rating company sell china cindapg.jrj.com.cn/acc/res/hk_res/stock/2014/5/15/eb5c... · 5/15/2014...

Deutsche Bank Markets Research

Rating

Sell Asia China

Banking / Finance Other Financial Services

Company

China Cinda

Date 15 May 2014

Initiation of Coverage

A misplaced sense of security - initiating with Sell

Reuters Bloomberg Exchange Ticker 1359.HK 1359 HK HSI 1359

History cannot repeat itself

________________________________________________________________________________________________________________

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) 148/04/2014.

Price at 15 May 2014 (HKD) 3.91

Price target - 12mth (HKD) 3.20

52-week range (HKD) 5.43 - 3.60

HANG SENG INDEX 22,583

Hans Fan, CFA

Research Analyst (+852) 2203 6353 [email protected]

Tracy Yu

Research Analyst (+852) 2203 [email protected]

Michael Zhang, CFA

Research Associate (+852) 2203 6158 [email protected]

Jacky Zuo

Research Associate(+852) 2203 [email protected]

Price/price relative

3.2

3.6

4.0

4.4

4.8

5.2

5.6

12/13

China Cinda

HANG SENG INDEX (Rebased)

Performance (%) 1m 3m 12m

Absolute -7.3 -20.2 –

HANG SENG INDEX -0.4 1.3 -2.0

Source: Deutsche Bank

We initiate our coverage of Cinda with a Sell rating and a HKD3.2 target price (1.05x 2014E P/B), as we believe the company is significantly more exposed than banks to China's long-term slowing economy while historical recovery rates may not be indicative of future trends given the changes in operating environment. Contrary to market perceptions that Cinda benefits from rising NPLs, the traditional NPL acquisition/recovery business only contributed to 4% of assets or 11% of income in 2013. For the other businesses, we see higher connectivity to the riskier shadow banking activities, with close ties with the price cycle of property and coal sectors.

Restructuring distressed assets (26% of assets) to face rising impairments Cinda’s restructuring distressed assets (RDA) business (26% of total assets) is a sub-prime lending business, with 60% of the lending extended to property developers (we estimate >50% in lower tiered cities). While we forecast 54% yoy RDA asset growth on Cinda’s growth strategy, we expect 2014 PBT from the business to decline by 5% yoy (2013: up 383% yoy), given high impairment provisions (294bps of gross balance) on a rising impaired ratio of 1.8% in 2014E from 1% in 2013. With the gross loan balance growing by 9.4x from 2011, to Rmb101bn in 2013, Cinda is vulnerable to any potential reversal of China’s long-term property bull cycle. In addition to the RDA business, Cinda also owns Jingu Trust (stake: 92.3%) with AUM of Rmb94bn in 2013 (collective trust: 24%), which may pose potential event risk/earnings impact on Cinda.

Debt equity swaps (11% of assets) – falling exit multiple to limit profit growth We believe the exit multiple, which has already fallen from 2.7x in 2012 to 1.9x in 2013, will fall further to 1.4x in 2014, translating into a 10% decline in DES’s total income and pre-tax losses of Rmb234m. As the coal sector made up 62% of the book value of the DES assets (11% of Cinda’s assets), the profitability of this business is closely tied to the coal price cycle. Our study concludes that the value of Cinda’s DES assets may fall 30% from the appraisal/market value in June 2013 to mainly reflect: (1) the 16% price decline for the 14 listed coal comparables to Cinda’s top unlisted coal DES companies, which made up 54% of total DES assets; and (2) our house view that China’s coal sector will likely see a persistent oversupply imbalance, suggesting potential further downside of Cinda’s coal DES portfolio and also making exit through IPOs difficult.

Traditional distressed assets (4% of assets) – volume offsets by falling margin Contrary to market perception that Cinda’s business is driven by the resolution of NPLs, TDA only made up 11% of 2013 income, implying a limited profit boost potential from rising NPL acquisitions/recoveries. We expect Cinda’s NPL recovery rate to fall as China’s economic growth normalizes.

SOTP-based target price of HKD3.20; stronger economic recovery the key risk We value Cinda by using a sum-of-the-parts (SOTP) valuation, with an HKD3.20 target price based on 1.05x 2014E P/B. Given the downside to our target price, we initiate with a non-consensus Sell. Upside risks: stronger economic recovery and improving conditions in coal/property companies.

15 May 2014

Other Financial Services

China Cinda


Table Of Contents

Investment thesis ................................................................ 3 Outlook ................................................................................................................. 4 Valuation ............................................................................................................... 6 Risks ..................................................................................................................... 6

Valuation ............................................................................. 7 Sum-of-the-parts value Cinda at 1.05x P/B or HKD3.20 ...................................... 7 Valuations of Cinda’s various business lines ....................................................... 7 De-rating triggered by concerns on Cinda’s exposure to trust, coal and property sectors ................................................................................................................ 10

RDA – A shadow bank with mounting risks and insufficient protection .......................................................................... 13 Restructuring Distressed Assets – A shadow bank in nature ............................ 13 Mounting risks due to heavy reliance on real estate sector .............................. 14 We expect rising impaired ratio and hence higher provision ............................ 18

DES – A lower-than-expected margin of safety ................ 21 Overall we apply 30% haircut to appraisal/market value of DES assets ........... 21 32% haircut to appraisal value of unlisted DES assets ...................................... 23 10% further decline to market value of listed DES assets ................................. 28

TDA – Lower margin but faster turnover ........................... 30 We expect margin on NPL disposal to trend lower ........................................... 30 Growth potential in NPL supply ......................................................................... 34

Jingu Trust – A higher-risk trust company ........................ 36 Jingu Trust – Rmb2.8bn high risk trust assets ................................................... 36 Potential earnings impact on Cinda ................................................................... 39

Business lines and forecasts ............................................. 40 Company profile and business overview ........................................................... 40 Distressed asset management – Cinda’s core business .................................... 42 Financial investment and asset management business .................................... 49 Financial service business .................................................................................. 53

Appendix A – AMC Industry in China ................................ 55 A bit of history .................................................................................................... 55 From distressed asset managers to financial holding companies ..................... 56 Financial overview of big-four AMCs ................................................................. 57

Appendix B – More about Cinda ....................................... 59 Funding mix shifting towards bank loans and bonds ........................................ 59 Synergies ............................................................................................................ 59 Cinda’s history .................................................................................................... 61 Corporate structure of Cinda .............................................................................. 61 Cinda management profile ................................................................................. 62

Appendix C ........................................................................ 64 The list of the 74 listed comparables to Cinda’s top-20 unlisted DES companies ............................................................................................................................ 64

