[ET Net News Agency, 28 June 2018] Morgan Stanley cut its target price for China
Huarong Asset Management (02799) to HK$2.16 from HK$3.79, and downgraded its rating to
"underweight" from "equal-weight".
The research house downgraded Huarong given uncertainties in its future business
strategy, likely lower ROE vs. banks and still only modest discount valuation. It revises
down earnings forecasts on: higher provision charges for 2018 in light of potential higher
impairments of restructured distressed assets as well as investment receivables on the
firm's legacy assets base following Huarong's senior management changes announced in April
2018; slower acquisition of NPL portfolios as Huarong was notably less aggressive in
competing for traditional distressed assets market share in 1H18 compared to 2H17, and
pricing for the NPL portfolios has become more stabilized at ~40%; and more rational asset
growth over the next few years following the rapid growth period over the past five years
with CAGR of 43% as new management team reviews future business strategy.
Morgan Stanley's ROE forecast of 8.3% for 2019 is well below the average ROE of 13.7%
for banks under its coverage and 14.4% for China Cinda (01359), while its 2019E P/B of
0.6x is similar to banks 2019E P/B of 0.6x and Cinda's 2019E P/B of 0.6x. It expect the
stock to continue to underperform other financial names until it can present a clearer
outlook for investors. (HL)