Jacky Zuo Hans Fan, CFA 2018 Outlook: current cycle still...

Deutsche Bank Markets Research

Asia

China

Banking / Finance

Banks

Industry

China AMCs

Date

15 December 2017

Forecast Change

2018 Outlook: current cycle still favors earnings

Decent earnings growth and attractive yield; we prefer Cinda over Huarong

________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong

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.

Jacky Zuo

Research Analyst

(+852 ) 2203 6255

[email protected]

Hans Fan, CFA

Research Analyst

(+852 ) 2203 6353

[email protected]

Key Changes

Company Target Price Rating

1359.HK 3.50 to 3.75(HKD) -

2799.HK 3.50 to 3.90(CNY) -

Source: Deutsche Bank

Top picks

China Cinda (1359.HK),HKD2.79 Buy


Companies Featured

China Cinda (1359.HK),HKD2.79 Buy

2016A 2017E 2018E

P/E (x) 5.2 5.9 4.5

EV/EBITDA (x) 3.4 3.1 2.7

Price/book (x) 0.8 0.7 0.6

China Huarong (2799.HK),CNY3.57 Hold

2016A 2017E 2018E

P/E (x) 5.9 6.2 5.8

EV/EBITDA (x) 3.4 3.0 2.5

Price/book (x) 0.8 0.9 0.8


We think current macro/policy cycles still favor AMCs’ earnings and we remain constructive on AMCs’ longer-term growth, given abundant distressed asset supply. We expect Cinda and Huarong to deliver mid- to high-teen earnings growth with 6-7% dividend yields. In this outlook report, we discuss 1) key 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 IFRS 9 impact. Cinda remains our sector top pick with higher-quality earnings and less shadow banking exposure. The stock trades at 0.67x 2018E P/B and 4.8x P/E. We suggest investors accumulate Cinda before March 2018 results.

Key trends in distressed asset management We think the traditional NPL acquisition & disposal (TDA) and debt-to-equity swap (DES) business will continue to benefit from elevated asset prices. A neutral/tightening-biased monetary policy should also drive stable restructuring distressed asset (RDA) earnings growth. On the margin side, TDA disposal return has been rising and RDA may finally see yield recovery in 2018 – as we saw for trust product yield. On the new round of market-driven DES, AMCs are not as active as banks and we think AMCs may set up DES funds rather than use their own capital to invest. Also, IFRS 9, which starts in 2018, may potentially provide one-time revaluation gains for unlisted DES assets, leading to large capital boosts (2.4-4.7% CET-1 boost for Cinda, per our estimate).

Distressed assets supply and demand dynamics 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).

Distributed on: 14/12/2017 23:00:54 GMT

7T2se3r0Ot6kwoPa

15 December 2017

Banks

China AMCs

Deutsche Bank AG/Hong Kong

Model updated: 12 Dec 2017 Fiscal year end 31-Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E

Fair value changes on DDA 3,878 4,618 4,077 4,420 5,716 8,596 10,940 12,617

Investment income 6,529 7,044 9,116 13,552 17,991 18,542 19,696 21,352

Net insurance premiums earned 5,325 5,772 7,443 12,912 16,636 21,668 10,427 11,470

Interest income 2,493 5,059 8,811 13,516 14,506 21,591 25,898 29,842

Revenue from sales of inventories 3,924 4,322 4,341 7,637 10,955 12,922 14,856 16,340

Fee & commission 2,226 2,520 3,008 4,330 3,848 4,983 5,566 6,220

Other revenue 1,456 2,195 2,057 1,259 2,812 1,622 2,292 2,528

Operating income 27,645 37,394 52,925 64,977 74,108 92,503 104,766 117,569

Operating expenses 18,510- 25,582- 35,168- 43,435- 50,809- 65,486- 74,294- 82,802-

Operating profit 9,135 11,812 17,756 21,543 23,300 27,017 30,472 34,767

Taxes 2,379- 2,671- 4,164- 4,594- 5,783- 6,349- 7,171- 8,203-

Minorities 89- 74 247 676 470 300 300 300

Net profit attributable to shareholders 7,306 9,027 11,896 14,027 15,512 17,799 20,265 23,362

Key Balance Sheet Items (CNYm) & Capital Ratios

TDA net balance 7,960 16,392 42,302 84,621 94,459 120,217 145,861 169,690

RDA net balance 48,068 97,971 162,109 163,145 184,447 213,260 245,178 276,363

DES book value 48,239 42,275 41,564 38,751 40,480 46,169 46,624 47,147

Loans and advances to customers - net 25,042 48,636 80,225 104,738 294,937 338,281 378,488 423,473

Total assets 254,614 383,785 544,427 713,975 1,174,481 1,396,783 1,598,755 1,799,505

Total liabilities 193,730 301,023 442,564 603,081 1,026,511 1,234,692 1,420,626 1,602,833

Total equity 60,885 82,762 101,863 110,894 147,970 162,091 178,130 196,672

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%

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 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%

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

+852 2203-6255

Source: Company data, Deutsche Bank estimates

30%

P/E FD (DB adj.)

P/E (stated)

P/B (stated)

18,114

30%

0.82na

13%

China Cinda

Target price 4.46% 5.06%

ROAA (stated) (%)HK$2.74

HK$3.75

Jacky Zuo

[email protected]

BVPS (stated) (CNY)

Other Financial Services DPS (CNY)

Running the NumbersEPS (stated) (CNY)Asia

ChinaGrowth rate - EPS (stated) (%)

Data per share

Reuters: 1359.HK Bloomberg: 1359 HK

Buy

HK$100,284mMarket Cap

52-week Range: HK$2.62 - 3.47

Price (12 Dec 2017)

0.120.10

0.25 0.30 0.33 0.39

-6% 17% 11%

1.82

0.43

2.14 2.58 2.81 3.09

18% 11%

5.74

na

na

6.73

1.01 0.86 0.79

5.74

0.86

0.05 0.03

7.33

1.56%

5.93

5.937.33

6.73

0.12

13.81%

Growth Rates & Key Ratios

By Segment

Company Profile

Payout ratio (%)

Dividend yield (%) 4.97%

Cinda is a leading asset management company (AMC) in

China, focusing on distressed asset management with a

market share of 35.5% in terms of distressed assets

acquired. Established in 1999, Cinda has been dedicating to

provide customized financial solutions and differentiated

asset management services to its clients, leveraging on its

nationwide branch network and diversified financial service

subsidiaries. Cinda went listed in December 2013.

Profit & Loss (CNYm)

30%

0 97,157 99,343 99,343 104,571

P/B (DB adj.) na 0.82

30,140 35,459 36,257 36,257Share in Issue (m)

ROAE (stated) (%) 15.78% 14.05% 14.38% 14.12%

Credit Quality

Income from DDA classified as receivables 3,518 10,144

Valuation Ratios & Profitability Measures

3.42% 2.83%

1.01

22%

18,884 15,539

38,165

Market cap (HKDm)

2.56% 2.23% 1.64%

0.79

0.47

9%

3.44

0.14

104,571

38,165

5.74%

30%

17,460

5.23

6.02

0.71

0.71

14.29%

1.38%

0.53

14%

3.83

0.16

104,571

0.61

15%

4.29

0.18

104,571

38,165 38,165

4.73 4.27

4.73 4.27

0.66 0.61

0.66 0.61

14.61% 15.07%

21,336 24,240

1.35% 1.37%

6.35% 7.02%

30% 30%

15 December 2017

Banks

China AMCs


Model updated: 12 Dec 2017 Fiscal year end 31-Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E