15 May 2014


China Cinda


Model updated: NA Fiscal year end 31-Dec 2011 2012 2013 2014E 2015E 2016E

Fair value changes on DDA 4,463 3,878 4,618 6,688 7,716 9,196 Investment income 5,779 6,529 7,044 7,030 6,732 6,285 Net insurance premiums earned 5,698 5,325 5,772 6,415 7,307 8,330 Interest income 1,479 2,493 5,059 6,144 7,245 8,583 Revenue from sales of inventories 3,237 3,924 4,322 4,827 5,300 5,820 Fee & commission 1,902 2,226 2,520 2,877 3,214 3,595 Other revenue 1,427 1,456 2,195 2,598 2,829 3,126 Operating income 24,382 32,335 42,413 52,402 61,610 70,475 Operating expenses 16,027 23,200 30,601 38,805 45,712 51,481 Operating profit 8,355 9,135 11,812 13,597 15,897 18,994 Taxes 2,272 2,379 2,671 3,119 3,649 4,362 Minorities 24 89- 74 81 89 98 Net profit attributable to shareholders 6,763 7,306 9,027 10,361 12,127 14,504 Key Balance Sheet Items (CNYm) & Capital RatiosTDA net balance 7,415 7,960 16,392 25,188 32,842 37,661 RDA net balance 9,681 48,068 97,971 148,450 189,239 219,355 DES book value 50,595 48,239 42,275 31,982 22,489 14,881 Loans and advances to customers - net 9,448 25,042 48,636 60,522 73,679 88,260 Total assets 173,124 254,614 383,785 462,671 534,146 595,642 Total liabilities 130,281 193,730 301,023 369,424 429,198 476,646 Total equity 42,843 60,885 82,762 93,248 104,948 118,996 CAR - company 19.18% 20.96% 21.58% na na naLeverage ratio 25% 24% 22% 20% 20% 20%

Impaired ratio of RDA 0.75% 1.20% 1.00% 1.80% 2.50% 3.20%Credit cost of RDA (bps) 41 494 194 294 287 257Provision to impaired loan ratio - RDA 27% 248% 291% 240% 235% 230%Provision to loan ratio - RDA 0.21% 2.99% 2.92% 4.32% 5.88% 7.36%Impaired ratio of RDA + loans 0.38% 1.17% 1.02% 1.66% 2.23% 2.78%Credit cost of RDA + loans (bps) 161 367 174 232 226 204Provision to impaired loan ratio - RDA + loans na 219% 253% 227% 223% 218%Provision to loan ratio - RDA + loans 0.99% 2.56% 2.58% 3.75% 4.97% 6.07%

Growth in income from DDA classified as receiva na 1845% 188% 48% 36% 21%Growth in revenue 1% 33% 31% 24% 18% 14%Growth in cost 8% 45% 32% 27% 18% 13%Growth in net profit -9% 8% 24% 15% 17% 20%Growth in DDA 134% 228% 104% 52% 28% 16%Growth in DES -3% -5% -12% -24% -30% -34%Growth in total assets 15% 47% 51% 21% 15% 12%Growth in impaired loans (RDA+loans) na 1099% 75% 134% 71% 48%Cost income ratio 39% 33% 31% 31% 32% 33%

Revenue - DAM 9,957 14,392 21,850 28,667 34,846 40,352Revenue - FIAM 5,946 7,911 8,977 10,274 11,376 12,593Revenue - FS 9,231 10,553 12,134 14,008 15,936 18,077PBT - DAM 7,202 6,234 8,314 9,812 12,213 15,270PBT - FIAM 2,488 3,285 3,012 3,213 3,346 3,571PBT - FS -207 164 515 605 375 191Total assets -DAM 91,551 140,328 228,604 285,643 331,401 365,026Total assets - FIAM 35,387 49,027 72,776 81,618 92,881 104,043Total assets - FS 49,786 69,352 86,248 99,254 113,707 130,416

+852 2203-6353

Source: Company data, Deutsche Bank estimates

20,372 24,556

35,459Market cap (HKDm)

2.45% 2.43% 2.57%

1.00

Credit Quality

Income from DDA classified as receivables 181 3,518 10,144

Valuation Ratios & Profitability Measures

3.42% 2.83%

1.42

22%

ROAE (stated) (%) 18.07% 15.78% 12.81% 13.28% 14.03%P/B (DB adj.) na na 1.14

25,155 30,140 35,459 35,459 35,459Share in Issue (m)0 0 138,644 138,644 138,644 138,644

Growth Rates & Key Ratios

By Segment

Company Profile

Payout ratio (%)Dividend yield (%) 2.63%

Cinda is a leading asset management company (AMC) inChina, focusing on distressed asset management with amarket share of 35.5% in terms of distressed assetsacquired. Established in 1999, Cinda has been dedicating toprovide customized financial solutions and differentiatedasset management services to its clients, leveraging on itsnationwide branch network and diversified financial servicesubsidiaries. Cinda went listed in December 2013.

Profit & Loss (CNYm)20%

0.05 0.03

10.29

1.11%

9.109.1010.29

10.65

0.07

13.81%

7.61nana

10.65

1.42 1.29 1.00

7.61

1.29

0.41

2.14 2.42 2.73 3.1017% 20%

0.080.06

0.25 0.30 0.29 0.34-6% 17% -2%1.82

Reuters: 1359.HK Bloomberg: 1359 HK

Sell

HK$143,106mMarket Cap

52-week Range: HK$3.6 - 5.43

Price (15 May 2014)

BVPS (stated) (CNY)

Other Financial Services DPS (CNY)

Running the NumbersEPS (stated) (CNY)Asia

ChinaGrowth rate - EPS (stated) (%)

Data per share

Hans Fan, [email protected]

China Cinda

Target price 1.88% 2.20%ROAA (stated) (%) 4.18%

HK$3.91

HK$3.20

15,009

20%

1.14na

0.27-15%1.500.07

13% 20%

nanana

27%

P/E FD (DB adj.)P/E (stated)

P/B (stated)

15 May 2014


China Cinda


Investment thesis

Outlook

China Cinda Asset Management (Cinda) is the second largest of the big-four asset management companies (AMCs) in China in terms of total assets, with a focus on three main businesses, including distressed asset management (DAM), financial investment and asset management (FIAM), and financial services (FS). DAM, the major contributor to assets (60% of total) and profit before tax (71%), can be further divided into four sub categories: restructuring distressed assets (RDA), traditional distressed assets (TDA), debt-to-equity swaps (DES) and others, as shown in Figure 1 and 2.

We believe Cinda is significantly more exposed than banks to China's long-term economic slowdown, as GDP growth rates stabilize. Contrary to market perceptions that Cinda benefits from rising NPLs, the traditional NPL acquisition/recovery business only contributed to 4% of assets or 11% of income in 2013. For the rest of the businesses, we see relatively high connectivity to the riskier shadow banking activities, with close ties to the price cycle of properties in lower tier cities and coal sector. In particular, we see rising impairment losses on substantial exposure of its RDA business to the property sector, lower exit multiples from DES assets and lower TDA disposal margin on stalled asset appreciation. Jingu Trust, a trust company 92.3%-owned by Cinda, may pose potential event risk/earnings impact on Cinda given the higher risks involved. We expect Cinda’s earnings growth to slow from 24% yoy in 2013 to 15%/17% yoy in 2014-15E, translating into lower ROAA of 2.45%/2.43% in 2014-15E (2013: 2.83%).

