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Distressed Asset Management Industry

Mar 31, 2017 Equity Research | Financials

This is a translation of a report originally written in Chinese. Please contact us for more information of the original report. The Chinese version shall prevail in the event of any discrepancy between the two versions.

Positive (initiation)

A booming industry with expanding market size

Wang Wen SFC CE No. BGL298 [email protected] +86 755 8826 1286 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong

Distressed asset management companies (AMCs) in China are categorized into the Big Four AMCs, local AMCs, and non-licensed AMCs. The Big Four AMCs are the dominant players in the industry, and local AMCs the latest policy beneficiaries. Licensed AMCs are regulated by the CBRC and MoF. The Big Four AMCs acquire distressed debt assets from both financial institutions and non-financial enterprises. The acquisition-and-disposal model used to be the mainstream business model for distressed debt asset management at the Big Four AMCs before their marketization. Once they were marketized, acquisition-and-restructuring became dominant at both China Cinda and China Huarong. However, with the sharp increase in distressed assets from financial institutions over the past two years, the proportion of new distressed debt asset acquisition costs attributable to the acquisition-and-disposal model has rebounded to ~40%. The acquisition-and-disposal model The Big Four AMCs acquire packages of distressed assets from financial institutions through public bidding or negotiated transfers. With an aim to maximize the recoverable value of distressed debt assets, they adopt a variety of methods to dispose of these assets. Main characteristics of the business include: 1) market space is expanding quickly as disposal remains consistently below distressed debt asset acquisition; 2) AMCs are maintaining stable IRRs by shortening disposal cycles as net disposal returns drop; 3) the IRR demonstrates counter-cyclical characteristics while the ROA appears to be pro-cyclical. The acquisition-and-restructuring business optimizes existing debt assets through restructuring, providing differentiated financial services for companies with temporary liquidity issues. It is in effect the provision of financing/lending to companies with a flawed credit profile. Main characteristics include: 1) monthly annualized returns declined to ~11% in 1H16, reflecting pro-cyclical characteristics; 2) the NIS is still quite high despite higher-than-banks credit cost, and asset growth is strong on high NIS and visible gains; 3) the business is property-sector-focused with fixed assets the preferred form of credit enhancement. Debt-to-equity swap The Big Four AMCs obtain DES assets primarily through debt-to-equity swaps, receipt of debt repayment with stock and follow-on equity investments; they then exit from these investments and realize profits through asset swaps, M&A, restructuring and stock listing. DES is the distressed asset management business with the highest return and longest disposal cycle, while there is only a small proportion of liquid assets in the business. Thriving industry with intensifying competition Both FI and NFE distressed assets have surged since 2013, providing support for a boom in the distressed asset management business. Recently the government has leant significantly towards more market-orientated industry operation, as is reflected by two major regulatory trends. First is the support for local AMC development by relaxing restrictions on business operations and the license quota, giving rise to competition with the Big Four AMCs. Second is the promotion of market-oriented DES business. While the Big Four AMCs’ competitive edge has been weakened, we believe that local AMCs’ business scale will still be much smaller than the Big Four AMCs amid a sufficient supply of distressed assets. Asset expansion bottleneck for Big Four AMCs, full-service operation key for future development Amid the currently strong supply of distressed debt assets, both China Cinda’s and China Huarong's capital adequacy ratios are approaching the minimum of 12.5%, hindering further asset expansion. The provision of a full spectrum of financial services will be the future of industry development as: 1) By establishing their own financial service platforms, the Big Four AMCs can reduce the cost of using external institutions and produce business synergy. 2) The fact that the business cycles of different financial service divisions do not move entirely in sync can help to smoothen profitability volatility and increase asset utilization efficiency. 3) It is now the Big Four AMCs’ developmental goal to become financial holding groups that provide high value-added financial services.

mailto:[email protected]

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Different types of distressed asset management companies in China There are mainly three types of distressed asset management companies (AMCs) in China: the Big Four AMCs, local AMCs, and non-licensed AMCs. The Big Four AMCs: China Huarong Asset Management, China Great Wall Asset Management,

China Orient Asset Management and China Cinda Asset Management were set up in 1999, each to accept, manage and dispose of distressed assets that had accumulated over the years at one of China’s big four state-owned banks, i.e. the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank respectively, as well as those at China Development Bank. In 2004, the Ministry of Finance issued a set of Administrative Measures for the Management of Risks Tied to Financial Asset Management Companies’

Business (《金融资产管理公司有关业务风险管理办法》), allowing the Big Four AMCs to make

additional investment in foreclosed assets, acquire distressed assets in a market-oriented manner, and offer custodian and agency services. This marked the beginning of a transition towards truly marketized diversified financial business operations at the Big Four AMCs. Since 2010, the four companies have become fully marketized, acquiring distressed assets through market-driven mechanisms such as bidding and assuming sole responsibility for its profits and losses from the disposal of assets. Their business scope now covers distressed assets from banks, non-bank financial institutions and non-financial institutions. In 2010, China Cinda took the lead in completing its joint-stock system reform, and the company became listed in Hong Kong in 2013. China Huarong completed its joint-stock system reform in 2012 and went public in Hong Kong in 2015. Both China Orient and China Great Wall were also converted into joint-stock financing institutions in 2016. Local AMCs: In 2012, the MoF and the CBRC issued the Administrative Measures for the Bulk

Transfer of Financial Enterprises’ Distressed Assets (《金融企业不良资产批量转让管理办法》),

allowing each provincial government to establish one local AMC or issue the license for one, which is required to have a minimum registered capital of Rmb1bn and is permitted to participate in the bulk acquisition and disposal of distressed assets from financial institutions within its own province. Furthermore, the central government has introduced a series of supportive policies for the distressed asset management industry since Oct 2016, including the permission for each provincial government to add one more local AMC (i.e. each now allowed to have up to two local AMCs) and the permission for local AMCs to dispose of distressed assets through debt restructuring and external transfer among other methods. Five local AMCs were granted a license

in Nov 2016. Among them, Everbright Jinou Asset Management Co., Ltd. (光大金瓯资产管理有限

公司) and Shanghai Win & Shengjia Asset Management Co., Ltd. (上海睿银盛嘉资产管理有限公

司) were added as the second local AMC in Zhejiang and Shanghai respectively. By the end of