Fair value changes on DDA 250 509 886 1,637 3,852 5,050 6,267 7,473

Investment income 5,328 8,179 9,804 19,167 24,678 42,254 53,373 63,859

Net insurance premiums earned na na na na na na na na

Interest income 9,687 10,076 12,048 14,067 16,444 18,192 21,672 25,199

Revenue from sales of inventories na na na na na na na na

Fee & commission 5,244 6,785 7,986 10,398 12,920 11,346 12,615 14,001

Other revenue 510 1,897 3,258 3,247 4,363 4,817 5,448 6,172

Operating income 26,063 37,319 51,061 75,386 95,208 118,093 143,947 168,278

Operating expenses 16,480- 23,126- 33,051- 50,939- 61,457- 78,546- 97,341- 111,942-

Operating profit 9,584 14,194 18,010 24,447 33,751 39,547 46,606 56,336

Taxes 2,123- 3,547- 3,744- 5,295- 7,401- 8,537- 10,046- 12,223-

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 10,656 14,482 19,613 22,612 26,322 31,374

Key Balance Sheet Items (CNYm) & Capital Ratios

TDA net balance 3,126 8,134 23,612 65,564 68,436 105,643 150,524 202,698

RDA net balance 51,322 84,886 157,239 202,051 270,072 334,924 389,486 428,614

DES book value 21,483 21,587 24,389 24,203 19,129 17,914 16,735 15,592

Loans and advances to customers - net 37,646 48,176 63,239 81,625 118,406 153,136 175,563 192,522

Total assets 315,034 408,367 600,521 866,546 1,411,969 1,783,712 2,063,133 2,357,111

Total liabilities 272,462 355,833 516,989 747,746 1,261,888 1,590,953 1,807,366 2,077,471

Total equity 42,571 52,534 83,532 118,801 150,081 192,760 255,767 279,641

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%

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 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%

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

+852-2203 6255

Source: Company data, Deutsche Bank estimates

20%

P/E FD (DB adj.)

P/E (stated)

P/B (stated)

15,662

10%

1.172.16

20%

China Huarong

Target price 2.3% 1.3%

ROAA (stated) (%)CNY3.51

CNY3.90

Jacky Zuo

[email protected]

BVPS (stated) (CNY)

Other Financial Services DPS (CNY)

Running the NumbersEPS (stated) (CNY)Asia

ChinaGrowth rate - EPS (stated) (%)

Data per share

Reuters: 2799.HK Bloomberg: 2799 HK

Hold

CNY87,904mMarket Cap

52-week Range: CNY2.56 - 3.87

Price (12 Dec 2017)

0.150.07

0.23 0.34 0.38 0.43

45% 14%

1.32

0.50

1.62 2.12 2.51 2.95

12% 17%

6.26

1.7%

12.33

12.33

7.42

1.71 1.33 1.07

6.26

1.33

0.05 0.07

8.31

2.4%

6.85

6.858.31

7.42

0.04

22.75%

Growth Rates & Key Ratios

By Segment

Company Profile

Payout ratio (%)

Dividend yield (%) 4.8%

China Huarong Asset Management (Huarong) is the largest

financial asset management company (AMC) in China in

terms of total assets as of 1H15. Huarong is one of the big

four state-owned AMCs in China and distressed asset

management (DDM) is its core business. In addition, the

company has financial service (FS) and asset management &

investment (AMI) segments. Huarong recorded Rmb9.9bn of

NPAT in 1H15, with total assets of Rmb735bn as of June

2015. Huarong was listed in HKEx in Oct 2015.

Profit & Loss (CNYm)

30%

90,684 90,684 114,763 137,136 137,136

P/B (DB adj.) 2.16 1.17

25,836 25,836 32,696 39,070Share in Issue (m)

ROAE (stated) (%) 19.40% 19.14% 17.29% 18.39%

Credit Quality

Income from DDA classified as receivables 4,645 8,918

Valuation Ratios & Profitability Measures

1.87% 2.39%

1.71

21%

23,095 25,140

39,070

Market cap (HKDm)

2.11% 1.97% 1.72%

1.07

0.58

15%

3.38

0.17

137,136

39,070

5.6%

30%

28,477

5.40

5.40

0.93

0.93

18.29%

1.42%

0.62

7%

3.80

0.17

161,337

0.68

10%

4.31

0.20

161,337

45,965 45,965

5.19 4.91

5.19 4.91

0.85 0.78

0.85 0.78

17.16% 16.82%

35,667 41,600

1.37% 1.42%

5.3% 6.1%

30% 30%

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

Cinda and Huarong

Figure 2: Both Cinda and Huarong offer attractive

dividend yields

24%

32%

18%

11%

15% 14%15%

47%

23%

36% 35%

15%16%

19%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2013 2014 2015 2016 2017E 2018E 2019E

Net profit growth - Cinda Net profit growth - Huarong

5.9%

6.7%

7.8%

5.7% 5.7%

6.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2018E 2019E 2020E

Dividend yield - Cinda Dividend yield - Huarong

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.

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

0.74

0.80

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

(x) 1-yr forward tangible P/B - Cinda 1-yr forward P/B - Huarong

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

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.

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

11% 9% 10%32%

22%

17%8%

4%

17%

18%

18%

19%

27%

33%

18%

17%

19%

0

10

20

30

40

50

60

70

80

90

2013 2016 2019E

(Rmb bn) PBT growth - Cinda + Huarong

Financial services

Investment &

asset mgmt

Other DAM

DES

RDA

TDA

26%

41%

29%

75%

12%

18%

2013-16 CAGR: 27%

20%

25%

18%

-8%

7%

23%

2016-19E CAGR: 17%

25

52

84

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

6%23%

17%

2%

14%

16%

12%

21%

40%

37%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2013 1H17

(Rmb bn) Asset growth - Cinda + Huarong

Financial

services

Investment &

asset mgmt

Other DAM

DES

RDA

TDA

42%

71%

53%

-0.4%

34%

80%

2013-1H17 CAGR: 45% Bank subs:

Rmb646b

or 22%

Overseas sub:

c.Rmb270b or

10%

c

792

2,937

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

15 December 2017

Banks

China AMCs


Figure 6: Cinda has larger TDA stock than Huarong Figure 7: TDA disposal return is recovering

38

24

6668

91

8

17

42

83

94

108

0

20

40

60

80

100

120

2012 2013 2014 2015 2016 1H17

Rmb bn TDA balance - Huarong TDA balance - Cinda

23.2

9.94.2 2.9

7.9

104.1

57.8

9.0 9.2

23.9

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2013 2014 2015 2016 1H17

(%) TDA return on disposal - Huarong TDA return on disposal - Cinda

Source: Deutsche Bank, company data


Figure 8: RDA balance grew strongly in since 2H16 due

to tightened liquidity

Figure 9: We expect RDA yield to recover in 2018

99%

9% (3%)

31%

15% 14%

82%

127%

46%

13%

39%

20% 14%

-50.0%

-25.0%

0.0%

25.0%

50.0%

75.0%

100.0%

125.0%

150.0%

0

200

400

600

800

1,000

1,200

2012 2013 2014 2015 2016 2017E 2018E 2019E

Rmb bn

RDA avg monthly balance - Cinda RDA avg monthly balance - Huarong

YoY growth - Cinda (RHS) YoY growth - Huarong (RHS)

16.0%

13.5%12.2% 11.7%

9.9%8.5% 9.0% 9.0%

19.4%

17.9%

13.1%12.5% 12.1%

10.0% 10.3% 10.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2012 2013 2014 2015 2016 2017E 2018E 2019E

RDA yield - Cinda RDA yield - Huarong

Source: Deutsche Bank estimates, company data


Figure 10: Trust product yield finally saw recovery,

indicating higher RDA yield

Figure 11: Cinda has larger DES portfolio than Huarong

7.24

5.00

6.00

7.00

8.00

9.00

10.00

11.00

(%) Trust product expected yield - 2-3 yrs

48

42 42 39

40

45

21 22 24 24

19 17

0

10

20

30

40

50

60

2012 2013 2014 2015 2016 1H17

Rmb bn DES book value - Cinda DES book value - Huarong

Source: Deutsche Bank, WIND


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.

