DES = debt-to-equity swap
Other DAM = other distressed asset management business other than TDA, RDA and DES

Deutsche Bank AG/Hong Kong Page 7
15 December 2017

Banks
China AMCs

Figure 6: Cinda has larger TDA stock than Huarong Figure 7: TDA disposal return is recovering
Rmb bn TDA balance - Huarong TDA balance - Cinda (%) TDA return on disposal - Huarong TDA return on disposal - Cinda
120 120.0
108 104.1
100 94 91 100.0
83
80 80.0
66 68
57.8
60 60.0
42
40 40.0
24 23.2 23.9
20 17 20.0
8 8 9.9 9.0 9.2 7.9
3 4.2 2.9
0 0.0
2012 2013 2014 2015 2016 1H17 2013 2014 2015 2016 1H17
Source: Deutsche Bank, company data Source: Deutsche Bank, company data

Figure 8: RDA balance grew strongly in since 2H16 due Figure 9: We expect RDA yield to recover in 2018
to tightened liquidity
RDA avg monthly balance - Cinda RDA avg monthly balance - Huarong RDA yield - Cinda RDA yield - Huarong
YoY growth - Cinda (RHS) YoY growth - Huarong (RHS)
25.0%
Rmb bn
1,200 127% 150.0%
19.4%
125.0% 20.0% 17.9%
1,000
82% 99% 100.0%
800 75.0% 15.0% 16.0% 13.1% 12.5% 12.1%
600 46% 39% 50.0% 13.5% 10.0% 10.3% 10.5%
13% 31% 20% 14% 25.0% 10.0% 12.2% 11.7%
400 9% 15% 14% 9.9% 8.5% 9.0% 9.0%
(3%) 0.0% 5.0%
200
-25.0%
0 -50.0% 0.0%
2012 2013 2014 2015 2016 2017E 2018E 2019E 2012 2013 2014 2015 2016 2017E 2018E 2019E
Source: Deutsche Bank estimates, company data Source: Deutsche Bank estimates, company data

Figure 10: Trust product yield finally saw recovery, Figure 11: Cinda has larger DES portfolio than Huarong
indicating higher RDA yield
(%) Trust product expected yield -2-3 yrs Rmb bn DES book value - Cinda DES book value - Huarong
60
11.00
10.00 50 48 45
42 42 40
39
9.00 40
8.00 30
24 24
21 22
7.00 7.24 19
20 17
6.00
10
5.00
0
2012 2013 2014 2015 2016 1H17

Source: Deutsche Bank, WIND Source: Deutsche Bank, company data

Page 8 Deutsche Bank AG/Hong Kong
15 December 2017

Banks
China AMCs

Distressed asset supply & demand
We think supply and demand dynamics for distressed assets in China are likely
to maintain a tight balance as new NPL supply should be absorbed quickly by
various distressed asset players, although demand sentiment may become
softer as economic activities cool down (DB China economist expects GDP
growth to slow in 4Q17 and 1H18). On the supply side, more NPLs may come
from shadow banking channels, given tightening asset management rules; on
the demand side, local AMCs (over 50 now) will still be active as will other
distressed funds. NPL pricing has been rising in 2017 and would remain stable
on our base case going forward. Cinda and Huarong, with large existing NPL
stock, should continue to record decent returns.
Supply: stable supply from banks; more distressed assets likely from shadow
banking
NPL formation at most banks has decreased and banks are under less
immediate pressure to sell out NPLs (e.g., Ping An Bank has expanded its in-
house NPL work-out team), but we think the absolute NPL disposal amount
from banks should be maintained at a stable level given strong loan growth. In
addition, distressed assets supply from shadow banking channels and
corporate is rising. We consider the following factors in forecasting distressed
asset supply.
 Banks may see lower NPL formation but the overall bank system is
maintaining low-teens loan growth. Some smaller banks are still
experiencing asset quality pressure.
 Shadow banking credit growth may slow down significantly with
tighter regulations (recent PBOC’s asset management new rules
targeting bank WMPs and various asset managers) and rising asset
quality pressure. We expect more NPAs coming from non-
standardized credit assets such as banks’ receivable investment and
trust assets.
 Corporates’ accounts receivable balances may continue to record
rapid growth and AMCs are likely to proactively acquire distressed
accounts receivable.
As such, we estimate total distressed assets supply in China to remain around
15% growth to reach Rmb1.9tr in 2019. Nevertheless, resolving distressed
assets from shadow banking channels and corporate requires sophisticated
solutions (e.g., liquidity support, restructuring, M&A etc.), favoring the Big Four
AMCs – which have multiple financial licenses, relevant talent and more than
17 years of industry experience.

