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					Company Research | HK & China
Credit China (8207.HK)

April 27, 2012

Credit China(8207.HK)
BUY | Share price: HK$0.99 | Target price: HK$1.17 | Upside: +18%

Rapid business expansion and strong credit demand to drive growth

Investment highlights                                                                                Analyst

                                                                                                     NG Wai
 2011 results benefited from strong bargaining power. Credit China posted                           +852 2899 8300
    high growth in 2011 due to monetary tightening and growing capital demand                        SFC CE No.: ANI759

    from SMEs in China. The company’s annual turnover and net profit soared
    125% and 171% y-o-y to RMB259 million and RMB142 million, respectively.
                                                                                                     Price performance as against HSI
 Pooling resources to concentrate on loan services. The company
                                                                                                        2.0                                      26,000
    disposed of 65% equity interest in its finance lease operations in November                                                                  24,000
    2011 to raise capital for its mortgage loan business, and expanded                                                                           22,000
    geographically into Chongqing through its indirect 85%-owned subsidiary,                                                                     20,000
                                                                                                        0.5                                      18,000
    namely Chongqing Liangjiang New Area Run Tong Small Loan Business
                                                                                                        0.0                                      16,000
    Limited (“Chongqing Run Tong”), in December 2011. Going forward, it also                             Apr/2011          Sep/2011   Feb/2012
    plans to establish operations in Zhengjiang and Jiangsu provinces.
                                                                                                                      8207.HK           HSI

 Taking active measures to diversify funding sources. Management plans                              Source: Bloomberg, as at April 24, 2012
    to increase the company’s working capital in 2012 through the proposed
    issuance of RMB-denominated bonds and new bank loans of no more than                              Sales Contact
    50% of Chongqing Run Tong’s registered capital.
                                                                                                      Dan Weil
                                                                                                      Global Head of Institutional
                                                                                                      Sales and Trading
 Maintain Buy rating with TP of HK$1.17. Credit China has expanded rapidly                           Managing Director
    in terms of operating area. Besides, the rapid increase in credit demand from                     +852 2248 3588
    SMEs has laid the foundation for the company’s sustainable development.
    Therefore, we maintain our Buy rating with a TP of HK1.17.                                        Chris Berney
                                                                                                      Managing Director
                                                                                                      +852 2248 3568
Exhibit 1: Financial summary
 Year to Dec                         2008A       2009A        2010A        2011A       2012E
                                                                                                      Joe Chan
 Turnover (RMB mn)                   12.4         30.4        115.2        258.7        587.4
                                                                                                      +852 2248 3578
 Change (%)                           N/A         145          279          125         126 
 Net profit (RMB mn)                  3.7         15.6         52.3        141.9       240.37
 Change (%)                           N/A         321.6       235.3        171.3         95           Cancy Kong
 EPS (RMB)                          0.0026        0.011       0.0494      0.0835       0.1406         Vice President
 CFO per share (RMB)                  N/A         N/A         0.018        0.395        0.501         +852 2248 3538
 P/E (x)                              N/A         N/A         17.21         9.22        8.32
 P/B (x)                              N/A         N/A         2.8402        2.07        2.33
 Dividend per share (HK$)             N/A         N/A         0.0187      0.0206       0.0245         Jiafeng Li
                                                                                                      Vice President
Source: Bloomberg, Guosen Securities (HK)                                                             +852 2899 7281

                                                                                                      Shunei Kin
                                                                                                      Vice President
                                                                                                      +852 2248 3536

For ratings definitions and other important disclosures, refer to the Information Disclosures at the end of this report.                                  1
Credit China (8207.HK)
April 27, 2012 | HK & China

                                             1 2011 results benefited from strong
                                               bargaining power
                                             1.1    Credit demand from SMEs grew rapidly in 2011 due to stringent
                                                    economic policies

Monetary tightening in China has             Monetary tightening in China has limited many SMEs’ access to bank loans, but greatly
reduced SMEs’ access to bank loans           benefited non-bank financial institutions, including Credit China. In 2011, sales turnover
but benefited Credit China                   and net profit of the company soared 125% and 171% y-o-y to RMB258.7 million and
                                             RMB142.8 million respectively, exceeding our forecasts of RMB206.1 million and
                                             RMB123.2 million. Basic EPS was RMB0.0835, representing 99.8% y-o-y growth. The
                                             company also announced a cash dividend of HK$0.0206 and a stock dividend of 0.2
                                             shares per share. We expect the strong growth momentum to continue.