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

62.4% 63.5%

81.6%

9.5% 16.1%

11.4%

13.0%

12.8%

3.2%

5.5% 2.1%

1.3% 9.4% 5.1% 2.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cinda + Huarong -

2015

Cinda + Huarong -

2016

Cinda + Huarong -

1H17

Distressed asset acquisition by channels Other banks

Non-bank

financial

institutions

City and rural

commercial

banks

Joint-stock

Commercial

Banks

Large

Commercial

Banks

Non-bank

enterprises

(NFE)


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

15 December 2017

Banks

China AMCs


room to increase further. Local AMCs typically have strong connections with

local governments so they need to balance commercial activities with policy

tasks. We found the Big Four AMCs invested in eight local AMCs with

Huarong taking controlling stakes in two of them.

In addition, the Big Four banks all won approval this year to set up asset

management subsidiaries specializing in DES business with Rmb10-12bn

registered capital each. The AMC subsidiaries of BoCom and CMB/MSB are

still awaiting approval. We are not sure whether these bank-sponsored AMCs

will compete in TDA or RDA business in the future.

Many distressed asset funds funded by domestic private investors, foreign

investors or even state capital are emerging in China. For example, Chengtong

Huan (诚通湖岸) Distressed Investment Fund jointly set up by China Chengtong

Group (under central SASAC) and Shoreline Capital in March 2017 has

Rmb10bn size with a four-year investment term. According to current

regulations, these distressed funds can only participate in the NPL secondary

market (i.e., purchase NPL packages from AMCs). The activities of these

distressed funds actually boost the NPL secondary market and benefit AMCs in

NPL disposal.

Last, but not least, the other two big AMCs are chasing, aiming for listing after

completing the introduction of strategic investors in 2017. News reported

Great Wall may raise US$2bn proceeds via a HK IPO in 2018. We think these

two AMCs will be more aggressive in acquiring NPLs as well. Great Wall AMC

reported it had acquired distressed assets of Rmb129bn in 9M17, up 154%

yoy, including Rmb73bn from financial institutions and Rmb56bn from

corporate.

15 December 2017

Banks

China AMCs


Figure 14: List of 56 local AMCs set up so far (as of August 2017)

Prov ince Company name CompanyDate of

estab lishment

Reg istered

cap ita l (Rmb mn)Major shareho lders

1 Henan Henan Asset Management Co., Ltd 河南资产管理公司 2017-Aug 5,000 Henan Investment Group

2 Xinjiang Xinjiang Jintou Asset Management Co., Ltd 新疆金投资产管理股份有限公司 2017-Aug 1,000 Xinjiang Financial Investment; Shenwan Hongyuan Group

3 Ningxia Ningxia Financial Asset Management Co., Ltd 宁夏金融资产管理有限公司 2017-Aug 1,000 Ningxia Guotou Group; Great Wall Guorong Investment

4 Gansu Gansu Changda Financial Asset Management Co. 甘肃长达金融资产管理股份有限公司 2017-Aug 1,000 Great Wall Asset Management Co.

5 Guizhou Guizhou Asset Management Co., Ltd 贵州省资产管理股份有限公司 2017-Aug 1,000 Guizhou Guimin Investment Corporation

6 Heilongjiang Heilongjiang Guotou Suiyong Asset Management 黑龙江国投穗甬资产管理公司 2017-Jul 1,000 State Development Investment Corp; Suiyong Holding

7 Anhui Zhongan Financial Asset Management Co., Ltd 安徽中安金融资产股份有限公司 2017-Jun 4,000 Anhui Provincial Investment Group; Zhongrun Jingfa (sub of Cinda)

8 Liaoning Liaoning Fu'an Financial Asset Management Co. 辽宁富安金融资产管理公司 2017-May 1,000 Hanhua Financial Holding Group

9 Guangdong Guangzhou Asset Management Co., Ltd 广州资产管理有限公司 2017-Apr 3,000 Yuexiu Financial Holding

10 Henan Zhongyuan Yubei Asset Management Co., Ltd 中原豫北资产管理公司 2017-Apr 1,000 Henan Yuda Capital

11 Shaanxi Yulin Financial Asset Management Co. 榆林金融资产管理有限公司 2017-Apr 500 Shaanxi Financial Asset Management Co.

12 Hebei Jizi Tangshan Asset Management Co., Ltd 冀资唐山资产管理有限公司 2017-Mar 500 Hebei Asset Management

13 Shanxi Jinyang Asset Management Co., Ltd 晋阳资产管理股份有限公司 2017-Mar 3,000 Jinshang Credit Enhancement; China Overseas Holding

14 Guangdong Merchant Pingan Asset Management Co., Ltd 深圳招商平安资产管理有限责任公司 2017-Mar 3,000 China Merchants Group

15 Fujian Industrial Asset Management Co., Ltd 兴业资产管理有限公司 2017-Mar 3,000 China Industrial Asset Management Ltd

16 Zhejiang Ningbo Financial Asset Management Co., Ltd 宁波金融资产管理股份有限公司 2017-Feb 1,000 Ningbo Financial Holding Group; Bangxin AM

17 Shandong Taihe Asset Management Co., Ltd 泰和资产管理有限公司 2017-Jan 10,000 China Minsheng Investment Group

18 Chongqing Chongqing Fucheng Asset Management Co., Ltd 重庆富城资产管理有限公司 2017-Jan 1,500 Maiqi Investment Co

19 Hubei Hubei Tianqian Asset Management Co., Ltd 湖北天乾资产管理有限公司 2016-Dec 2,000 Wuhan Donde Tech Industry Group

20 Yunan Yunan Asset Management Co., Ltd 云南省资产管理有限公司 2016-Dec 1,000 Yunan Investment Holding Co

21 Jiangsu Suzhou Asset Management Co. 苏州资产管理公司 2016-Nov 1,200 Suzhou SASAC, one of big AMCs, and local SOEs

22 Shanghai Shanghai Ruiyin Shengjia AMC 上海睿银盛嘉资产管理有限公司 2016-Nov 1,000 Shanghai Jiading State Assets Operation Co.

23 Heilongjiang Heilongjiang Jiashi Longsheng Financial Assets 黑龙江嘉实龙昇金融资产有限公司 2016-Nov 1,000 Zhongsheng Heyin Asset Management; Harvest Capital Management

24 Tianjin Tianjin Binhai Zhengxin Asset Management Co. 天津滨海正信资产管理有限公司 2016-Nov 1,000 Tianjin Zhengxin Group

25 Guangxi Guangxi Investment Asset Management Co. 广西广投资产管理有限公司 2016-Oct 1,000 Guangxi Investment Financial Holding Group