Figure 1: Cinda’s total assets breakdown by segment –

DAM makes up the majority (60%)

Figure 2: Cinda’s income breakdown by segment – DAM

is the major earnings contributor (52%)

60%

19%

22%

Total assets breakdown - FY13

Others

FS

FIAM

DAM

RDA, 26%

DES, 11%

TDA, 4%

Other DAM, 19%

52%

21%

29%

Income breakdown -FY13

Others

FS

FIAM

DAM

RDA, 11%

DES, 24%

TDA, 12%

Other DAM, 5%

Source: Deutsche Bank, company data Source: Deutsche Bank, company data

RDA – Mounting risks on high real estate exposure to face rising impairments Cinda’s restructuring distressed assets (RDA) business (26% of total assets) is a sub-prime lending business, with 60% of the lending extended to property developers (over 50% in lower tiered cities we estimate). While we forecast RDA asset growth of 54% yoy in 2014 on Cinda’s growth strategy, we expect PBT from the business to decline by 5% yoy in 2014 (2013: 383% yoy), given high impairment provisions charged (294bps of gross balance) on a rising impaired ratio of 1.8% in 2014 from 1% in 2013 when facing the first

15 May 2014


China Cinda


repayment peak in 2H14. With the gross loan balance growing by 9.4x from 2011, to Rmb101bn in 2013, Cinda is vulnerable to the reversal of China’s 10-year plus property bull cycle and we expect some smaller, weaker developer borrowers of Cinda’s RDA business to go under amid the property price correction and dried-up credit availability.

Figure 3: 60% of Cinda’s RDA net balance were extended

to real estate sectors

Figure 4: Cinda started to grow RDA strongly from 2012,

thus the first repayment peak would be in 2H14

Real estate, 60%

Leasing & commercial,

10%

Public utilities, 6%

Manufacturing, 6%

Construction, 5%

Transportation, 3%

Mining, 1%

Others, 9%

9.7

49.2

76.5

89.7

12.9

35.3

50.5 28.7

155.2

-

50.0

100.0

150.0

200.0

250.0

Gross balance -

2011

Acquired -2012

Acquired -2013

Acquired -2014E

Repayment - 2012

Repayment - 2013

Repayment - 2014E

Accured interest -2012-14E

Gross balance -

2014

Rmb bn Evolution of RDA gross balance during 2012-14E

The first repayment

peak at 2H14

Source: Deutsche Bank, company data Source: Deutsche Bank estimates, company data

DES – 30% haircut applied to market value leads to lower exit multiples We believe the exit multiple from DES assets, which has dropped from 2.7x in 2012 to 1.9x in 2013, will fall further to 1.4x in 2014, translating into a 10% decline in DES’s income and pre-tax losses of Rmb234m. As the coal sector made up 62% of the book value of the DES assets (11% of Cinda’s total assets), the profitability of this business ties closely with the coal price cycle. Our study concludes that the value of Cinda’s DES assets may fall 30% by end-2014 from the appraisal value in June 2013 and current market value to reflect: (1) the 16% price decline for the 14 listed coal comparables to Cinda’s top unlisted coal DES companies, which made up 54% of total DES assets; and (2) our house view that China’s coal sector should see persisting oversupply, suggesting potential further downside of Cinda’s coal DES portfolio and also making exit through IPOs/capital market difficult.

Figure 5: The share prices of listed coal comparables and

Cinda’s listed DES companies have declined by 16% and

11% since June 2013, respectively

Figure 6: Cinda’s DES portfolio heavily concentrated in

troubled coal sector (62%)

-30%

-20%

-10%

0%

10%

20%

30%

Jul13 Aug13 Sep13 Oct13 Nov13 Dec13 Jan14 Feb14 Mar14 Apr14 May14

Top 20 listed DES - % change since Jun1314 coal production comparables for unlisted DES - % change since Jun13

-11%

-16%

Coal, 62%

Chemical, 16%

Metals, 9%

Others, 13%

DES sector breakdown - 1H13

Source: Deutsche Bank, Bloomberg. Note: Prices are updated on 14 May 2014. Source: Deutsche Bank, company data

15 May 2014


China Cinda


TDA – 84 resolution cases points to lower disposal margin but faster turnover Contrary to market perception that Cinda’s business is driven by the resolution of banks’ NPLs, TDA only made up 4% of total assets or 11% of 2013 income, implying a limited profit boost from rising NPL acquisition and subsequent recovery. While its TDA business has generated decent return on disposal of 119% during 2010-13, our study of 84 of Cinda’s TDA resolution cases, together with a recent survey of listed banks on NPL disposals, suggests that the NPL recovery rate should trend lower in coming years. On the other hand, we expect Cinda to accelerate the acquisition and disposal of NPLs under the backdrop of rising supply of NPLs from banks.

Figure 7: 84 TDA resolution cases suggest higher-return

means may be no longer workable

Figure 8: We expect the supply of NPLs from the

banking sector to grow strongly in coming years

86

85

84

69

49

30

21

19

17

36

- 20 40 60 80 100

Litigation

Auction of collateral

Development of the land/property

Execution of guarantee

Debt restructuring

Multiple means

Repayment in real assets

Debt to equity swap

Sell to third-party buyers

TOTAL

NPL recovery rate on average (cents in a dollar)

Suggesting asset appreciation was the key driver to strong return

434 428 493 592 768 975

1,258 810

625 582 697

891

1,121

1,389

1,244 1,053 1,075

1,289

1,659

2,096

2,647

1.14% 1.00% 0.95% 1.00%1.15% 1.30% 1.50%

6.29%

4.06%3.78%

4.00%4.50%

5.00%

5.50%

2.44%1.81% 1.60% 1.68% 1.92%

2.15% 2.43%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

-

500

1,000

1,500

2,000

2,500

3,000

2010 2011 2012 2013 2014E 2015E 2016E

Rmb bn

NPL balance - other banking FIs NPL balance - commercial banksNPL ratio - commercial banks (RHS) NPL ratio - other banking FIs (RHS)NPL ratio - entire banking system (RHS)

Source: Deutsche Bank, NPL Disposal Case Selection of China Cinda Asset Management (Edited by Mr. TIAN Guoli, former President of the company) Source: Deutsche Bank estimates, PBOC, CBRC

Jingu Trust could pose potential earnings impact on Cinda Jingu Trust is 92.3%-owned by Cinda with trust AUM of Rmb94bn as of 2013. Our in-depth screening into 65 collective trust products issued by Jingu Trust identified Rmb2.8bn trust assets with higher default risks, or 21% of our sample. Together with Jingu Trust’s unfavorable sector concentration in the real estate sector, the recent regulatory penalty and management change, we see Jingu Trust as a higher-risk trust company. Our sensitivity analysis shows that 30% loss of Jingu Trust’s high risk trust assets (assuming at 6.5% of total trust AUM) would translate into a 13% negative impact on Cinda’s 2014E PBT.