Exhibit 2: Sales turnover maintained strong growth                Exhibit 3: Value of its loan portfolio continued to rise

    300     RMB mn                                                  600    RMB mn

    250                                                             500

    200                                                             400

    150                                                             300

    100                                                             200

     50                                                             100

      0                                                               0
                 2009               2010     2011                               2009              2010              2011

                                Turnover                                                      loan portfolio

Source: Company data, Guosen Securities (HK)                      Source: Company data, Guosen Securities (HK)

                                             1.2    Rapid increase in loan portfolio value fueled revenue growth

                                             The aggregate value of the company’s loan portfolio amounted to RMB958 million in
                                             1-3Q2011, but fell to RMB561 million in 4Q2011. This was mainly because the company
                                             partially disposed of its finance lease business, paid up the registered capital of
                                             Chongqing Run Tong and repaid part of its loans before the due date, resulting in a
                                             slowdown in its 4Q 2011 revenue growth.

Guosen Securities (HK) Brokerage Co., Ltd.                                                                                            2
Credit China (8207.HK)
April 27, 2012 | HK & China

Exhibit 4: Quarterly revenue of the company over 2010-11 by business

                 RMB '000





               Real estate pawn Other collateral-   Entrusted loan   Personal property Other collateral-   finance lease    financing
    -10,000     loan services backed pawn loan         services         pawn loan       backed loan           services     consultancy
                                   services                              services         services                           services

              1Q2010           1H2010        3Q2010            4Q2010          1Q2011           1H2011          3Q2011       4Q2011

Source: Company data, Guosen Securities (HK)

                                                    1.3   Tight credit supply to SMEs strengthened the company’s
                                                          bargaining power

                                                    Capital shortage of many SMEs in 3Q2011 has significantly enhanced the company’s
                                                    bargaining power in lending operations. During the period, financial consultancy service
                                                    income surged 75% q-o-q, accounting for 34% of the company’s annual revenue.
                                                    However, the company’s bargaining power was curtailed on signs that China may ease
                                                    tightening in 4Q2011.

                                                    2 Pooling resources to concentrate on
                                                      loan services
                                                    2.1   Chongqing Run Tong is established for geographical expansion

Credit China plans to expand into                   Chongqing Run Tong was established in December 2011 with a registered capital of
Zhengjiang and Jiangsu provinces,                   US$30 million, of which RMB160 million were contributed by Credit China, which
and it already has a lending business               currently holds 85% equity interest. The contribution was derived from the disposal of
in Hong Kong                                        Credit China’s real estate pawn loans in Shanghai, leading to a drop in its total loan
                                                    portfolio value. Credit China currently plans to develop business in Zhengjiang and
                                                    Jiangsu provinces, and it has already set up loan operations in Hong Kong.

                                                    2.2   Partially disposing the finance lease business to enhance its

                                                    At present, the annual return rate of the company’s finance lease business is only 20%,
                                                    lower than the interest rates of its other loan operations. In November 2011, Credit China
                                                    partially disposed 65% of its interests in Ever Step Holdings Limited (“Ever Step”), a
                                                    wholly-owned subsidiary principally engaged in finance leases, at a consideration of
                                                    HK$75 million, which has been utilised to develop other mortgage loan operations for
                                                    higher returns. However, as only a few financial institutions are licensed to conduct
                                                    finance lease operations in China, the company has retained 35% equity interests in Ever
                                                    Step for better opportunities.

Guosen Securities (HK) Brokerage Co., Ltd.                                                                                                   3
Credit China (8207.HK)
April 27, 2012 | HK & China

                                             3 Taking active measures to diversify
                                               funding sources
                                             3.1   Exploring additional funding sources

   Credit China is also actively             Management is taking active measures to develop diversified funding sources. It plans to
   diversifying funding sources and          increase the company’s working capital in 2012 via the proposed issuance of
   developing non-interest income            RMB-denominated bonds and new bank loans of no more than 50% of Chongqing Run
   businesses                                Tong’s registered capital.

                                             3.2   Developing sources of non-interest income

                                             The company currently generates around 5% of its total revenue by referring clients to
                                             other interested financial service providers, most of which are state-owned companies
                                             with solid capital strength. The company plans to jointly establish a trust fund with other
                                             financial institutions, and will work as the fund manager to refer clients who fail to meet
                                             the company’s credit requirements to the fund on a commission basis.

                                             4 Credit demand remains strong; but the
                                               company’s bargaining power may wane
                                             As China’s inflation eases and economic fundamentals improve, the government is
                                             expected to relax its monetary policy to a certain extent, which will greatly boost the
                                             healthy development of SMEs, but may intensify the competition in the credit market and
                                             thus pressure Credit China’s bargaining power in setting lending rates.