26 Shaanxi Shaanxi Financial Asset Management Co. 陕西金融资产管理股份有限公司 2016-Aug 4,500 Shaanxi SASAC

27 Gansu Gansu Asset Management Co. 甘肃资产管理有限公司 2016-Aug 2,000 Gansu Provincial State-owned Asset Investment Group

28 Hainan Hainan Haide Asset Management Co. 海德资产管理有限公司 2016-Jul 1,000 Hainan Haide Industry Co.,Ltd

29 Guangxi Guangxi Financial Holding Asset Management Co. 广西金控资产管理公司 2016-Jul 5,000 Guangxi Financial Investment Group

30 Tibet Haide Asset Management Co. 海徳资产管理有限公司 2016-Jul 1,000 Hainan Haide Industrial (000567.SZ)

31 Qinghai Huarong Kunlun Asset Management Co. 华融昆仑青海资产管理股份有限公司 2016-Jun 1,000 China Huarong AMC

32 Fujian Xiamen Asset Management Co., Ltd 厦门资产管理有限公司 2016-May 1,000 Jinyuan Group

33 Shandong Qingdao Municipal Asset Management Co. 青岛市资产管理有限责任公司 2016-Mar 1,000 Qingdao International Investment

34 Jiangxi Jiangxi Financial Asset Management Co. 江西省金融资产管理股份有限公司 2016-Mar 1,300 Jiangxi Financial Holding

35 Shanxi Huarong Jinshang AMC 华融晋商资产管理股份有限公司 2016-Feb 3,000 China Huarong AMC

36 Sichuan Sichuan Development Asset Management Co. 四川发展资产管理公司 2016-Jan 1,000 Sichuan Development (Holding) Co.

37 Hunan Hunan Provincial Asset Management Co. 湖南省资产管理有限公司 2015-Dec 1,000 Hunan Caixin Financial Holding

38 Zhejiang Everbright Jinou Asset Management Co. 光大金瓯资产管理有限公司 2015-Dec 1,000 Everbright Group

39 Hebei Hebei Provincial Asset Management Co. 河北省资产管理有限公司 2015-Dec 1,000 Hebei Construction Investment Group

40 Henan Zhongyuan Asset Management Co. 中原资产管理有限公司 2015-Oct 3,000 Henan Finance Bureau/ Cinda

41 Inner Mongolia Inner Mongolia Financial Asset Management Co. 内蒙古金融资产管理公司 2015-Sep 2,040 Local Finance Bureau

42 Ningxia Ningxia Shunyi Asset Management Co. 宁夏顺亿资产管理公司 2015-Apr 1,000 Shanghai Ruiyin Financial Holding; Shanghai Dongxing Investment

43 Jilin Jilin Provincial Asset Management Co. 吉林省资产管理公司 2015-Feb 1,000 Jilin SASAC

44 Shandong Shandong Financial Asset Management Co. 山东省金融资产管理股份有限公司 2014-Dec 2,030 Shandong Luxin Investment Holding

45 Tianjin Tianjin Jinrong Investment Service Co., Ltd. 天津津融投资服务有限公司 2014-Jul 2,888 Tianjin SASAC

46 Anhui Anhui Guohou Asset Management Co., Ltd 安徽省国厚资产管理有限公司 2014-Jul 1,500 Shanghai Dongxing Investment

47 Fujian Fujian Mintou Asset Management Co. 福建省闵投资产管理有限公司 2014-Jun 1,500 Fujian Investment and Development Group

48 Zhejiang Zheshang Asset Management Co., Ltd. 浙商资产管理公司 2013-Aug 2,718 Zhejiang International Trade Group

49 Jiangsu Jiangsu Provincial Asset Management Co., Ltd. 江苏资产管理有限公司 2013-May 5,000 Jiangsu SASAC

50 Guangdong Yuecai Asset Management Co., Ltd 粤财资产管理公司 2006-Sep 1,200 Guangdong Yuecai Holding

51 Liaoning Liaoning State-owned Assets Operation Co., Ltd 辽宁国有资产经营公司 2006-Mar 1,000 Liaoning State-owned Asset Management Co.

52 Beijing Beijing Guotong Asset Management Co.,Ltd 北京国通资产管理公司 2005-Feb 1,000 Beijing State-owned Asset Management Co.

53 Chongqing Chongqing Yufu Assets Management Group Co., Ltd 重庆渝富资产经营管理集团有限公司 2004-Feb 10,000 Chongqing SASAC

54 Hainan Hainan Union Asset Management Co., Ltd 海南联合资产管理公司 2003-Jul 1,034 Hainan Government

55 Shanghai Shanghai State-owned Assets Operation Co., Ltd 上海国有资产经营有限公司 1999-Jan 5,500 Shanghai International Group

56 Hubei Hubei Provincial Asset Management Co. 湖北宏泰国有资产经营有限公司 1905-Jul 1,000 Hubei SASAC

Sum 117,910 Source: Deutsche Bank, media report, company data Note: local AMCs highlighted with light orange color are invested in by Big Four AMCs

Figure 15: List of bank-sponsored AMC subsidiaries (specializing in debt-to-equity swaps)

Company name CompanyDate of

estab lishment

Registered

cap ita l (Rmb mn)Major shareho lders

ICBC Asset Management Co. 2016-Dec 12,000 ICBC

ABC Asset Management Co. 2016-Nov 10,000 ABC

BOC Asset Management Co. 2016-Dec 10,000 BOC

CCB Asset Management Co. 2016-Dec 12,000 CCB

BoCOM Asset Management Co. 2017-Jan 10,000 BoCOM

CMB MSB Great Wall Asset Management Co. 2016-Nov 10,000 Great Wall Asset Management Co.

Sum 64,000 Source: Deutsche Bank, company data Note: CMB MSB Great Wall AMC’s registered capital is estimated by DB

15 December 2017

Banks

China AMCs


Tightening shadow banking – impact of new asset management rules

PBOC on 17 November 2017 released a draft document on China’s asset

management business, which is an essential part of the shadow banking

system (see report: Asset Management Guideline – Reshaping China’s shadow

banking). Although the document is not finalized yet and lacks implementation

details, our initial thinking is that it is likely to shrink shadow banking liquidity

and thus put asset quality pressure on shadow banking channels. This creates

distressed asset business opportunities for AMCs on the one hand, but may

affect AMCs’ own shadow banking businesses on the other, including on-

balance sheet NSCA investment and the wealth management business of

various subsidiaries. We think Huarong may be more impacted than Cinda,

given its much larger on-balance shadow credit exposure.

Tightening non-standardized credit asses (NSCA) – upcoming asset quality

pressure

The new asset management guidance proposes to reduce duration

mismatches, cap leverage, cut down shadow banking SPV layers and remove

implicit guarantees. For asset management products (e.g., bank WMP)

investing in non-standardized credit, NSCA maturity should not be longer than

the maturity of close-end products or next open-end products. As such, many

bank WMPs and brokers’ AMPs can no longer invest in NSCA given their short

product duration (average bank WMP duration only two months vs. one to five

years for NSCA). We estimate the total size of NSCAs reached Rmb37trn as of

2016 by stripping out the overlap among different asset managers (Figure 16).

After the tightening, we believe some NSCAs are likely to be: 1) converted to

standard products via ABS or asset exchange; 2) replaced by banks’ balance

sheet loans (for those off-balance sheet portion); 3) purchased by longer

duration asset management products; and 4) left as distressed assets. We

think regulators will manage the process smoothly but distressed asset supply

should increase from these shadow banking channels as we highlighted earlier

in our supply forecast.

15 December 2017

Banks

China AMCs


Figure 16: Overview of China’s asset management sector – regulation tightening may lead to more distressed asset

supply from non-standard credit assets (Rmb37tr in 2016)

Brokers' AM

schemes

(Rmb17.6trn)Trust investment

schemes

(Rmb17.5trn)

Public

mutual fund

(Rmb9.2trn)

Fund and fund

subsidiaries'

investment

schemes

(Rmb16.9trn)

Privatefunds

(Rmb10.2t

rn)

Retail investors (31%)

Corporates (18%)

Financial institutions (51%) Non-standard asset (36%) ~ Rmb37trn

Mutual fund (2%)

Others (11%)

Deposit and money market fund (15%)

Bond (29%)

Equity and other securities (7%)

Funding Source Underlying Asset

Bank's WMP

(Rmb29trn)

Insurance

investment

schemes (1.7trn)

Total asset management industry AUM at Rmb102trn as of end-2016; or

Rmb60-70trn if stripping out overlap.