2016, there were a total of 33 local AMCs across 27 provinces and municipalities. Non-licensed AMCs: As distressed asset disposal becomes a large market in recent years,

some foreign and private capital has also set foot in the distressed asset management business, acquiring and disposing of distressed assets from the Big Four AMCs, local AMCs or banks (without being able to participate in the bulk transfer of assets from financial institutions). Some non-licensed AMCs focus on investing in niche segments such as distressed assets in the property or small/micro loans space. In addition, following the issuance of the Guidelines on

Market-Oriented Debt-To-Equity Swaps at Banks (《关于市场化银行债权转股权的指导意见》) by

the State Council in Oct 2016, banks began to set up or make plans for setting up their own AMC subsidiaries with a focus on the debt-to-equity swap business.

Overall, the distressed asset management market is dominated by the Big Four AMCs. They are the main institutions that acquire and dispose of distressed assets thanks to their significant advantages in terms of business experience, capital strength and professional expertise. Meanwhile, as the beneficiaries of the latest policies, local AMCs are likely to thrive on an increasing number of licenses and the relaxation of restrictions on their business models. Besides, while not being able to benefit from an AMC license, non-licensed AMCs are popular among private and foreign capital as the distressed asset management market prospers and becomes more segmented.

Policy and regulatory documents Licensed AMCs are mainly regulated by the CBRC and the MoF. Industry-related policy and regulatory documents issued since 2012 are listed below.

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Document Key points Highlights

Quantity: 1 local AMC for

each province

Article 3:

1. In principle, each provincial government can establish or authorize the establishment of

just one local AMC

Minimum package size: 10

items

2. A local AMC can only participate in distressed assets bulk transfers within its own

province/municipality. Bulk transfer is the transaction where financial enterprises

transfer a package of distressed assets (comprising no less than 10 separate items) to

a targeted AMC

Disposal: Debt restructuring

only, no external transfer

allowed

3. Purchased distressed assets should be disposed of by means of debt restructuring

and should not be transferred by local AMCs

Capital requirements:

Five regulatory indicators are set: qualified capital, minimum capital, group consolidated

financial leverage ratio, asset company leverage ratio, and asset company liquidity ratio.

Among them:

The minimum capital for the Group is determined based on the calculation standards set

out by the Guidelines for the Consolidation of Financial Asset Management Companies .

The minimum capital for an AMC is calculated as 12.5% of its risk-weighted assets (OBS

assets included), where the weights are determined mainly based on the level of risks and

relevance to core business. The minimum capital for securities, insurance, trust and

leasing companies should be calculated in accordance with the regulatory requirements of

relevant regulatory bodies;

The leverage ratio of the Group and the asset company shall not be less than 6%;

The liquidity ratio of the asset company shall not be less than 15%.

Local AMCs shall meet the following prudent conditions:

1. Minimum paid-in registered capital of Rmb1bn

2. Having directors and senior management personnel with professional knowledge and

experience, as well as professional teams suitable for the bulk purchase and disposal of

distressed assets from financial enterprises

3. Having sound corporate governance, internal control and risk management systems

4. Having achieved solid operating results, continuously making profits over the past three

accounting years

5. Good credit quality, with no violations of any laws or regulations or any other bad records

over the past three years

1. The parent company and its subsidiary financial institutions shall meet the capital

requirements set out by their respective regulatory bodies. The Group/parent company's

capital adequacy ratio shall not be less than 12.5%.

2. Article 98: The parent company shall strengthen the prudent management of its

subsidiaries. Where the parent company holds a 20%-50% stake in a subsidiary and has

actual control of the latter, only the proportion of eligible capital in excess of the pro rata

capital requirement for the subsidiary may be used to cover the group/parent company's

own capital.

AMCs are required to acquire distressed assets from banking financial institutions at fair

market prices. They shall not enter any agreements with the transferor which might affect

the true and complete transfer of the assets and risks; they shall not set any explicit or

implicit repurchase terms, transfer interests in violation of regulations, or provide channels

for banking financial institutions to evade asset quality regulations

AMCs shall not acquire the performing assets of non-financial institutions

In the acquisition of distressed assets, AMCs shall not provide financing for enterprises or

projects by purchasing debt or assets that are yet to exist

1. Banks shall not directly convert debt into equity. Banks should first transfer the

creditor’s rights to an executing institution which will then convert the debt into equity

2. The government will not bail out in the case of any losses

3. Debt-to-equity swaps must not be carried out for "zombie enterprises"

4. The bank, enterprise and executing institution should determine the transfer of creditor's

rights, the prices and terms of the transfer with no external influence

5. Stock market trading prices are allowed to be used as reference in determining the debt-

to-equity swap pirces for listed SOEs; competitive market quotes or other fair prices are

allowed to be used as reference when determining the swap prices for unlisted SOEs

Administrative

Measures for the Bulk

Transfer of Financial

Enterprises' Distressed

Assets

《金融企业不良资产批量转让管理办法》MoF [2012] No.6

Notice on Local AM Cs'

Qualifications for

Distressed Asset Bulk

Acquisition and Disposal

《关于地方资产管理公司开展金融企业不良资产批量收购处置业务资质认可条件等有关问题的通知》

CBRC [2013] No. 45

Notice on the Issuance

of Off-Site Supervision

Report Standards for

Financial Asset

Management

Companies (Provisional)

《关于印发金融资产管理公司非现场监管报表指标体系（试行）的通知》

CBRC office [2012]