Valuation

We value Cinda based on sum-of-the-parts (SOTP) valuation methodology, with a target price of HKD3.20, equivalent to 1.05x 2014E P/B and 8.72x 2014E P/E, as we believe Cinda does not have direct comparables in the market and its business lines are notably different from each other in terms of business models and risk profiles.

Risks

Upside risks: 1) stronger-than-expected economic recovery, leading to improvements in financial conditions of coal companies and real estate developers; 2) faster asset appreciation to push up the TDA recovery rate; 3) Slower regulatory progress to allow competition in the RDA market; 4) better-than-expected synergies among the three group segments.

15 May 2014


China Cinda


Valuation

Sum-of-the-parts value for Cinda at 1.05x P/B or HKD3.20

We value Cinda based on the sum-of-the-parts (SOTP) valuation methodology, as we believe Cinda does not have direct comparables in the market and its business lines are notably different from each other in terms of business models and risk profiles. By applying different valuation methodologies to each business line of the company, we value Cinda at HKD3.20, equivalent to 1.05x 2014E P/B and 8.70x 2014E P/E.

Given the downside of 18% to our target price and our 2014E earnings forecast being 15% lower than consensus, we initiate with a non-consensus Sell, reflecting our view that Cinda will likely be more vulnerable to weak economic activities than banks, given its substantial exposure to weaker property developers and coal companies. The market once perceived that Cinda may benefit from rising NPLs and high exit-multiples from DES assets. However, with traditional distressed assets only making up 4% of total assets, the benefit from acquiring/recovering rising bank NPLs is not sufficient to offset the asset quality deterioration in its sub-prime lending business (RDA) and lower exit-multiples from DES assets.

Figure 9: Our sum-of-the-parts model values Cinda at 1.05x P/B or HKD3.20

Business l ines Valuation methodo logyFair va lue (Rmb mn) P/B 2014E

Revenue 2014E (Rmb mn)

% of g roup revenue

DAM Various 57,926 1.32 28,667 55% TDA One-stage GGM 6,223 1.60 6,688 13% RDA Three-stage GGM 14,097 0.62 15,009 29% DES Market value with a hair-cut 28,360 5.76 4,502 9% Other DAM assets P/B comparables 9,246 0.75 2,468 5%FIAM P/B comparables 19,590 0.60 10,274 20%FS P/B comparables 12,651 0.75 14,008 27%Cinda Group 90,167 1.05 52,402Target price (HK$) 3.20 P/E 2014E 8.70

Source: Deutsche Bank estimates, company data

Valuations of Cinda’s various business lines

We adopt different valuation methodologies to value the different business lines of Cinda in order to better capture the risk/reward profiles.

Traditional Distressed Assets (TDA) – One-stage GGM We use a one-stage Gordon Growth Model (GGM) to value Cinda’s TDA business, as we believe TDA is mainly driven by flows of NPL acquisition and margins of NPL disposal. We have adopted a sustainable ROAE of 20%, reflecting faster turnover of NPL disposal, offset by lower disposal margin on a falling recovery rate. Our valuation of 1.6x 2014E P/B is based on cost of equity of 13.6% and a long-term growth rate of 3%.

15 May 2014


China Cinda


Figure 10: We value the TDA business at 1.6x 2014E P/B using one-stage

GGM TDA - one-stage GGM

Sustainable ROAE 20.0%

COE 13.6%

Growth rate 3.0%

Fair P/B 1.6

Net assets 2014E (Rmb m) 3,880

Valuation (Rmb m) 6,223Source: Deutsche Bank estimates, company data

Restructuring Distressed Assets (RDA) – Three-stage GGM We use a three-stage GGM to value Cinda’s RDA business, as we believe RDA is essentially a sub-prime lending business. Reflecting its higher return than banks, we have adopted slightly higher ROE than banks for the three stages at 17.9%, 14.5% and 10%, respectively. On the other hand, given its high concentration in the property sector and insufficient provision protection, we used a cost of equity of 16.6%, which is higher than 11-13% for listed Chinese banks. Our three-stage GGM pegs Cinda’s RDA business at 0.6x 2014E P/B.

Figure 11: We value RDA business at 0.6x 2014E P/B using three-stage GGM RDA - three-stage GGM

First Stage Second Stage Terminal

RoE 17.9% 14.5% 10.0%

Growth 14.4% 9.4% 4.0%

COE 16.6% 16.6% 16.6%

Payout Ratio 20% 35% 60%

No. of Years 3 3

Fair P/B 0.6

Net assets 2014E 22,870

Valuation 14,097 Source: Deutsche Bank estimates, company data

Debt-to-equity Swaps (DES) – Market value with a haircut We value Cinda’s DES assets using the market/appraisal value and applying a haircut (see section A much lower margin of safety on its DES portfolio for more details). We value its unlisted and listed DES assets separately:

For unlisted DES, which accounts for 79% of total DES book value, we apply a 32% discount (including 25% discount on share price correction of comparables and 10% discount on lack of marketability) to the appraisal value, which was provided by American Appraisal China Limited (AACL), a third-party valuation specialist appointed by Cinda. Hence, our adjusted fair value of Rmb48.9bn implies an exit multiple of 1.4x, much lower than the 2.3x suggested by AACL.

Figure 12: We apply a 32% discount to the appraisal value of unlisted DES assets, implying an exit multiple of 1.4x Unlisted DES 13 coal companies 7 non-coal companies Other unlisted DES Total unlisted DES

Book value - 1H13 22,403 5,286 6,690 34,378

Appraisal value - unadjusted 52,700 9,600 9,700 72,000

Implied exit multiple - unadjusted 2.4x 1.8x 1.5x 2.1x

Discount - share price correction of comparables 30% 0% 25% 25%

Discount - lack of marketability 10% 5% 10% 10%

Appraisal value - adjusted 33,201 9,120 6,547 48,868

Implied exit multiple - unadjusted 1.5x 1.7x 1.0x 1.4xSource: Deutsche Bank estimates, company data, American Appraisal China Limited

15 May 2014


China Cinda


For listed DES, we use current market value of the listed companies attributable to Cinda and apply a further downside of 10%, given its heavy concentration on overcapacity sectors (85%).

Figure 13: We apply a 10% further downside discount to listed DES assets Listed DES

Book value of all listed DES 8,140

Current market value of top-20 listed DES 7,141

As % of total listed DES 98%

Current market value of all listed DES 7,274

Further MTM losses 10%

Current market value of all listed DES - adjusted 6,546 Source: Deutsche Bank estimates, company data

Overall, we value Cinda’s DES assets at Rmb28.4bn.