China's asset management sector

Source: Deutsche Bank estimates, PBOC, AMAC, Trust Association, CIRC, CBRC, “Blue Book of Asset Management 2017” Note: The size of squares represents the size of AUM.

AMCs’ on-balance sheet shadow banking lending may be affected

AMCs use their own balance sheets to lend shadow credit to corporate

customers (most are non-distressed customers) to fulfill their financing needs,

and such business has become a key revenue driver in recent years. Huarong

has a much larger shadow credit exposure with NSCA, reaching Rmb471bn in

1H17, up 109% yoy, accounting for 28% of total assets per our calculation. For

comparison, Cinda’s NSCA exposure was only Rmb74bn. These NSCAs were

mainly booked under other AFS assets and receivable investments. We

summarize NSCA exposure details for the two AMCs in the following figures.

In our view, the direct impact on AMCs’ on-balance sheet shadow credit

exposure from the new AM guidance is limited as it targets the off-balance

sheet AM businesses. However, the asset quality of AMCs’ NSCA investment

may be negatively affected, and we cannot exclude the possibility of further

shadow banking tightening/window guidance to include AMCs, given the

current risk prevention attitude of top level of government. We expect AMCs,

especially Huarong, to slow down aggressive expansion in shadow banking

lending going forward.

15 December 2017

Banks

China AMCs


Figure 17: Shadow credit accounts – Huarong Figure 18: Shadow credit accounts – Cinda

8 7 20 41

121169

24 3970

127

279

333

3147

89

167

401

503

0

100

200

300

400

500

600

2012 2013 2014 2015 2016 1H17

Rmb bn Non-RDA receivable investment - HuarongNon-DES AFS assets - Huarong

2012-1H17 CAGR : 85%

1630

44

82

172

209

3

1919

18

14

19

19

4963

100

186

228

0

50

100

150

200

250

2012 2013 2014 2015 2016 1H17

Rmb bn Non-RDA receivable investment - Cinda Non-DES AFS assets - Cinda

2012-1H17 CAGR : 73%


Source: Deutsche Bank, company data; Note: Cinda’s non-DES AFS in 1H17 included Rmb88bn fund investment (vs. Rmb65bn in 2016) which was due to increasing private fund investment by Cinda and its subsidiaries

Figure 19: Summary of NSCA exposure – Huarong

Rmb mn 2014 2015 2016 1H17

Trust products 13,284 63,287 140,801 176,476

Debt instruments 20,500 42,418 84,494 90,625

Entrusted loans 18,462 21,746 54,207 76,331

WMP 8,560 7,403 25,992 30,173

Asset management plans 18,917 8,578 26,250 25,190

Unlisted funds 0 7,104 37,446 62,721

Structured products 1,418 4,082 5,094 9,171

Total NSCA 81,142 154,618 374,283 470,687

Total assets 600,521 866,546 1,411,969 1,658,155

NSCA as % total assets 14% 18% 27% 28%

Provision as % NSCAs 1.5% 2.5% 2.2% 1.9%


Figure 20: Summary of NSCA exposure – Cinda

Rmb mn 2014 2015 2016 1H17

Unlisted funds 9,061 13,284 15,552 14,489

Trust products 6,559 14,663 23,563 31,169

Asset management plans 4,414 8,507 12,720 14,606

WMP 3,760 7,586 10,485 10,495

Structured products 13,259 10,059 1,232 482

Debt instruments 13,003 3,986 3,833 3,223

Entrusted loans 0 0 0 0

Total NSCA 50,055 58,084 67,383 74,464

Total assets 544,427 713,975 1,174,481 1,295,566

NSCA as % total assets 9% 8% 6% 6%

Provision as % NSCAs 0.1% 0.1% 0.5% 0.4%


15 December 2017

Banks

China AMCs


Impact on asset management businesses of AMCs’ subsidiaries

The new guidance will impact the various asset management businesses of

the AMCs’ subsidiaries, such as bank, trust, broker, and private funds etc.,

especially those channel business. Bank WMP and those non-active managed

AUM growth are under pressure going forward. Nevertheless, the financial

impact is limited as the revenue of these asset management businesses

accounted for less than 5% at the two AMCs with higher exposure in Huarong

(4-5%). We summarize the AM businesses of the AMC subsidiaries and new

guidance impact in the below table.

Figure 21: Summary of asset management businesses of AMC subsidiaries and impact from new PBOC guidance

Subsidiaries

Rmb mn Sub name AUM - 1H17 Trust rev - 1H17 Sub name AUM - 2016 AM rev - 2016 Sub name AUM - 2016 AM rev - 2016 Sub name AUM - 1H17 Rev - 1H17

Cinda Jingu Trust 110,312 190 Cinda Securities 71,255 270

Nanyang

Commercial

Bank

20,779 91Cinda

Investment187,100 140

Huarong Huarong Trust 315,942 737Huarong

Securities306,139 893

Huarong

Xiangjiang Bank18,767 na Huarong Yufu 71,860 621

New rule impact

BankTrust Broker Private fund

Less channel business (lower AUM) Less channel business (lower AUM)Less NSCA investment, so lower AUM, and lower

yieldLeverage & tranche restrictions


Capital & IFRS 9 impact

Divergent capital management between Cinda and Huarong

Capital management at Cinda and Huarong differ. Cinda runs a prudent capital

strategy and it replenished capital at different levels in 2016 by issuing a

private placement, preferred shares and a tier-2 bond. We believe Cinda will

focus more on organic capital generation going forward. Cinda’s CET-1 ratio

dipped to 10.6% in 1H17 due to the dividend payment (c.1ppt impact) and

Rmb3.6bn capital injection into Happy Life. In contrast, Huarong’s strategy is

grow first and get capital later. It maintained a thin buffer above minimum

capital requirement with aggressive balance sheet growth (12.9% CAR in 2016

and 13.9% in 1H17 vs. 12.5% required). Huarong issued an Rmb10bn tier-2

bond in June 2017 and plans to issue Rmb20bn overseas preferred shares and

an A-share IPO in 2018. Huarong currently ranks No.88 in the A-share IPO

queue, as shown on the CSRC website. In addition, we notice Huarong

continued to issue overseas perpetual bonds to lower group leverage

(Rmb27bn balance in 1H17, issuing a further US$700m in Nov 2017). We

summarize the leverage & capital ratios for Cinda and Huarong in below table.

Figure 22: Summary of leverage & capital ratios of Cinda and Huarong

Min. requirement

2016 1H17 2016 1H17

Leverage ratio - group 17.0% 16.5% 15.0% 14.2% 6.0%

Leverage ratio - company 16.9% 16.4% 11.0% 9.9% 6.0%

CAR - company 19.4% 17.2% 12.9% 13.9% 12.5%

Tier-1 ratio - company 16.4% 14.6% na 10.5-11.5% 10.0%

CET-1 ratio - company 11.9% 10.6% na 10.5-11.5% 9.0%

Cinda Huarong

Source: Deutsche Bank, company data Note: Leverage ratio = equity / interest bearing liabilities CET-1 ratio for Huarong is estimated number by DB (deducting subordinated bonds issued)

Unlisted DES assets – a potential capital boost under IFRS 9

IFRS 9 will be effective in the beginning of 2018 for banks, insurers and AMCs.

We think the new accounting method is net positive for AMCs due to fair value

15 December 2017

Banks

China AMCs


adjustment to unlisted DES portfolio, which may have a large boost to capital

ratio. Unlisted DES assets are currently recorded at historical acquisition cost

on balance sheet and will be re-evaluate using fair value approach under IFRS

9 based on our understanding. We estimate Cinda’s CET-1 ratio would be lifted

from 10.6% to 13.0% if we assume a 50% value appreciation of unlisted DES

book and further to 15.3% assuming 100% higher unlisted DES valuation.