                                             5 Investment advice
                                             Maintain Buy rating with TP of HK$ 1.17. We maintain our Buy rating and TP of
                                             HK$1.17 on the company’s rapid geographical expansion and strong credit demand from

Guosen Securities (HK) Brokerage Co., Ltd.                                                                                             4
Credit China (8207.HK)
April 27, 2012 | HK & China

Appendix I - Income statement

 Unit: RMB ’000                                                2010A        2011A        2012E        2013E        2014E

 Turnover                                                      115,169      258,701      504,467      807,147     1,194,578

 Interest income                                               45,383       116,706      227,577      402,811      596,160

 Interest expenses                                             -3,641       -5,194       -9,090       -13,180      -19,111

 Net interest income                                           41,742       111,512      218,487      389,631      577,049

 Financial consultancy fee income                              69,786       141,995      262,691      407,171      590,397

 Other income                                                   2,563        6,241       13,917       25,747       42,612

 Gain on disposal of subsidiaries                                 -         12,823          -            -            -

 Administrative and other operating expenses                   -31,178      -54,606      -87,370     -117,949     -147,436

 Change in fair value of derivative and embedded derivative       -          -364           -            -            -
 components of convertible bonds and exchangeable bond

 Share-based payment expenses                                  -4,820       -18,913      -32,152      -46,621      -62,938

 Profit before tax                                             78,093       198,688      375,574      657,979      999,684

 Income tax                                                    -25,799      -53,417     -100,972     -176,897     -268,764

 Profit for the year                                           52,294       145,271      274,601      481,083      730,921

 Earnings per share

 Basic                                                        8.35 cents   4.18 cents   5.67 cents   6.45 cents   7.45 cents

 Diluted                                                      8.05 cents   4.15 cents   5.35 cents   6.24 cents   7.13 cents

Source: Guosen Securities (HK)

Guosen Securities (HK) Brokerage Co., Ltd.                                                                                     5
Credit China (8207.HK)
April 27, 2012 | HK & China

Appendix II - Balance sheet

  Unit: RMB ’000                                    2008A    2009A     2010A     2011A

  Non-current assets                                 643      609       875      40,896

  Current assets

  Other assets                                       449      138       139        82

  Loan receivables                                  30,884   131,693   303,845   561,067

  Prepayments and other receivables                 4,812     2,902     3,694     1,815

  Amounts due from jointly-controlled entities        -         -         -      43,758

  Early redemption option of an exchangeable bond     -         -         -        38

  Promissory notes                                    -         -         -      28,333

  Property held for sale                              -         -       2,996       -

  Bank balances and cash                            15,329   43,499    303,828   348,620

  Current liabilities                               27,237   152,338   223,125   364,285

  Net current assets                                24,237   28,890    391,377   619,428

  Total assets less current liabilities             24,880   29,499    392,252   660,324

  Non-current liabilities

  Borrowings                                        11,000      -         -         -

  Deferred tax liabilities                            -         -       1,511     2,804

  Net assets                                        13,880   29,499    390,741   657,520

  Capital and reserves

  Share capital                                     28,500   40,000    142,363   149,870

  Reserves                                            -      10,501    248,378   503,887

  Equity attributable to owners of the company      8,207    29,499    390,741   653,757

  Non-controlling interests                         5,673       -         -       3,763

  Total equity                                      13,880   29,499    390,741   657,520

Source: Guosen Securities (HK)

Guosen Securities (HK) Brokerage Co., Ltd.                                                 6
Credit China (8207.HK)
April 27, 2012 | HK & China

Information Disclosures
Stock ratings, sector ratings and related definitions
Stock Ratings:
Buy: A return potential of 10 % or more relative to overall market within 6 – 12 months.
Neutral: A return potential ranging from -10% to 10% relative to overall market within 6 – 12 months.
Sell: A negative return of 10% or more relative to overall market within 6 –12 months.

Sector Ratings:
Buy: The sector will outperform the overall market by 10% or higher within 6 –12 months.
Neutral: The sector performance will range from -10% to 10% relative to overall market within 6 –12 months.
Sell: The sector will underperform the overall market by 10% or lower within 6 – 12 months.

Interest disclosure statement
The analyst is licensed by the Hong Kong Securities and Futures Commission. Neither the analyst nor his/her associates serves as an
officer of the listed companies covered in this report and has no financial interests in the companies.

Guosen Securities (HK) Brokerage Co., Ltd. and its associated companies (collectively “Guosen Securities (HK)”) has no disclosable
financial interests (including securities holding) or make a market in the securities in respect of the listed companies. Guosen Securities
(HK) has no investment banking relationship within the past 12 months, to the listed companies. Guosen Securities (HK) has no
individual employed by the listed companies.

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Co., Ltd. Some parts of the report may have been originally published in Chinese, within the People’s Republic of China, by Guosen
Securities Co., Ltd. That material has been reviewed, translated and, where applicable, adapted by Guosen Securities (HK) Brokerage
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opinions contained therein are subject to change and may be amended without any notification.

Guosen Securities (HK) Brokerage Co., Ltd.                                                                                                 7

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