Figure 14: Adding unlisted and listed DES together, we value Cinda’s DES

assets at Rmb28.4bn Listed + unlisted DES

Total adjusted fair value of DES assets 55,415

Liabilities of DES - 2014E 27,055

Valuation = market value - liabilities 28,360 Source: Deutsche Bank estimates, company data

Other Distressed Asset Management (DAM) – 0.8x 2014E P/B For other DAM assets, we simply apply 0.8x 2014E P/B and derive a fair value of Rmb9.3bn.

Figure 15: We value other DAM business at 0.8x 2014E P/B Other DAM assets

Other DAM net assets 2014E 12,328

P/B 2014E 0.80

Valuation 9,246 Source: Deutsche Bank estimates, company data

Financial Investment and Asset Management (FIAM) – Market value and P/B As there are two listed companies under Cinda’s FIAM business, i.e. Cinda Real Estate (600657 CH) and Tongda Venture (600647 CH), we value them using current market value attributable to Cinda. For the rest of the FIAM business, we simply peg it at 0.7x P/B. As a result, we value FIAM business at Rmb19.6bn, or 0.6x 0214E P/B.

Figure 16: We value FIAM business at 0.6x 2014E P/B FIAM Cinda Real Estate Tongda Venture Other FIAM assets Total FIAM

Stock code 600657.CH 600647.CH

Net assets 2013 7,611 268 24,643 32,521

P/B 2014E 0.7 5.8 0.7 0.6

Total valuation (market cap) 5,015 1,554 16,018 22,587

% owned by Cinda 58.5% 41.0% 100.0% 86.7%

Valuation attributable to Cinda 2,935 638 16,018 19,590 Source: Deutsche Bank estimates, company data

15 May 2014


China Cinda


Financial Services (FS) – P/B comparables We value the subsidiaries of Cinda’s FS business using P/B comparables and peg the business at 0.8x 2014E P/B. Reflecting the relatively weaker market positions for Cinda’s FS subsidiaries, we generally adopt a discount to the P/B of listed comparables.

Figure 17: We value Cinda’s FS business at 0.8x 2014E P/B Securities Jingu Trust Cinda Leasing First State Fund Cinda P&C Happy Life Total FS

subsidiaries

Net assets 2014E 7,059 3,719 3,372 213 3,109 1,333 18,804

PBR 0.8 0.6 0.7 0.8 1.0 0.6 0.8

Total valuation 5,506 2,231 2,360 170 3,109 800 14,177

% owned by Cinda 99.3% 92.3% 99.6% 54.0% 51.0% 61.6% 89.2%

Discount - lack of marketability 5% 5% 5% 5% 5% 5% 5%

Valuation attributable to Cinda 5,742 2,162 2,467 96 1,665 517 12,651 Source: Deutsche Bank estimates, company data

Should we apply a valuation discount as a holding company? Overall, we do not view Cinda as a financial holding company, given: (1) the group company has its own business functions, which include the DAM and part of FIAM; and (2) Cinda has tight control on its subsidiaries with dominating shareholdings, so that it should not be subject to a discount on lack of control. Nevertheless, for Cinda’s unlisted DES assets and FS business, we apply a discount to reflect the lack of marketability.

De-rating triggered by concerns on Cinda’s exposure to trust, coal and property sectors

Following a strong performance of 52% increase since its IPO in December 2013, Cinda’s share price has de-rated to 1.3x 2014E P/B. We believe its de-rating was mainly triggered by market concerns on its heavy exposure to the coal (62% of total DES assets), property (60% of its RDA gross balance) and trust sectors (Jingu Trust, 92%-owned by Cinda, with total trust AUM of Rmb94bn as of end 2013).

15 May 2014


China Cinda


Figure 18: Share price performance of Cinda since its IPO in December 2013 – The de-rating was triggered by negative

news related to default cases of trust, bonds and property developers

3.00

3.50

4.00

4.50

5.00

5.50

6.00

HK$ Share price performance of Cinda reflects plenty of negative news

11 Dec 2013H-share IPO at HK$3.58

5 Mar 2014The first corp bond default from Shanghai Chaori

19 Mar 2014A small-sized default case of a small developer (Zhejiang Xingrun)

27 Mar 2014FY13 results of Rmb9.03bn, beating consensus by 5%

Most recentMounting concerns on property sector in China

-10%

+52% -28%

23 Jan 2014Default case of China Credit Trust triggered concerns on trust co.s

Source: Deutsche Bank, Bloomberg Finance LP, media report. Note: Share price updated on 14 May 2014.

15 May 2014


China Cinda


Figure 19: Valuation comparable table of various types of financial stocks in Great China space

Price Crncy Market cap

(LCY) (USD) 14Y 15Y 14Y 15Y 14Y 15Y

Ch ina banks `1398 HK Equity ICBC-H 4.80 HKD 201,300 4.94 4.64 0.93 0.82 7.1% 7.5%939 HK Equity CCB-H 5.50 HKD 176,418 4.95 4.70 0.91 0.81 7.1% 7.4%1288 HK Equity ABC-H 3.37 HKD 128,585 4.95 4.57 0.84 0.74 6.9% 7.3%3988 HK Equity BOC-H 3.49 HKD 120,949 4.81 4.54 0.76 0.69 7.3% 7.7%

3328 HK Equity BCOM-H 4.98 HKD 46,274 4.46 4.18 0.64 0.58 6.7% 7.2%3968 HK Equity CMB-H 13.68 HKD 41,218 5.00 4.62 0.92 0.81 6.0% 6.5%998 HK Equity CITIC Bank-H 4.69 HKD 32,112 4.02 3.65 0.68 0.60 6.2% 6.8%1988 HK Equity Minsheng-H 7.80 HKD 33,607 3.73 3.34 0.74 0.63 4.6% 5.2%3618 HK Equity CRCB 3.46 HKD 4,151 3.86 3.46 0.63 0.56 7.6% 8.5%3698 HK Equity Huishang 3.53 HKD 5,018 5.91 5.39 0.89 0.80 5.9% 6.5%

1963 HK Equity BOCQ 5.00 HKD 1,741 4.05 3.63 0.70 0.60 4.9% 5.5%600000 CH Equity SPDB 9.74 CNY 29,236 4.17 3.88 0.78 0.68 7.2% 7.8%601166 CH Equity Industrial Bank 10.00 CNY 30,657 4.10 3.75 0.80 0.68 4.9% 5.3%601818 CH Equity CEB 2.47 CNY 18,715 3.75 3.13 0.65 0.56 8.0% 9.6%000001 CH Equity Ping An Bank 11.18 CNY 17,109 6.02 5.19 0.84 0.74 3.3% 3.9%

601169 CH Equity Bank of Beijing 7.59 CNY 10,740 4.31 3.71 0.73 0.62 2.7% 3.2%601009 CH Equity Bank of Nanjing 7.90 CNY 3,757 4.52 4.25 0.77 0.68 6.7% 7.1%002142 CH Equity Bank of Ningbo 9.10 CNY 4,214 4.69 4.24 0.88 0.76 5.1% 5.6%Av erage 4.76 4.43 0.84 0.74 6.7% 7.2%Insurance `2628 HK Equity China Life 20.10 HKD 65,423 18.31 14.71 1.82 1.66 1.7% 2.1%