No.153

Minimum capital = risk-

weighted assets (including

OBS assets) * 12.5%

Leverage ratio: no less than

6%

Liquidity ratio: no less than

15%

Local AMCs are required to

have a minimum paid-in

registered capital of Rmb1bn

Notice on Regulating the

Acquisition of

Distressed Assets by

AMCs

《关于规范金融资产管理公司不良资产收购业务的

通知》CBRC [2016] No. 56

Channel business prohibited

The parent company shall

have a capital adequacy ratio

of no less than 12.5%

Rules related to the

replenishment of the group's

or parent company's capital

Regulatory Measures

for Financial Asset

Management

Companies

《金融资产管理公司监管办法》

CBRC [2014] No.41

Bank debt-to-equity swaps

should be realized through

executing institutions

Guidelines on Market-

Oriented Debt-to-Equity

Swaps at Banks

《关于市场化银行债权转股权的指导意见》

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Distressed asset management business overview based on listed AMCs Sources of distressed assets: The Big Four AMCs acquire distressed debt assets from both

financial institutions and non-financial enterprises through bidding, public auctions, blind auctions, and negotiations. Depending on their sources, distressed assets acquired by the AMCs can therefore be categorized into FI distressed assets from financial institutions and NFE distressed assets from non-financial enterprises.

FI distressed assets are mainly distressed loans and other distressed debt assets sold by large

commercial banks, joint-stock banks, urban and rural commercial banks and non-bank financial institutions. Before becoming fully marketized, each of the Big Four AMCs focused on accepting the distressed debt from their corresponding state-own bank. However, the proportion of distressed debt assets acquired from joint-stock banks has risen in recent years. NFE distressed assets In recent years, a large amount of distressed assets have come into

being in some of the non-financial industries during the course of economic restructuring and

industry consolidation, which mainly include overdue receivables, receivables expected to default

and receivables due from debtors with liquidity issues. Based on data from China Cinda (1359 HK) and China Huarong (2799 HK), NFE distressed assets increased rapidly during 2012-2015, contributing to more than 50% of newly acquired distressed debt.

Figure 1: Newly acquired distressed debt assets (Rmb m)

Sources: Company data, GF Securities (Hong Kong)

1. Each provincial government allowed to add one more local AMC

2. Local AMCs allowed to dispose of distressed assets by way of debt restructuring and

external transfer, with no geographical restrictions on the transferee

The CBRC also requires provincial governments to consider the following three factors

when adding local AMCs:

1. The local distressed debt balance is relatively high, with considerable pressure for the

disposal of distressed debt

2. Distressed assets grow rapidly with strong demand to trasfer distressed assets

3. The existing local AMC is operating normally and has played an active part

Administrative

Measures for the Bulk

Transfer of Financial

Enterprises' Distressed

Assets (new version)

新《金融企业不良资产批量转让管理办法》

Minimum package size: 3

itemsMinimum number of assets needed to make a pachage redcued from ten to three

Shaanxi Financial Asset Management Co., Ltd., Huarong Kunlun Qinghai Assets

Management Co., Ltd., Heilongjiang Castrol Longsheng Financial Asset Management Co.,

Ltd., Everbright Jinou Asset Management Co. Ltd., and Shanghai Win & Shengjia Asset

Management Co., Ltd. permitted to participate in the bulk transfer of distressed assets

within their respective province/municipality

Among them, Shanghai and Zhejiang have been approved to set up their second local

AMC

Notice on Announcement

of the List of Local AM Cs

in Shaanxi, Qinghai,

Heilongjiang, Zhejiang

and Shanghai

《关于公布陕西省、青海省、黑龙江省、浙江省、上海市地方资产管理公司

名单的通知》

Adjustments to Local

AMC Policies

《关于适当调整地方资产管理公司有关政策的函》

(Document No.1738)

Five local AMCs approved to

be set up, includign the

second local AMC for

Shanghai and Zhejiang

Quantity: up to 2 local AMCs

each province

Asset disposal: both debt

restructuring and external

transfer allowed

0

50,000

100,000

150,000

200,000

2010 2011 2012 2013 2014 2015 1H16

China Cinda

FI NFE

0

50,000

100,000

150,000

200,000

250,000

2012 2013 2014 2015 1H16

China Huarong

FI NFE

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Figure 2: FI distressed assets breakdown


In terms of business models, the Big Four AMCs have now established a business structure with traditional distressed asset acquisition, acquisition & restructuring, debt-to-equity swap, and custodian and agency services at the core. Based on China Huarong’s and China Cinda’s revenue breakdown, distressed debt asset management and debt-to-equity swap are their most important businesses. More specifically, distressed debt asset management consists of the acquisition-and-disposal business and the acquisition-and-restructuring business (for Cinda, distressed-asset-based special situations investments and property development are grouped under the investment and asset management business).

Figure 3: Distressed asset management revenue breakdown (1H16)

Source: Company data, GF Securities (Hong Kong)

Distressed debt asset management business The distressed debt asset management business is conducted following the acquisition-and-disposal model or the acquisition-and-restructuring model. Under the acquisition-and-

disposal model, an AMC acquires a distressed debt asset at a discount to the asset’s original carrying value, and enhances its value based on the classification of the asset; the AMC then makes a profit by selling the asset or collecting the debt by various means. Under the acquisition-and-restructuring model, the AMC, during the acquisition, decides upon a method to restructure the debt or asset based on the level of its risks, and then enters into a restructuring agreement with the debtor and related parties. The main differences between the two models are as follows.