Cinda historically recorded 2.5x DES exit multiple, i.e., 150% value

appreciation, so 50-100% assumption should be a conservative assumption, in

our view. We cannot do the same analysis for Huarong due to insufficient

data, but the capital boost should be smaller than for Cinda given the smaller

unlisted DES book. On the other hand, IFRS 9 may negatively impact the

provision expense from the expected loss perspective, the same way as banks,

but the magnitude should be relatively small.

Figure 23: Cinda has Rmb29.1bn unlisted DES assets

booked at historical cost

Figure 24: We estimate fair value adjustment (50%-

100%) to unlisted DES assets under IFRS 9 may boost

Cinda’s CET-1 ratio by 2.4%/4.7%

29.1

9.5

16.3

7.9

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Cinda Huarong

Rmb bn DES book value - unlisted DES book value - listed

45.5

17.5

10.6% 10.6%

2.4%4.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Assume 50% value appreciation for

unlisted DES

Assume 100% value appreciation for

unlisted DES

Rmb bn CET-1 ratio - 1H17 CET-1 boosted

13.0%

17.5

15.3%



Valuation and risks

Valuation

We adopt the sum-of-the-parts (SoTP) valuation methodology for Cinda and

Huarong given the different business models and risk profiles of the business

lines. For both companies, we assume an 11.8% COE for the TDA business

and a 15.6% COE for the RDA business, compared with the 11.5-14.0% COE

we assume for Chinese banks. We are raising our earnings forecasts for Cinda

and Huarong by 2-4% by factoring in 1H17 results. We lift our target price by

7% for Cinda and 12% for Huarong due to rolling over to 2018E.

For Cinda, our target price of HK$3.75 is equal to 0.90x 2018E P/B and

we have stripped out the premium paid in the NCB acquisition from

our valuation. The stock is currently trading at 0.67x 2018E P/B or

0.79x tangible P/B (vs. 18% return on tangible book), and 4.8x 2018E

P/E.

For Huarong, our target price of HK$3.90 is equal to 0.94x 2018E P/B.

The stock is currently trading at 0.86x 2018E P/B and 5.3x P/E.

15 December 2017

Banks

China AMCs


Sector risks Significant price correction in the property market in China given the

AMCs’ 30% direct/indirect balance sheet exposure to the property

sector, leading to asset quality deterioration and falling collateral

values

Weaker-than-expected distressed asset supply

Balance sheet risks relating to proprietary investment and shadow

credit

Stronger-than-expected competition from local AMCs and banks

driving down business volume and pricing.

Stock-specific risks Cinda: Key downside risks include: 1) large property market correction;

2) weaker-than-expected synergies with NCB; and 3) lower return on

proprietary investment.

Huarong: Key upside risks include: 1) better-than-expected asset

quality in RDA and shadow bank credit; and 2) less strict shadow

banking regulation. Key downside risks include: 1) delay of A-share

IPO and other capital raising plans; 2) balance risks in shadow bank

credit and HK subsidiaries; 3) worse-than-expected operating trend for

the bank subsidiary (Huarong Xiangjiang Bank), which would require a

capital injection from the group; and 4) credit rating downgrade to

push up funding cost.

15 December 2017

Banks

China AMCs


Figure 25: Valuation comparison of Cinda and Huarong with related listed financial peers