Deutsche Bank AG/Hong Kong Page 9
15 December 2017

Banks
China AMCs

Figure 12: We estimate distressed assets supply to keep high-teens growth in the coming years
Rmb bn 2013 2014 2015 2016 2017E 2018E 2019E Comments
System loan balance 76,633 86,787 99,346 112,055 126,062 141,820 159,547
yoy growth 13.9% 13.3% 14.5% 12.8% 12.5% 12.5% 12.5% China to keep low teen loan growth
- Commercial banks 59,210 67,405 76,313 86,885 97,746 109,964 123,709
- Policy banks and other banking FIs 17,423 19,382 23,033 25,170 28,316 31,856 35,838
Banks' receivable investment 3,636 5,585 12,775 21,298 21,298 19,168 17,251
yoy growth 111.7% 53.6% 128.7% 66.7% 0.0% (10.0%) (10.0%) Slowing growth due to tighter shadow banking regulation
- Deduct investment to trust products (1,454) (2,234) (5,110) (8,519) (8,519) (7,667) (6,901) Assume 40% receivable inv overlapping with trust asssets
Trust assets 10,907 13,980 16,364 20,220 24,264 21,838 19,654
yoy growth 46.0% 28.2% 17.1% 23.6% 20.0% (10.0%) (10.0%) Slowing growth due to tighter shadow banking regulation
Industrial account receivables 9,569 10,517 11,455 12,600 13,860 15,246 16,771 Only industrial A/R balance data available
yoy growth 13.9% 9.9% 8.9% 10.0% 10.0% 10.0% 10.0%
Total credit assets (bank + trust + NFE) 99,291 114,634 134,829 157,654 176,965 190,404 206,323
yoy growth 17.9% 15.5% 17.6% 16.9% 12.2% 7.6% 8.4%
NPL sold from banks 118 186 589 540 548 576 633
as % avg outstanding balance 0.16% 0.23% 0.63% 0.51% 0.46% 0.43% 0.42% Lower selling % due to moderating NPL formation
NPA selling from receivable investment 26 64 81 91
as % avg outstanding balance 0.15% 0.30% 0.40% 0.50% Rising pressure on shadow credit asset quality
NPA selling from trust assets 37 67 92 104
as % avg outstanding balance 0.20% 0.30% 0.40% 0.50% Rising pressure on shadow credit asset quality
- deduction of double accounting (10) (26) (32) (36)
Distressed account receivables from NFE 662 794 946 1,121
as % avg outstanding balance 5.5% 6.0% 6.5% 7.0% Cinda + Huarong acquisition accounted for 3% of A/C in 2016
Total distressed assets supply 1,254 1,447 1,663 1,912
yoy growth 15.4% 14.9% 15.0%
Source: Deutsche Bank estimates, PBOC, CBRC, NBS, Trust Association, company data
Note: Historical NPL sold from banks is implied from Cinda’s reported TDA data

Figure 13: Distressed asset channels – more supply from corporate than from
banks
Distressed asset acquisition by channels
Other banks
100% 2.4%
9.4% 25..11%% 3.2% 1.3%
90%
5.5% 12.8% 11.4% Non-bank
80% 13.0% financial
70% 16.1% institutions
9.5% City and rural
60%
commercial
50% banks
Joint-stock
40% 81.6%
Commercial
30% 62.4% 63.5% Banks
20% Large
Commercial
10%
Banks
0% Non-bank
Cinda + Huarong - Cinda + Huarong - Cinda + Huarong - enterprises
2015 2016 1H17 (NFE)

Source: Deutsche Bank, company data
Demand: strong appetite from local AMCs and various distressed funds
On the demand side, distressed asset players are increasing as well. New local
AMC openings have been accelerating since China allowed the setting up of
two local AMCs in each province in October 2016. Eighteen new local AMCs
have been established in 2017 so far and the total number has reached 56
according to our database (Figure 14). The total registered capital of these local
AMCs amounted to Rmb118bn, already exceeding Cinda’s TDA balance. Local
AMCs’ current market share in NPL acquisition is less than 10%, and it has

Page 10 Deutsche Bank AG/Hong Kong