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015 1H16

China Cinda

Large commercial banks Joint-stock commercial banks

Urban/rural commercial banks Other banks

Non-bank financial institutions

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 1H16

China Huarong

Large commercial banks Joint-stock commercial banks

Urban/rural commercial banks Other banks

Non-bank financial institutions

63%

26%

11%

China Cinda

Distressed debt assetmanagement

Debt-to-equity swap

Others

73%

1%

1% 7%

7%

11%

China Huarong Distressed debt assetmanagement

Debt-to-equity swap

Custody and agencyservices for distressedasset businessDistressed-asset-basedspecial situationsinvestmentsDistressed-asset-basedproperty development

Others

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Exhibit 4: Acquisition-and-disposal vs acquisition-and-restructuring

Source: Wind, GF Securities (Hong Kong)

Relative size of the two models The acquisition-and-disposal model used to be the mainstream

business model at the Big Four AMCs before their marketization. Once they were marketized, acquisition-and-restructuring became the dominant model for newly acquired distressed debt assets at both China Cinda and China Huarong. However, as the Big Four AMCs accelerated the pace of asset acquisition and disposal amid a sharp increase in distressed assets from financial institutions over the past two years and the diversification of downstream AMCs (e.g. local and non-licensed AMCs), the proportion of new distressed debt asset acquisition costs attributable to the acquisition-and-disposal model has rebounded to ~40%.

Figure 5: Acquisition costs of newly added distressed assets, acquisition-and-disposal vs acquisition-and-restructuring


The acquisition-and-disposal model

As the major players in the primary market for distressed debt assets, the Big Four AMCs acquire packages of distressed assets from financial institutions through public bidding or negotiated transfers. With an aim to maximize the recoverable value of distressed debt assets, they adopt a variety of methods to dispose of these assets, which include: short-term operations, asset restructuring, debt-to-equity swap, individual transfer, packaged transfer, discounted repayment by debtors, bankruptcy, liquidation, collection through litigation, repayment in kind, and debt restructuring. The core competitiveness of the acquisition-and-disposal business lies in an AMC’s acquisition pricing power and asset disposal capabilities. Based on data from China Cinda and China Huarong, the distressed debt asset acquisition-and-disposal business has demonstrated the following characteristics in recent years. 1) Market space expanding quickly as disposal remains consistently below distressed debt asset acquisition Prior to 2012, the cost of distressed debt asset acquisition and the gross

amount of distressed debt asset disposal were roughly the same at China Cinda and China Huarong. After 2013, however, the size of the distressed asset disposal market had grown amid the economic downturn, with Cinda and Huarong recording a significant increase in the cost of distressed debt asset acquisition. The gross amount of distressed debt asset disposal did not start to pick up considerably until mid-2015, and has remained lower than the amount of newly acquired distressed debt assets in the same period. This means the pace at which distressed debt

Source of acquired

assetChanges in legal relationships Profit-making model

Acquisition-

and-disposal

Primarily from

financial

institutions

All elements of the original creditor-debtor

relationship remain unchanged, except that

of the creditor

Price spread between the acquisition

cost and disposal proceed for the

distressed asset

Acquisition-

and-

restructuring

Both from

financial

institutions and

NFEs

New contractual rights and obligations

established through a three-party

agreement between the AMC, the orignial

creditor and the debtor

Restructuring income and date of

payment set in restructuring

agreement

100%

23%6%

14% 21%

51%41%

77%94% 86% 79%

49%59%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015 1H16

China Cinda

Acquisition-and-disposal Acquisition-and-restructuring

6% 12% 14%26%

44%

94% 88% 86%74%

56%

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 1H16

China Huarong

Acquisition-and-disposal Acquisition-and-restructuring

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assets are disposed of has lagged that of their acquisition, and that the earnings growth of the business has been achieved mainly through increasing input in asset acquisition. The regulatory requirement for a minimum net capital ratio of 12.5% has been a bottleneck for business growth at the Big Four AMCs. In view of this, China Cinda significantly reduced its cost of distressed debt asset acquisition in 1H16, whereas China Huarong has expanded its business even more aggressively.

Figure 6: Disposal consistently lower than newly acquired distressed debt assets (Rmb m)


2) AMCs maintaining stable IRR by shortening disposal cycles as net disposal returns drop

The disposal IRR is the discount rate that makes the net present value of all cash flows from acquisition-and-disposal projects completed in a given period equal to zero. Meanwhile, the net return on disposal is calculated as, in China Cinda’s case, “(net gains from acquisition-and-disposal distressed debt assets - unrealized fair value changes) / cost of distressed debt assets”, or, in China Huarong’s case, “realized disposal gains from distressed debt assets / gross value of distressed debt assets disposed of”. The main difference between the IRR and the net return is that time cost is factored in in the former but not the latter. Net disposal returns have plunged since 2011, dropping from 145.5% in 2011 to 6.6% in 1H16 for China Cinda, and down from 26.4% in 2012 to 3.2% in 1H16 for China Huarong. That said, the disposal IRR (which captures time cost) has remained stable for both companies, staying in the range of 15%-20% from 2012 to 1H16, which has been achieved mainly by shortening the disposal cycle. By using the equation (1 + IRR) n = 1 + net disposal return (where n = disposal cycle), we can roughly calculate the changes in the disposal cycle at the two listed AMCs. Cinda’s disposal cycle shortened from 4.24 years in 2013 to 0.42 years in 1H16, while Huarong’s shortened from 1.71 years in 2012 to 0.21 years in 1H16. Shorter disposal cycles can not only help maintain a relatively stable IRR for the acquisition-and-disposal business amid declining net disposal returns, but it also means the Big Four AMCs can benefit from the existence of other types of AMCs, as they can now transfer relatively tricky projects to other AMCs quickly after a preliminary review of the value of the asset packages. Another explanation for the relatively stable IRR might be that policy-driven distressed debt assets acquired at low costs before the Big Four AMCs were marketized have generated high returns over the past few years. However, this explanation cannot be widely applicable: in China Cinda’s case, a disposal cycle of 4.24 years in 2013 meant that most of the disposable assets were acquired around 2009, but the company has not acquired any policy-driven distressed debt assets since 2000.