Ticker Name Rating TP Price Upside Market cap

LCY LCY USD m 17Y 18Y 17Y 18Y 17Y 18Y 17Y 18Y

China AMCs

1359 HK Equity China Cinda Buy 3.75 2.79 34.5% 13,642 5.35 4.83 0.73 0.67 5.6% 6.2% 14.29 14.61

2799 HK Equity China Huarong Hold 3.90 3.57 9.3% 17,870 5.49 5.28 0.94 0.86 5.5% 5.3% 18.29 17.16

Average 5.43 5.09 0.85 0.78 5.5% 5.7% 16.56 16.06

China banks

1398 HK Equity ICBC-H Buy 6.52 6.23 4.7% 309,408 6.59 6.28 0.90 0.82 4.6% 4.9% 14.32 13.62

939 HK Equity CCB-H Buy 7.68 6.98 10.0% 223,657 6.10 5.79 0.85 0.77 4.9% 5.2% 14.66 13.94

1288 HK Equity ABC-H Buy 4.10 3.66 12.0% 179,329 5.31 5.08 0.73 0.67 5.8% 6.1% 14.54 13.76

3988 HK Equity BOC-H Buy 4.78 3.81 25.5% 165,184 5.69 5.26 0.67 0.61 5.5% 6.0% 12.23 12.12

3328 HK Equity BCOM-H Buy 6.53 5.82 12.2% 63,547 5.43 5.18 0.59 0.54 5.5% 5.8% 11.36 10.95

3968 HK Equity CMB-H Hold 26.27 31.25 (15.9%) 107,597 9.64 8.46 1.48 1.31 3.1% 3.5% 16.23 16.40

998 HK Equity CITIC Bank-H Hold 4.67 4.93 (5.3%) 41,662 4.89 4.73 0.55 0.50 3.1% 3.2% 11.67 11.02

1988 HK Equity Minsheng-H Hold 7.80 7.80 0.0% 45,401 4.97 4.73 0.65 0.58 3.0% 3.2% 13.90 13.05

3618 HK Equity CRCB Hold 6.05 5.54 9.2% 6,970 4.89 4.51 0.72 0.64 4.1% 4.4% 15.66 15.01

3698 HK Equity Huishang Sell 3.14 3.83 (18.0%) 5,408 4.81 4.53 0.68 0.60 2.0% 2.2% 15.11 14.06

1963 HK Equity BOCQ Sell 5.65 6.16 (8.3%) 2,472 4.27 3.97 0.61 0.55 6.1% 6.5% 15.16 14.56

Average 6.34 5.96 0.86 0.77 4.2% 4.5% 14.10 13.49

Insurance

2628 HK Equity China Life - H Buy 33.20 24.35 36.3% 121,368 24.72 18.07 1.78 1.72 1.9% 2.1% 7.41 9.48

2601 HK Equity CPIC - H Buy 48.90 37.55 30.2% 53,466 21.71 18.67 2.11 1.95 2.6% 3.1% 10.04 10.86

1336 HK Equity NCI - H Buy 71.20 51.95 37.1% 26,924 24.45 19.40 2.20 2.00 1.3% 1.7% 9.40 10.81

966 HK Equity CTIH Buy 38.70 28.55 35.6% 13,123 18.28 15.51 1.57 1.43 0.5% 0.6% 9.00 9.66

1339 HK Equity PICC Group Hold 4.50 3.91 15.1% 21,089 9.17 10.00 1.02 1.08 0.9% 0.9% 11.80 11.39

2328 HK Equity PICC P&C Hold 18.00 14.96 20.3% 29,030 9.37 10.00 1.47 1.52 2.8% 3.2% 16.78 16.19

Average 20.85 16.67 1.79 1.71 1.9% 2.2% 9.60 10.79

Chinese brokers

6030 HK Equity CITICS- H Buy 21.10 15.94 32.4% 32,101 15.98 13.56 1.11 1.05 1.9% 2.2% 7.11 7.95

6837 HK Equity HTS- H Buy 17.30 11.24 53.9% 22,104 13.72 11.80 0.96 0.90 2.3% 2.7% 7.14 7.87

6881 HK Equity CGS Buy 8.70 5.62 54.8% 13,707 9.74 8.44 0.75 0.70 3.1% 3.6% 8.14 8.57

1776 HK Equity Guangfa - H Buy 21.30 15.68 35.8% 18,863 11.81 10.41 1.19 1.10 3.0% 3.4% 10.46 10.98

6886 HK Equity Huatai - H Buy 21.60 15.54 39.0% 19,022 16.85 14.28 1.04 0.99 2.1% 2.5% 6.86 7.13

Average 14.11 12.10 1.03 0.97 2.4% 2.7% 7.80 8.41

Financia l leas ing

5871 TT Equity Chailease Holding n.a. n.a. 85.60 n.a. 3,633 10.29 10.29 2.13 1.93 4.3% 4.8% 20.81 19.55

3360 HK Equity Far East Horizon Buy 8.80 6.76 30.2% 3,433 6.79 5.79 0.89 0.80 4.4% 5.2% 13.78 14.50

1848 HK Equity China Aircraft Leasing Group n.a. n.a. 7.83 n.a. 686 6.89 6.89 1.61 1.42 6.7% 7.1% 20.97 22.33

1606 HK Equity CDB Financial Leasing Hold 2.05 1.66 23.5% 2,673 9.14 7.43 0.76 0.72 4.9% 6.1% 8.47 9.91

2666 HK Equity Universal Medical Buy 9.40 7.40 27.0% 1,612 8.85 8.85 1.70 1.50 2.6% 3.3% 15.71 17.53

2588 HK Equity BOC Aviation Buy 49.00 40.35 21.4% 3,632 7.41 6.47 0.99 0.90 4.7% 5.4% 13.96 14.62

000415 CH Equity Bohai Leasing n.a. n.a. 5.83 n.a. 5,422 10.18 10.18 1.15 1.02 0.0% 0.0% 8.85 10.00

Average 8.83 8.29 1.26 1.13 3.3% 3.9% 13.46 14.14

Trust

600816 CH Equity Anxin Trust n.a. n.a. 13.37 n.a. 9,329 16.27 13.29 3.51 3.13 2.4% 2.9% 23.35 24.48

600643 CH Equity Shanghai Aj Corporation n.a. n.a. 12.60 n.a. 2,729 21.07 16.03 2.28 2.05 1.6% 2.0% 12.16 14.02

000563 CH Equity Shaanxi Intl Trust n.a. n.a. 4.49 n.a. 2,084 26.41 20.69 1.64 1.56 0.6% 0.7% 6.87 7.23

Average 18.69 14.91 3.00 2.69 1.9% 2.4% 18.76 19.92

Financia l ho ld ing group

2318 HK Equity Ping An Group Buy 106.10 79.00 34.3% 193,958 19.90 17.02 2.97 2.58 1.5% 1.8% 15.94 16.22

2882 TT Equity Cathay Financial Holding Buy 59.50 54.30 9.6% 22,322 12.60 13.08 1.23 1.22 3.2% 2.9% 8.40 8.68

2881 TT Equity Fubon Financial Holding Hold 56.00 50.70 10.5% 17,194 9.23 9.24 1.11 1.02 3.2% 3.2% 12.60 11.65

2891 TT Equity Ctbc Financial Holding Buy 23.00 20.65 11.4% 13,226 10.37 10.06 1.32 1.23 4.8% 5.0% 13.10 12.66

2886 TT Equity Mega Financial Holding Hold 26.20 23.60 11.0% 10,745 10.24 9.82 1.05 1.00 4.5% 4.7% 9.68 9.62

2880 TT Equity Hua Nan Financial Holdings n.a. n.a. 16.70 n.a. 6,131 13.62 12.87 1.10 1.09 3.9% 4.2% 8.40 9.05

2892 TT Equity First Financial Holding n.a. n.a. 19.35 n.a. 7,839 15.07 12.52 1.21 1.18 4.3% 5.6% 8.23 9.40

2885 TT Equity Yuanta Financial Holding n.a. n.a. 13.95 n.a. 5,475 11.05 9.94 0.80 0.77 3.6% 4.2% 7.30 7.96

2890 TT Equity Sinopac Financial Holdings n.a. n.a. 9.58 n.a. 3,518 12.38 11.04 0.75 0.72 3.4% 3.6% 6.32 6.91

2884 TT Equity E.Sun Financial Holding Hold 20.50 18.80 9.0% 6,349 11.72 11.69 1.26 1.17 2.4% 2.6% 10.70 10.88

2887 TT Equity Taishin Financial Holding n.a. n.a. 13.70 n.a. 4,526 10.91 10.43 1.09 1.00 3.4% 3.6% 9.45 9.51

2888 TT Equity Shin Kong Financial Holding n.a. n.a. 10.75 n.a. 3,614 10.28 10.59 0.81 0.73 1.6% 1.6% 8.59 7.64

Average 16.94 14.94 2.33 2.06 2.3% 2.5% 13.84 14.03

Alternative asset management

BX US Equity Blackstone Group n.a. n.a. 31.99 n.a. 38,402 11.42 10.40 5.70 5.25 8.2% 7.5% 26.22 na

KKR US Equity Kkr & Co n.a. n.a. 19.94 n.a. 16,520 8.15 8.26 1.42 1.31 3.3% 3.3% 19.11 16.70

APO US Equity Apollo Global Management n.a. n.a. 32.17 n.a. 13,157 10.95 10.81 10.05 6.31 5.9% 7.8% 39.60 40.40

CG US Equity Carlyle Group n.a. n.a. 22.50 n.a. 7,642 7.85 9.14 6.46 4.86 6.3% 8.0% 39.07 40.80

OAK US Equity Oaktree Capital Group n.a. n.a. 41.95 n.a. 6,556 11.00 11.47 3.06 3.03 7.2% 7.4% 27.18 30.03

FIG US Equity Fortress Investment n.a. n.a. 7.85 n.a. 3,051 6.89 10.06 na na 1.1% na na na

OZM US Equity Och-Ziff Capital n.a. n.a. 2.58 n.a. 1,354 4.75 7.27 na na 6.1% 7.2% na na

Average 10.12 9.96 5.12 4.19 6.4% 6.5% 26.77 15.18

Note: closing price of Dec 13,2017

PE Ratio PB Ratio Div idend Yield Return on Equity (%)

Source: Deutsche Bank estimates, Bloomberg Finance LP, WIND Note: Estimates for those companies not under our coverage are based on BBG

15 December 2017

Banks

China AMCs


Appendix 1

Important Disclosures

*Other information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

China Cinda 1359.HK 2.80 (HKD) 14 Dec 17 1,7,14,15

China Huarong 2799.HK 3.58 (CNY) 14 Dec 17 1,7 Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services.

Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Jacky Zuo

15 December 2017

Banks

China AMCs


Historical recommendations and target price: China Cinda (1359.HK) (as of 12/14/2017)

1

2

3 4

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

**Analyst is no longer at Deutsche Bank

1. 30/03/2016: Buy, Target Price Change HKD4.43 Hans Fan, CFA 3. 28/07/2017: Buy, Target Price Change HKD3.72 Jacky Zuo

2. 12/05/2017: Buy, Target Price Change HKD3.60 Jacky Zuo 4. 30/08/2017: Buy, Target Price Change HKD3.50 Jacky Zuo

Historical recommendations and target price: China Huarong (2799.HK) (as of 12/14/2017)

1

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

**Analyst is no longer at Deutsche Bank

1. 12/05/2017: Upgrade to Hold, Target Price Change CNY3.50 Jacky Zuo

15 December 2017

Banks

China AMCs


Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

56 %

33 %

11 %18 %17 % 13 %

0

100

200

300

400

500

600

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

15 December 2017

Banks

China AMCs


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denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the

investment. Past performance is not necessarily indicative of future results. Performance calculations exclude

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previous trading session and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is also

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respect to our research are available on our website under Disclaimer, found on the Legal tab.

