China AMCs 2018Outlook:current cycle still favors earnings

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

    We think current macro/policy cycles still favor AMCs’ earnings and we remainconstructive on AMCs’ longer-term growth, given abundant distressed assetsupply. We expect Cinda and Huarong to deliver mid- to high-teen earningsgrowth with 6-7% dividend yields. In this outlook report, we discuss 1) keytrends for AMC business lines; 2) distressed assets supply and demand; 3) theimpact of the PBOC’s new asset management guidance; and 4) capital andIFRS 9 impact. Cinda remains our sector top pick with higher-quality earningsand less shadow banking exposure. The stock trades at 0.67x 2018E P/B and4.8x 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-equityswap (DES) business will continue to benefit from elevated asset prices. Aneutral/tightening-biased monetary policy should also drive stable restructuringdistressed asset (RDA) earnings growth. On the margin side, TDA disposalreturn has been rising and RDA may finally see yield recovery in 2018