0

20,000

40,000

60,000

80,000

100,000

2010 2011 2012 2013 2014 1H15 2015 1H16

China Cinda

Acquisition cost of newly added distressed debt assets

Gross amount of distressed debt assets disposed of

0

20,000

40,000

60,000

80,000

100,000

2012 2013 2014 1H15 2015 1H16

China Huarong

Acquisition cost of newly added distressed debt assets

Gross amount of distressed debt assets disposed of

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Sector report

Figure 7: Net disposal return Figure 8: Disposal IRR


3) Counter-cyclical IRR vs pro-cyclical ROA The distressed asset disposal industry is generally

perceived to a counter-cyclical industry, given that the supply of distressed debt assets tend to increase with greater acquisition discounts amid an economic downturn, leading to increased opportunities for the acquisition-and-disposal business. However, only during an economic upcycle when the price of distressed asset disposal rises, can disposal profits be maximized, which still shows pro-cyclical characteristics. While Cinda and Huarong have achieved relatively stable IRRs by accelerating the disposal cycle, the ROA of the acquisition-and-disposal business is still decreased in a weakening economy if the substantially increased input in acquiring new distressed debt assets is considered (ROA = net disposal gains/average net amount of distressed debt assets).

Figure 9: Distressed asset disposal cycle (years) Figure 10: ROA of acquisition-and-disposal business


The acquisition-and-restructuring model

The acquisition-and-restructuring business optimizes existing debt assets through restructuring, providing differentiated financial services for companies with temporary liquidity issues. It seeks to discover and enhance asset value by re-pricing credit risk, redeploying distressed debt assets with going-concern value, restoring the debtor’s corporate credit profile, and assessing the price and operational value of the debtor’s core assets. The revenue from the business comprises restructuring gains and asset appreciation gains, as well as financial advisory fees. It is in effect a business that provides financing/lending services to companies with a flawed credit profile (or those with sound asset quality but unable to gain access to normal financing due to regulatory reasons, such as property companies). The ability to discover, reassess and enhance overall debt asset value is key to the business.

26.4% 23.2%

9.9%

11.8%4.2% 3.2%

123.9%

145.5%

112.5% 111.3%

62.1%

16.7%8.1% 6.6%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2010 2011 2012 2013 2014 1H15 2015 1H16

China Huarong China Cinda

14.7%

15.7% 16.0%

17.0%

20.2%

16.2%

19.30%18.6%

19.2%

20.4%

16.2%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

2012 2013 2014 1H15 2015 1H16


1.711.43

0.64 0.710.22 0.21

4.24

2.83

0.88

0.42 0.42

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

2012 2013 2014 1H15 2015 1H16


8% 9%6%

4% 2%

67%61%

50%

37%

14%

7%1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2010 2011 2012 2013 2014 2015 1H16


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Sector report

Based on data from China Cinda and China Huarong, the acquisition-and-restructuring business has demonstrated the following characteristics in recent years: 1) Monthly annualized returns declining to ~11% in 1H16, reflecting pro-cyclical characteristics The decline in the return on distressed debt assets under the acquisition-and-

restructuring model was mainly due to the combined effect of the economic downturn and falling interest rates. As a de facto financing/lending provision business, its revenue (except financial advisory fees) is mainly driven by market interest rates and customers’ risk premiums. During the latest economic downturn, the Big Four AMCs have adopted a more prudent business strategy in their selection of customers and projects. Meanwhile, the bargaining power of quality customers has also increased amid such a market environment. The monthly annualized return on distressed debt assets under the acquisition-and-restructuring model declined to ~11% in 1H16, though the pace of decline was much slower than the ROA decline in the acquisition-and-disposal business.

Figure 11: Monthly annualized return on acquisition-and-restructuring distressed assets

Figure 12: Total amount of acquisition-and-restructuring distressed assets (Rmb bn)


2) NIS still quite high despite higher-than-banks credit cost; strong asset growth on high NIS and visible gains Cinda and Huarong have maintained relative stable ratios of distressed

asset impairment provisions over the past two years. Based on our estimates (credit cost = distressed debt asset impairment losses / average amount of distressed debt assets under the acquisition-and-restructuring model), the credit costs of Cinda and Huarong are higher than the average level at commercial banks, in line with the level of risks associated with the acquisition-and-restructuring business (unusually low data in 1H16 were probably due to impairment losses mostly being recognized towards year-end). That said, deducting the credit cost and 5% cost of funds from the restructuring return, AMCs still manage to earn a 3.5-5% NIS. In addition, acquisition-and-restructuring gains are more visible compared with the acquisition-and-disposal model. As such, the gross amount of distressed debt assets under the acquisition-and-restructuring model has increased rapidly given higher NIS and more visible gains. However, it is worth noting that the NIS, which is dependent on the restructuring return, credit cost and cost of funds, has narrowed in recent years, a trend which is mirrored by a slowdown in the growth of acquisition-and-restructuring distressed debt assets over the past two years.

17.2%16.0%

13.5%12.2%

11.2% 11.7%10.6%

19.4%17.9%

13.1% 12.9% 12.5% 11.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2011 2012 2013 2014 1H15 2015 1H16

China Cinda China Huarong

49

99

167 156168

148

55

92

169

212222

236

0

50

100

150

200

250

2012 2013 2014 1H15 2015 1H16


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Sector report

Figure 13: Impairment ratio of acquisition-and-restructuring distressed assets

Figure 14: Credit cost of acquisition-and-restructuring distressed assets


3) Property-sector-focused with fixed assets preferred form of credit enhancement Based

on Huarong’s data, the proportion of to-be-restructured distressed debtors from the property sector has declined in recent years, but remained above 60% in 1H16. The high proportion is partly due to the fact that property companies are forced to seek alternative financing channels as lending supply for the sector has long been restricted by policies. In addition, properties have proven to be highly effective in preserving and enhancing value as a collateral. The rising debt-to-collateral ratio of distressed assets in the acquisition-and-restructuring business reflects the Big Four AMCs’ preference for fixed assets.