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Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise

to pay fixed or variable interest rates. For an investor who is long fixed-rate instruments (thus receiving these cash

flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a

loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the

loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse

macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation

(including changes in assets holding limits for different types of investors), changes in tax policies, currency

convertibility (which may constrain currency conversion, repatriation of profits and/or liquidation of positions), and

settlement issues related to local clearing houses are also important risk factors. The sensitivity of fixed-income

instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX

depreciation, or to specified interest rates – these are common in emerging markets. The index fixings may – by

construction – lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of

the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons

indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. Funding in a currency

that differs from the currency in which coupons are denominated carries FX risk. Options on swaps (swaptions) the risks

typical to options in addition to the risks related to rates movements.

Derivative transactions involve numerous risks including market, counterparty default and illiquidity risk. The

appropriateness of these products for use by investors depends on the investors' own circumstances, including their tax

position, their regulatory environment and the nature of their other assets and liabilities; as such, investors should take

expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this

publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the

high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the

amount of funds initially deposited – up to theoretically unlimited losses. Trading in options involves risk and is not

suitable for all investors. Prior to buying or selling an option, investors must review the "Characteristics and Risks of

Standardized Options”, at http://www.optionsclearing.com/about/publications/character-risks.jsp. If you are unable to

access the website, please contact your Deutsche Bank representative for a copy of this important document.

Participants in foreign exchange transactions may incur risks arising from several factors, including: (i) exchange rates

can be volatile and are subject to large fluctuations; (ii) the value of currencies may be affected by numerous market

factors, including world and national economic, political and regulatory events, events in equity and debt markets and

changes in interest rates; and (iii) currencies may be subject to devaluation or government-imposed exchange controls,

which could affect the value of the currency. Investors in securities such as ADRs, whose values are affected by the

currency of an underlying security, effectively assume currency risk.

Deutsche Bank is not acting as a financial adviser, consultant or fiduciary to you or any of your agents with respect to

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receiving this directly from us, we ask that you inform us immediately.

Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the

investor's home jurisdiction. Aside from within this report, important risk and conflict disclosures can also be found at

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are strongly encouraged to review this information before investing.

United States: Approved and/or distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA and

SIPC. Analysts located outside of the United States are employed by non-US affiliates that are not subject to FINRA

regulations, including those regarding contacts with issuer companies.

Germany: Approved and/or distributed by Deutsche Bank AG, a joint stock corporation with limited liability incorporated

in the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorized under

15 December 2017

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German Banking Law and is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal

Financial Supervisory Authority.

United Kingdom: Approved and/or distributed by Deutsche Bank AG acting through its London Branch at Winchester

House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by the

Prudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and Financial

Conduct Authority. Details about the extent of our authorisation and regulation are available on request.

Hong Kong: Distributed by Deutsche Bank AG, Hong Kong Branch or Deutsche Securities Asia Limited.

India: Prepared by Deutsche Equities India Private Limited (DEIPL) having CIN: U65990MH2002PTC137431 and

registered office at 14th Floor, The Capital, C-70, G Block, Bandra Kurla Complex Mumbai (India) 400051. Tel: + 91 22

7180 4444. It is registered by the Securities and Exchange Board of India (SEBI) as a Stock broker bearing registration

nos.: NSE (Capital Market Segment) - INB231196834, NSE (F&O Segment) INF231196834, NSE (Currency Derivatives

Segment) INE231196834, BSE (Capital Market Segment) INB011196830; Merchant Banker bearing SEBI Registration

no.: INM000010833 and Research Analyst bearing SEBI Registration no.: INH000001741. DEIPL may have received

administrative warnings from the SEBI for breaches of Indian regulations. Deutsche Bank and/or its affiliate(s) may have

debt holdings or positions in the subject company. With regard to information on associates, please refer to the

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Japan: Approved and/or distributed by Deutsche Securities Inc.(DSI). Registration number - Registered as a financial

instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA,

Type II Financial Instruments Firms Association and The Financial Futures Association of Japan. Commissions and risks

involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by

multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to

losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional

losses stemming from foreign exchange fluctuations. We may also charge commissions and fees for certain categories

of investment advice, products and services. Recommended investment strategies, products and services carry the risk

of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in

market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the

relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in

this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the

name of the entity. Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank

Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are

not disclosed according to the Financial Instruments and Exchange Law of Japan. Target prices set by Deutsche Bank's

equity analysts are based on a 12-month forecast period..

Korea: Distributed by Deutsche Securities Korea Co.

South Africa: Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register

Number in South Africa: 1998/003298/10).

Singapore: This report is issued by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore

Branch (One Raffles Quay #18-00 South Tower Singapore 048583, +65 6423 8001), which may be contacted in respect

of any matters arising from, or in connection with, this report. Where this report is issued or promulgated by Deutsche

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Taiwan: Information on securities/investments that trade in Taiwan is for your reference only. Readers should

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written consent. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and

is not to be construed as a recommendation to trade in such securities/instruments. Deutsche Securities Asia Limited,

Taipei Branch may not execute transactions for clients in these securities/instruments.

15 December 2017

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Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre

Regulatory Authority. Deutsche Bank AG - QFC Branch may undertake only the financial services activities that fall

within the scope of its existing QFCRA license. Its principal place of business in the QFC: Qatar Financial Centre, Tower,

West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related

financial products or services are only available only to Business Customers, as defined by the Qatar Financial Centre

Regulatory Authority.

Russia: The information, interpretation and opinions submitted herein are not in the context of, and do not constitute,

any appraisal or evaluation activity requiring a license in the Russian Federation.

Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company (registered no. 07073-37) is regulated by the

Capital Market Authority. Deutsche Securities Saudi Arabia may undertake only the financial services activities that fall

within the scope of its existing CMA license. Its principal place of business in Saudi Arabia: King Fahad Road, Al Olaya

District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia.

United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated

by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may undertake only the financial services

activities that fall within the scope of its existing DFSA license. Its principal place of business in the DIFC: Dubai

International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been

distributed by Deutsche Bank AG. Related financial products or services are available only to Professional Clients, as

defined by the Dubai Financial Services Authority.

Australia: Retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product

referred to in this report and consider the PDS before making any decision about whether to acquire the product. Please

refer to Australia-specific research disclosures and related information at

https://australia.db.com/australia/content/research-information.html

Australia and New Zealand: This research is intended only for "wholesale clients" within the meaning of the Australian

Corporations Act and New Zealand Financial Advisors Act, respectively.

Additional information relative to securities, other financial products or issuers discussed in this report is available upon

request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent.

Copyright © 2017 Deutsche Bank AG

David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Global Chief Operating Officer

Research

Michael Spencer Head of APAC Research

Global Head of Economics

Steve Pollard Head of Americas Research

Global Head of Equity Research

Anthony Klarman Global Head of Debt Research

Paul Reynolds Head of EMEA

Equity Research

Dave Clark Head of APAC

Equity Research

Pam Finelli Global Head of

Equity Derivatives Research

Andreas Neubauer Head of Research - Germany

Spyros Mesomeris Global Head of Quantitative

and QIS Research

International locations

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Deutsche Bank Place

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Australia

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Mainzer Landstrasse 11-17

60329 Frankfurt am Main

Germany

Tel: (49) 69 910 00

Deutsche Bank AG

Filiale Hongkong

International Commerce Centre,

1 Austin Road West,Kowloon,

Hong Kong

Tel: (852) 2203 8888

Deutsche Securities Inc.

2-11-1 Nagatacho

Sanno Park Tower

Chiyoda-ku, Tokyo 100-6171

Japan

Tel: (81) 3 5156 6770

Deutsche Bank AG London

1 Great Winchester Street

London EC2N 2EQ

United Kingdom

Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc.

60 Wall Street

New York, NY 10005

United States of America

Tel: (1) 212 250 2500

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