2318 HK Equity Ping An 57.25 HKD 53,658 11.84 10.68 1.88 1.53 NA NA2601 HK Equity CPIC 24.20 HKD 25,080 15.25 13.52 1.62 1.50 7.4% 0.0%1336 HK Equity NCI 23.65 HKD 9,853 10.20 8.51 1.32 1.14 0.0% 0.0%966 HK Equity CTIH 12.26 HKD 3,850 11.89 8.92 1.26 1.10 NA NA1299 HK Equity AIA 38.05 HKD 59,201 20.24 17.92 2.21 2.04 1.2% 1.4%1339 HK Equity PICC Group 3.04 HKD 16,583 10.49 9.76 1.23 1.10 NA NA

2328 HK Equity PICC P & C 10.98 HKD 19,270 11.56 10.23 1.92 1.68 NA NAAv erage 15.65 13.49 1.84 1.64 1.5% 0.9%Securi t ies f i rm `6030 HK Equity Citic Securities- H 16.32 HKD 20,960 30.52 25.98 1.59 1.53 1.0% 1.2%6837 HK Equity Haitong Securities- H 11.46 HKD 14,708 18.77 17.14 1.35 1.29 2.1% 2.3%

6881 HK Equity Galaxy Securities 4.93 HKD 4,764 11.55 10.50 1.09 0.99 0.0% 2.9%1788 HK Equity GUOTAI JUNAN INTERNATIONAL 4.05 HKD 989 12.74 9.88 1.32 1.22 4.4% 5.4%Av erage 23.74 20.67 1.44 1.37 1.4% 1.9%Financial leasing `5871 TT Equity CHAILEASE HOLDING 73.20 TWD 2,418 11.71 10.59 2.42 2.18 0.0% 0.0%3360 HK Equity FAR EAST HORIZON 5.31 HKD 2,251 7.38 5.69 0.84 0.75 5.0% 6.2%

000415 CH Equity BOHAI LEASING CO 7.74 CNY 2,203 10.32 8.23 NA NA NA NAAv erage 9.80 8.17 1.63 1.47 2.5% 3.1%Trust `000563 CH Equity SHAANXI INTL TRUST CO LTD-A 7.04 CNY 1,371 15.64 11.93 NA NA NA NA600816 CH Equity ANXIN TRUST CO LTD-A 14.64 CNY 1,071 21.69 17.96 4.54 3.65 1.2% 2.0%600643 CH Equity SHANGHAI AJ CORPORATION-A 9.73 CNY 1,738 15.69 11.45 1.55 NA 3.9% 3.8%

Av erage 17.68 13.78 3.04 3.65 2.6% 2.9%Financial holding group `2318 HK Equity Ping An 57.25 HKD 53,658 11.84 10.68 1.88 1.53 NA NA2882 TT Equity CATHAY FINANCIAL HOLDING 44.80 TWD 17,779 14.37 15.47 1.79 1.72 4.1% 3.8%2881 TT Equity FUBON FINANCIAL HOLDING 39.85 TWD 13,526 10.66 10.00 1.18 1.10 3.5% 3.7%

2891 TT Equity CTBC FINANCIAL HOLDING 18.50 TWD 9,028 10.87 10.24 1.28 1.21 4.1% 4.3%2886 TT Equity MEGA FINANCIAL HOLDING 23.75 TWD 9,807 11.91 11.16 1.13 1.07 3.4% 3.6%2880 TT Equity HUA NAN FINANCIAL HOLDING 17.40 TWD 5,227 11.20 10.68 0.86 NA 3.3% 3.5%2892 TT Equity FIRST FINANCIAL HOLDING 17.90 TWD 5,138 12.84 12.54 1.04 0.99 2.6% 2.7%2885 TT Equity YUANTA FINANCIAL HOLDING 15.25 TWD 5,004 0.94 0.92 0.94 0.92 1.1% 1.1%2890 TT Equity SINOPAC FINANCIAL HOLDING 13.25 TWD 3,611 7.70 7.65 0.69 NA 3.4% 3.4%

2884 TT Equity E.SUN FINANCIAL HOLDING 18.85 TWD 4,041 1.22 1.13 1.22 1.13 0.8% 0.9%2887 TT Equity TAISHIN FINANCIAL HOLDING 14.40 TWD 4,184 1.03 0.95 1.03 0.95 1.0% 1.0%2888 TT Equity SHIN KONG FINANCIAL HOLDING 9.22 TWD 2,853 7.73 7.30 0.55 NA 0.5% 0.7%Av erage 15.65 13.49 1.84 1.64 1.5% 0.9%Al ternativ e asset management `BX US Equity BLACKSTONE GROUP 29.61 USD 33,460 9.31 8.40 NA NA 6.1% 7.2%

KKR US Equity KKR & CO LP 23.10 USD 18,511 6.55 6.65 1.55 1.42 9.8% 9.3%APO US Equity APOLLO GLOBAL MANAGEMENT 25.69 USD 9,767 7.36 7.46 2.88 2.68 12.9% 11.5%CG US Equity CARLYLE GROUP 31.55 USD 10,293 8.21 7.82 0.72 0.59 8.1% 8.8%OAK US Equity OAKTREE CAPITAL GROUP 50.53 USD 7,969 9.28 8.67 3.25 3.53 7.7% 8.5%FIG US Equity FORTRESS INVESTMENT 6.89 USD 2,967 6.82 5.57 1.43 1.29 10.4% 11.7%

OZM US Equity OCH-ZIFF CAPITAL MANAGEMEN 12.90 USD 6,083 10.50 7.59 2.77 2.83 8.9% 12.2%Av erage 8.29 7.45 2.10 2.06 9.1% 9.9%Note: closing price of May 14, 2014

T icker NamePE Ratio PB Ratio Div idend Yie ld

Source: Deutsche Bank, Bloomberg Finance LP

15 May 2014


China Cinda


RDA – A shadow bank with mounting risks and insufficient protection

Restructuring Distressed Assets – A shadow bank in nature

We believe Cinda’s Restructuring Distressed Assets (RDA) is essentially a sub-prime lending business, offering loans to distressed borrowers (60% are property developers) to refinance their bank loans, trust loans and accounts payable, with a relatively higher interest rate of 13.5% on average and an average duration of two years. Figure 19 illustrates the deal structure of RDA with a property developer borrower as an example.

Figure 20: A quasi-loan business – The deal structure of Restructuring

Distressed Asset business with a property developer borrower as an example

- Repayment schedule: 2 years- Interest rates: 13 – 15% per annum- Collateral/guarantee enhancement

Cinda

Creditors-Suppliers

- Banks- Trust cos.