Figure 15: Sector breakdown of China Huarong’s acquisition-and-restructuring distressed debtors

Figure 16: Debt-to-collateral ratio of acquisition-and-restructuring distressed assets at China Huarong


Debt-to-equity swap

The Big Four AMCs obtain DES assets primarily through debt-to-equity swaps, receipt of debt repayment with stock and follow-on equity investments; they then exit from these investments and realize profits through asset swaps, M&A, restructuring and stock listing. The revenue of the business mainly comes from equity disposal income, dividend income, financial service income, restructuring income (equity swaps) and follow-on investment gains. DES assets acquired from the MoF at low costs make up the bulk of the Big Four AMCs’ DES asset pool.

0.8%

1.2%

1.0%1.2% 1.52%

1.78% 1.82%

0.90%

2.70%

1.60% 1.60%

1.50%1.70%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2011 2012 2013 2014 1H15 2015 1H16


0.2%

5.0%

2.0% 2.1%

1.0%

0.1%

4.6%

4.6%

3.3%

4.1%

0.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2011 2012 2013 2014 2015 1H16


75.7%67.2% 62.6% 65.8% 61.2%

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 1H16

Property Manufacturing Construction Services

Infrastructure Mining Transportation Others

30.2%30.7%

35.7%

34.2%

36.2%35.8%

27.0%

28.0%

29.0%

30.0%

31.0%

32.0%

33.0%

34.0%

35.0%

36.0%

37.0%

2012 2013 2014 1H15 2015 1H16

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Sector report

Distressed asset management business with the highest return… Based on the formula for calculating the exit multiple (exit multiple = [net gains on DES assets disposed of + corresponding acquisition cost of DES assets] / corresponding acquisition cost of DES assets), the following can be derived: exit net return = (exit multiple - 1)*100%. A DES asset net return range of 90-420% at Cinda and Huarong makes DES asset management the most profitable distressed asset management business. …and longest disposal cycle The majority of DES assets at the Big Four AMCs had been

converted from distressed debt assets acquired from large and medium SOEs before the AMCs were turned into joint-stock companies, which means most of the DES assets disposed of by the Big Four AMCs have been in their possession for at least a decade. Except in 2013 when there was a liquidity crunch, the number of DES companies disposed of by China Cinda and China Huarong each year has accounted for less than 20% of the total number of companies in their existing DES asset pool; the same proportion calculated in terms of the amount of assets has also been lower than 20% in general. This means it will take at least five years for the Big Four AMCs to completely dispose of all the existing DES assets in their possession with reasonable returns.

Figure 17: High exit multiples for DES business Figure 18: Proportion of DES assets disposed of


A small proportion of liquid assets It is worth noting that time cost and realization cost are not

reflected in the calculation of the exit multiple and net return on DES assets. Listed shares are the most highly valued and liquid of DES assets given the existence of a liquid secondary market and easily accessible fair value information. However, listed companies represent just a small proportion of companies in the Big Four AMCs’ DES asset pool: below 15% at Huarong and Cinda. In addition, considering that most of the Big Four AMC's DES assets had been transferred from the MoF with many of these SOEs being key beneficiaries of government support, and considering that these assets have been under the AMCs’ management for more than a decade, only a very small proportion of these DES assets are likely to eventually become listed.

Figure 19: DES asset classification, listed vs unlisted (No. of companies)


2.3 2.2

2.7

1.9

2.13.0

2.7

3.82.9

5.2

1.9

3.33.7 3.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013 2014 1H15 2015 1H16


0%

10%

20%

30%

40%

50%

2010 2011 2012 2013 2014 2015 1H16

Cinda: (cost of DES assets disposed of + net gains)/gross DES assets

Huarong: (cost of DES assets disposed of + net gains)/gross DES assets

Cinda: No. of DES co. disposed of/total No. of DES co.

Huarong: No. of DES co. disposed of/total No. of DES co.

10%

26%27%

12%8%

9%10% 11%

0

50

100

150

200

250

300

2010 2011 2012 2013 2014 1H15 2015 1H16

China Cinda

Unlisted Listed

11%16%

14% 12% 13% 13%

0

50

100

150

200

250

300

2012 2013 2014 1H15 2015 1H16

China Huarong

Unlisted Listed

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Sector report

As of the end of June 2015, Huarong had DES assets worth Rmb26.6bn from 221 companies. By asset value, industrial companies accounted for the largest proportion of assets (56%), followed by materials (23%), energy (7%) and information technology companies (5%). As of the end of June 2013, Cinda had on its book Rmb43.65bn worth of DES assets from 249 companies. Coal companies accounted for the largest proportion of 61.5%, followed by chemical (16.2%) and metal companies (9.1%). 13 of the top 20 unlisted companies with the largest amount of DES assets on Cinda’s book were coal companies, which accounted for 81% of the total DES asset acquisition cost for these 20 companies. Overall, through DES asset management Cinda had equity interests in 21 of the top 50 largest coal companies by output in China in 2011, and it has benefited significantly from the upcycle of resource prices.

Figure 20: DES asset sector breakdown (China Cinda, as of end-June 2013)

Figure 21: DES asset sector breakdown (China Huarong, as of end-June 2015)


Thriving industry with intensifying competition

Expanding market space

Both FI and NFE distressed assets have surged since 2013, providing support for a boom in the distressed asset management business. FI distressed asset acquisition As commercial banks write off or package transfer distressed

debts that are unable or difficult to be recovered each year, the actual increase in commercial banks’ total NPLs is the sum of newly added NPLs as disclosed by the banks and NPLs disposed of or written off during the year. For distressed loans that are difficult to be collected, a commercial bank can choose to transfer them to an AMC through public bidding or negotiated batch transfer, of which the latter is currently the prevalent channel. Since 2014, with the deterioration of asset quality, commercial banks have stepped up the transfer of distressed assets off their balance sheets, resulting in an actual NPL ratio that is much higher than the reported figure. Accordingly, the acquisition costs of newly added FI distressed debt assets at the Big Four AMC’s increased significantly in 2015, and continued to rise in 1H16. Cinda and Huarong acquired FI distressed debt assets with a combined value of Rmb158.4bn during 2015, up 58% YoY. Full-year FI distressed asset acquisition would have grown 42% YoY in 2016 if the amount of acquisition in 1H16 was maintained in 2H16. Based on 2016 data from commercial banks, the proportion of “special-mention” loans came down in 4Q16 but remained high, and these loans will subsequently turn into NPLs. As such, the supply of distressed assets from banks is expected to remain high in 2017. NFE distressed assets mainly come from enterprises’ receivables. Net receivables in China

have continued to increase as the economy grows. That said, amid ongoing industrial restructuring and upgrade, receivable growth has mainly been driven by slower receivable turnover, which has led to strengthening demand among companies to revitalize their assets and restructure their debt. Cinda and Huarong collectively acquired NFE distressed debt assets worth Rmb233.3bn during 2015, a figure which has grown at a three-year CAGR of 94%. Meanwhile, net receivables at industrial companies in China have continued to increase, up 10% YoY to

62%16%

9%

13%

Coal

Chemical

Metal

Others56%

23%

7%

5%

9%

Manufacturing

Raw materials

Energy

IT

Others

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Sector report

Rmb12.6trn at the end of 2016. Continuously growing receivables will give rise to a large supply of distressed debt, providing room for the development of the distressed debt asset management business.

Figure 22: Acquisition cost of newly added FI distressed debt assets (Rmb m)

Figure 23: Acquisition cost of newly added NFE distressed debt assets (Rmb m)


Figure 24: NPL ratios become much higher with write-offs and OBS transfers added back (end-2015)

Figure 25: Net receivables from industrial companies continue to rise


Industry becoming increasingly market-oriented Previously the distressed asset management business has been highly policy-driven. Over the years, the Big Four AMCs have accumulated relevant business experience by accepting distressed assets at cheap prices from their designated state-owned banks, and have benefited greatly from preferential policy and licensing treatments amid an economic upcycle. However, recently the government has leant significantly towards more market-orientated industry operation. This is reflected in two major regulatory trends. First is the support for local AMC development

by relaxing restrictions on business operations and the quota of licenses, giving rise to competition with the Big Four AMCs. New policies issued in 2016 allow each provincial government to set up or authorize the establishment of up to two local AMCs, while local AMCs are now allowed to conduct both acquisition-and-restructuring and acquisition-and-disposal businesses (the latter of which used to be prohibited); the minimum number of items in a package of distressed assets for transfer has also been lowered from ten to three, effectively enabling local AMCs with less capital strength to participate in the bidding for distressed asset packages.

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2012 2013 2014 2015 1H16


0

50,000

100,000

150,000

200,000

250,000

2012 2013 2014 2015 1H16


1.5% 1.6% 1.7% 1.6% 1.6%

0.8%

2.0%

2.5%

3.0%2.6%

2.3%1.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

ICBC601398

CH1398 HK

CCB601939

CH939 HK

CMB600036

CH3968 HK

CMBC600016

CH1988 HK

SPDB600000

CH

BoNJ601009

CH

Reported NPL ratio

NPL ratio with write-offs & OBS transfers added back

0%

5%

10%

15%

20%

25%

30%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,0002

000

20

012

002

20

032

004

20

052

006

20

072

008

20

092

010

20

112

012

20

132

014

20

152

016

Rm

b b

n

Net receivables from industrial companies YoY

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Sector report

The second regulatory change is the promotion of market-oriented DES business. Previously

DES transactions were entirely orchestrated by the government, while the Big Four AMCs had little say in company selection and asset pricing. In the Guidelines on Market-Oriented Debt-to-

Equity Swaps at Banks (《关于市场化银行债权转股权的指导意见》) issued in 2016, marketization

was identified as a guiding principle for the DES business, under which the bank, debtor company and executing institution should determine the transfer of creditor's rights, the prices and terms of the transfer through negotiation with no external influence, while the government will not bail out in the case of any losses. In addition, in view of the potentially high returns of the DES business, several state-owned banks and joint-stock banks have shown interests in setting up fully or partially owned subsidiaries to participate in the business. CCB took the lead by launching the first market-driven DES project ever launched by a bank. At the early stage of their development, AMCs (DES executing institutions) established by banks might focus on DES projects coming from their parent banks due to personnel and capital constraints. However, as part of large banks’ diversified financial service platforms, bank-affiliated AMCs will inevitably set foot in a broader scope of distressed asset management businesses in the long run, and might eventually become important players in the industry. Local AMCs’ business scale much smaller than Big Four AMCs despite policy support So