Property developer

Payment

Formation of D

istressed D

ebt Assets

Claim

s on Loans/ R

eceivables

Transfer of debt

Debt Restructuring*

•C

ollateral

•D

ebt R

epayment

Source: Deutsche Bank, company data

With total RDA assets growing by 9.4 times in the past two years, Cinda mainly sources RDA deals from the below three major channels:

Non-financial enterprises (NFEs) – 61% of total acquisitions in 2013. As the only AMC that obtained approval from the CBRC to purchase accounts receivable from NFEs, Cinda’s RDA sourced from NFEs has accounted for the majority in the past few years. With property developers making up 60% of the underlying borrowers, we believe Cinda mainly acquired accounts receivable from upstream sectors of the real estate sector, e.g. construction, steel and cement makers.

Non-bank financial institutions (FIs) – 16%. We believe Cinda mainly acquired troubled trust plans from trust companies before the due dates. Within the 21 nearly-defaulted trust cases we collected, two of them were bailed out by AMCs.

15 May 2014


China Cinda


Commercial banks – 23%. Cinda also provided “bridge loans” to troubled borrowers of banks before the loans turned to NPLs.

Figure 21: The net balance of RDA has soared 9.1x

during the past two years

Figure 22: Cinda sourced RDA from NFEs (60.7% in

FY13) – based on the acquisition cost for the period

9,681

48,068

97,971

5.6%

18.9%

25.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2011 2012 2013

Net balance of RDA (LHS) As % of total assets (RHS)(Rmb mn)

69.2%60.2% 60.7%

18.5%23.4% 23.4%

12.3% 16.3% 15.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013

NFE Banks Non-bank FIs


Mounting risks due to heavy reliance on real estate sector

Our key concern on Cinda’s RDA business is its heavy reliance on the real estate sector, which accounted for 60% of gross RDA balance as of end 2013.

We see rising risks related to Cinda’s real estate exposure, reflecting a lower-quality borrower profile, emerging weaknesses in the property sectors in lower-tiered cities and deleveraging in shadow banking, which we believe represents the key financing channel to Cinda’s underlying borrowers.

Our property analyst expects inevitable property price cuts in the near term and to see diverging operating performance with stronger developers benefiting while selected developers suffer from financial distresses. As such, a potential property price correction could lead to cash flow deterioration among Cinda’s weaker developer borrowers and hence may push up the impaired ratio of the RDA portfolio (impaired ratio at only 1.0% as of end-2013).

15 May 2014


China Cinda


Figure 23: 60% of Cinda’s RDA net balance was

extended to real estate sectors

Figure 24: Cinda’s RDA has been concentrated in real

estate sector over the past years, as has Orient, another

big-4 AMC

Real estate, 60%


10%


Manufacturing, 6%

Construction, 5%

Transportation, 3%

Mining, 1%

Others, 9%

78%68%

60%74%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cinda -2011

Cinda -2012

Cinda -2013

Orient -2013

Others

Mining

Transportation

Construction

Leasing&commercial servicesPublic utilities

Manufacturing

Real estate


A lower quality borrower profile Given relatively higher interest rates charged on underlying borrowers and the nature of extending loans to distressed borrowers, we believe the majority of Cinda’s RDA clients are weaker medium- and small-sized developers. Figure 24 demonstrates that the interest rate of Cinda’s RDA business is higher than that of other financing channels for property developers.

Figure 25: Ranges of interest rates charged on various financing channels for

real estate developers – Cinda’s RDA interest rate is among the highest,

suggesting weaker underlying borrowers

3.57

6.60

8.00

11.00

10.78

8.40

10.00

13.00

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Avg funding cost of listed developers

General bank developer loans

USD bonds Real estate trust loans Cinda's RDA lending

% Range of interest rates on various financing channels

Avg: 7.35

Avg: 13.5

R isks

Avg: 8.7


Emerging weaknesses in property sector in lower-tiered cities While the company does not disclose its real estate exposure breakdown by tier of city, we estimate at least half of its real estate RDA is located in lower-tiered cities (lower tier-2 and tier-3/4), as more than half of its RDA gross balance was extended to borrowers in less developed regions in China, i.e. the western (27% of gross balance), central (16%) and northeastern regions (8%).

15 May 2014


China Cinda


We see weaknesses emerging in property sectors in lower-tiered cities, evidenced by a notable decline in YTD residential property sale value (Figure 25) and a rising inventory period for lower tier-2 and tier-3/4 cities (Figure 26).

Figure 26: YTD residential property sales value yoy

growth by city tiers (2009 - 2M14) – Low-end tier-2 cities

were showing the sharpest decline

Figure 27: Inventory period for residential property (2011

– 3M14) – Tier 2/3/4 cities were all trending up above 15

months

-100%

-50%

0%

50%

100%

150%

2M09

4M09

1H09

8M09

09M

0912

M09

3M10

5M10

7M10

9M10

11M

102M

114M

111H

118M

1110

M11

12M

113M

125M

127M

129M

1211

M12

2M13

4M13

1H13

8M13

10M

1312

M13

Tier-1 Cities YoY High-end Tier-2 Cities YoYLow-end Tier-2 Cities YoY Tier-3/4 Cities YoY

-

5.0

10.0

15.0

20.0

25.0

30.0

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

monthTier 1 Cities Inventory High-end Tier 2 Cities InventoryLow-end Tier 2 Cities Inventory Tier 3/4 Cities Inventory

Source: Deutsche Bank, NBS. Note: We refer high-end tier-2 cities to tier-2 cities with higher GDP Source: Deutsche Bank, Soufun. Note: We refer high-end tier-2 cities to tier-2 cities with higher GDP

In addition, risks related to commercial property in tier-2 cities are climbing, in our view. As shown in Figure 27, for the six selected tier-2 cities, i.e. Chengdu, Tianjin, Qingdao, Chongqing, Shenyang and Wuhan, the vacancy rate of office buildings combined has been trending up and is expected to even rise much higher in 2014E, given the massive new supply, which is nearly three times 2013’s sales. Specifically, office building vacancy rates for Chongqing and Tianjin are expected to rise to 45% and 37% in 2014, according to the estimates of Jones Lang LaSalle (Figure 28).

Figure 28: For the six selected tier-2 cities, office building

supply in 2014E is nearly three times 2013’s sales,

potentially leading to much higher vacancy rates

Figure 29: Also, vacancy rates of these cities have been

on the rise, and Jones Lang LaSalle expects vacancy

rates for Chongqing and Tianjin to rise to 45% and 37%

81

605 820

1,195 1,056

240 294

673 699 853

2,531

17%

24%26% 26% 26%

0%

5%

10%

15%

20%

25%

30%

-

500

1,000

1,500

2,000

2,500

3,000

2009 2010 2011 2012 2013 2014E

000'sqm

Office building supply & demand dynamics - 6 tier-2 cities

GFA completed Sales Future Supply Vacancy rate (RHS)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2009 2010 2011 2012 2013 2014E

Vacancy rates of selected tier-2 cities

Chengdu

Tianjin

Qingdao

Chongqing

Shenyang

Wuhan

Source: Deutsche Bank, Jones Lang LaSalle Source: Deutsche Bank, Jones Lang LaSalle

The deceleration in shadow banking credit may squeeze the credit availability We believe weaker medium- and small-sized developers have been more reliant on shadow banking financing over the past few years, as banks loans have been restricted to top-tier developers since 2011 with name list lending strictly imposed.