far there are 32 local AMCs officially in operation, including 28 provincial AMCs and four municipal AMCs. Every province in China now has a local AMC of their own except Xinjiang, Guizhou, Hainan and Yunnan. Most of these local AMCs are predominantly owned by local state-owned capital such as local fiscal bureaus, local SOEs and local financial holding groups, though private-sector shareholders, listed companies, the Big Four AMCs and other financial institutions are also found among quite a few local AMCs’ shareholders. The 32 local AMCs have a combined registered capital of Rmb71.6bn, equivalent to an average of Rmb2.2bn for each. Based on the 12.5% minimum capital adequacy requirement, these existing local AMCs together can accept distressed assets worth up to Rmb573.2bn. Assuming another 28 local AMCs are added under the relaxed policy with each to have registered capital at the minimum threshold of Rmb1bn, the total distressed asset undertaking capacity of local AMCs could thus be increased by Rmb224bn; the additional distressed asset acquisition capacity would increase to Rmb492.8bn if we assume that the new AMCs had an average registered capital of Rmb2.2bn. Meanwhile, China Cinda and China Huarong reported equity of Rmb104.3bn and Rmb108bn respectively at mid-2016, translating into a combined maximum distressed asset acquisition capacity of Rmb1.7trn under the 12.5% capital adequacy requirement. Assuming that the yet-to-be-listed China Orient and China Great Wall each had equity of Rmb80bn, meaning maximum capacity of Rmb640bn each, the total distressed asset acquisition capacity of the Big Four AMCs can be estimated at around Rmb3trn at mid-2016. In this simple estimation, it should be noted that the newly established local AMCs are unlikely to be brought into operation at fully capacity immediately, while there are also likely to be fewer of them than estimated. In addition, the Big Four AMCs’ upcoming financing plans have not been taken into consideration: China Huarong’s plan for an A-share listing was accepted by the CSRC for review in Dec 2016, while China Great Wall and China Orient have also finished their joint-stock system reform and are actively seeking listing. In a bull case scenario, the combined distressed asset acquisition capacity of local AMCs might be equal to the average of the Big Four AMCs. As such, while the Big Four AMCs’ competitive edge has been weakened, we believe that local AMCs’ business scale will still be much smaller than the Big Four AMCs amid a sufficient supply of distressed assets.

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Sector report

Figure 26: AMC industry size estimates

Source: Wind, GF Securities (Hong Kong)

Big Four AMCs facing asset expansion bottleneck, full-service operation key for future development Asset expansion bottleneck for Big Four AMCs Both the acquisition-and-disposal and DES

businesses involve purchasing and holding assets for value appreciation, while the acquisition-and-restructuring business can essentially be seen as the provision of financing/lending to enterprises with less convincing credit profiles. All three are asset-heavy businesses with revenue growth dependent upon asset expansion and are subject to net capital restrictions under the 12.5% minimum capital adequacy requirement. Amid the currently strong supply of distressed debt assets, both China Cinda’s and China Huarong's capital adequacy ratios are approaching 12.5%, meaning their current pace of asset expansion might not be sustainable at their existing capital levels. In response to this situation, China Huarong is actively seeking A-share listing, and as are China Orient and China Great Wall. In addition, China Cinda has freed up some capital by transferring a 41% stake in Cinda P&C Insurance. Big Four AMCs as full-service financial firms

The Big Four AMCs have all turned themselves into full-service financial firms covering banking, securities, trust, fund management, financial leasing and insurance businesses. Thus, financial services and investment & asset management have become two other key business segments for the Big Four AMCs alongside distressed asset management. We see the following benefits of a full-service operation.

First, the management and operation of distressed assets typically require coordinated services from different financial institutions. By establishing their own financial service platforms, the Big Four AMCs can reduce operating costs originating from using external institutions’ services and produce business synergy. For example, an AMC’s banking division can serve as its account management and cross-selling platform, helping to expand its distribution channels; an investment banking function can enhance its distressed asset pricing ability, and provide financial, restructuring, M&A and listing advisory for distressed debtors under the acquisition-and-restructuring model. Second, the fact that the business cycles of different financial service divisions do not move entirely in sync can help to smoothen the profitability volatility in the distressed asset management business and increase asset utilization efficiency. For example, China Huarong recorded annualized average pre-tax ROE of 26.3%, 23.6% and 20.6% from its distressed asset management, financial service, and investment & asset management segments respectively in 2014 (annualized average pre-tax ROE = annualized pre-tax profit / average of beginning and ending net asset balances); in 2015, the percentages changed to 20.2%, 25.1% and 23.4%

respectively. For both distressed asset management under the acquisition-and-disposal model and the DES business, AMCs mostly realize profits when asset prices are high. However, it is also more costly to acquire new distressed assets at such times. If the funds recovered from the asset disposal are instead allocated to other business divisions (e.g. banking, leasing, other investments), a better overall return might be achieved.

Registered capital (Rmb bn)Maximum distressed asset

acquisition capacity (Rmb bn)

Total acquisition capacity

- local AMCs (Rmb trn)

32 existing local AMCs 71.6 572.8

28 local AMCs to be set up

Min registered capital Rmb 1bn 28 224 0.8

Avg registered capital Rmb2.2bn 61.6 492.8 1.1

Total acquisition capacity

- Big Four AMCs (Rmb trn)

China Huarong 108 864

China Cinda 104 835

China Orient 80 640

China Great Wall 80 640 3.0

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Sector report

Third, it is now the Big Four AMCs’ developmental goal to become financial holding groups that provide high value-added financial services. Previously the Big Four AMCs’ profitability had mainly derived from the monopolistic market position brought by their business licenses. However, with the marketization of the distressed asset management business, intensified competition will continue to eat into the industry profit margin. As a response, the Big Four AMCs can maintain their market dominance by providing high value-added services relying on their extensive professional expertise and leading technical skills.

Figure 27: Asset expansion hindered by net capital restrictions Figure 28: China Huarong’s segment annualized average pre-tax ROE


12.50%

13.70% 13.45% 13.58%14.75% 13.71%

20.96% 21.58%

18.08%

16.11% 15.63%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2012 2013 2014 2015 1H16


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2012 2013 2014 1H15 2015 1H16

Distressed asset management Financial services

Asset management & investment

Mar 31, 2017

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Sector report

Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months

Company ratings

Buy Stock expected to outperform benchmark by more than 15%

Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15%

Hold Expected stock relative performance ranges between -5% and 5%

Underperform Stock expected to underperform benchmark by more than 5%

Sector ratings

Positive Sector expected to outperform benchmark by more than 10%

Neutral Expected sector relative performance ranges between -10% and 10%

Cautious Sector expected to underperform benchmark by more than 10%

Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report.

Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited (“GF Securities (Hong Kong)”) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report.

Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness of the information contained in the research report. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the report. Copyright © GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. © GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk

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