15 May 2014


China Cinda


Reflecting several recently-issued regulations aiming to curb riskier shadow banking lending, including Circular No. 8 (on off-balance sheet non-standardized WMP assets and issued in March 2013), No. 107 (overall guideline in regulating shadow bank in January 2014), No. 99 (on trust lending in April 2014) and No. 11 (on non-standardized assets for rural financial institutions in April 2014), shadow banking credit growth has slowed down and we expect low growth to remain in the near term, leading to less credit availability to Cinda’s RDA borrowers. For example, total new trust loans have dropped 70% yoy in the first four months of 2014. As a result, we expect some smaller, weaker developer borrowers of Cinda may go under amid the property price correction and dried-up credit.

Figures 29 and 30 show a slowdown in growth of real estate trust and Chinese banks’ on-balance sheet non-standardized assets, respectively. Figure 31 demonstrates that shadow bank credit made up a smaller proportion of total social financing in 1Q14.

Figure 30: Real estate trust slowed down in 1Q14 due to

regulatory crackdown

Figure 31: Non-standardized assets from Chinese banks,

once an important financing channel to smaller property

developers, has declined by 4% hoh in 2H13

55

118

75

8

(2)(11)

1 12

82

42

82

140

118

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

(20)

-

20

40

60

80

100

120

140

160

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

Rmb bn New real estate trust (LHS) New real estate trust % total new trust

204660

9651,420

647283

248

626

895

1,158

193

293

919

1,869

2,193

680

1,201

2,510

4,1843,997

0.5%

0.8%

1.6%

4.6% 4.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2H11 1H12 2H12 1H13 2H13

Rmb bn

Proprietary investments in loan-type WMPs

Reverse repo backed by trust beneficiary rights

Reverse repo backed by bills

% of total assets (RHS)

Source: Deutsche Bank, Trustee Association of China Source: Deutsche Bank estimates, company data

Figure 32: Total social financing breakdown – Shadow

banking proportion decreased in 1Q14

Figure 33: Bank loans extended to property developers

remained largely stable over the past quarters

83%77%

67%73% 76%

60% 63%58% 55%

61%

0%4%

11%3%

17% 8%7%

4%

10%

6%6%

5% 6%10%

8% 15%

13%

3% 3%2%

8%11%

5%

7% 5%4% 8% 9% 8% 11% 14% 10%

7%1% 4% 7% 5% 2% 4% 3% 2% 1% 2%2% 2% 2% 2% 2% 2% 4% 3% 4% 2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 3M14

Total Social Financing in China - BreakdownOthers

Non-FI Enterprise Equity Raising

Net Corporate Bond Financing

Trust Loans

Entrusted Loans

Undiscounted bank acceptance billsBank loans

10%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

New developer loans as % of total new loans

8%

Source: Deutsche Bank, PBOC Source: Deutsche Bank, PBOC

Potential default ratio of real estate entrusted loans is rising, media reported The sluggish sales and elevated inventory level has already led to cash flow tightness of selected weaker property developers, evidenced by Rmb600m

15 May 2014


China Cinda


entrusted loans extended by listed companies in Zhejiang province to property developers that have already been overdue, rolled over or filed in litigation process, equivalent to a potential default ratio of 12%, according to 21st Century Business Herald on 10 May 2014.

Cinda is highly sensitive to property price, we estimate Our sensitivity analysis on the impact from property price correction suggests Cinda is highly sensitive to property prices. Under our assumptions, a 15% property price decline might impact Cinda’s FY13 earnings by 31%, including: (1) impact of 19% from worsening asset quality on RDA assets, where the rising impaired RDA ratio would push up the impairment losses; and (2) impact of 12% from more provisions charged on its held for sale property inventories and real estate investment.

Figure 34: Our sensitivity analysis on property price correction suggests Cinda is sensitive to property price change,

with a 15% property price drop knocking 31% off FY13 earnings

Property p rice drop by 5% 10% 15% 20%Impact 1 - Worsening asset qua lity on RDA assetsCurrent impaired ratio 1.00% 1.00% 1.00% 1.00%Increase to impaired ratio by (based on stress test of Huaxia Bank in 2010) 0.00% 0.46% 1.10% 1.73% based on stress test of Huaxia Bank in 2010Increase to impaired ratio at Cinda's RDA assets 0.50% 0.96% 1.60% 2.23% 0.5% higher on weaker property borrowersIncremental impaired assets 378 726 1,206 1,686 Impairment provision coverage ratio to incremental impaired assets 200% 200% 200% 200% Assume 200% coverageIncremental impairment provision charged (756) (1,452) (2,412) (3,373) Impact on FY13 earnings -6% -11% -19% -27%

Impact 2 - Fa ir va lue changes in its property investment and development portfo lioImpact on investment property (held for sale inventories + RE investment) (491) (982) (1,474) (1,965) Assume 50% impairment provision chargedImpact on FY13 earnings -4% -8% -12% -16%

Overa l l impact on FY13 earnings ( Impact 1 + Impact 2) -10% -19% -31% -42%


We expect rising impaired ratio and hence higher provision

Amid the mounting credit risks related to its real estate exposure, the near-term challenge for Cinda is the first repayment peak of RDA assets in 2014E with Rmb50.5bn RDA due, which would mostly likely be concentrated in 2H14E, as Cinda started aggressively acquiring RDA assets from 2012 and the average duration was around two years. Figure 34 shows the evolution of Cinda’s RDA gross balance during 2012-14E.

15 May 2014


China Cinda


Figure 35: Cinda started aggressively acquiring RDA assets in 2012, thus the

first repayment peak would occur in 2014E, most likely in 2H14E, we estimate

9.7

49.2

76.5

95.6

12.9

35.3

50.5 29.0

161.5

-

50.0

100.0

150.0

200.0

250.0

Gross balance -

2011

Acquired -2012

Acquired -2013

Acquired -2014E

Repayment -2012

Repayment -2013

Repayment -2014E

Accured interest -2012-14E

Gross balance -

2014

Rmb bn Evolution of RDA gross balance during 2012-14E

Repayment peak at 2014E

Source: Deutsche Bank estimate, company data

Compared with Chinese banks, Cinda’s RDA business indeed generates a higher margin. However, the provision coverage of Cinda’s RDA business was only slightly higher than Chinese banks, which seems insufficient, in our view, considering more distressed borrowers and much heavier concentration on the real estate sector.

Figure 36: Cinda’s RDA business generates much higher

margin (9.52%) than that of Chinese banks (3.93%)

Figure 37: But given the riskier profile of RDA business,

Cinda’s provision coverage, which was only slightly

higher than Chinese banks, looks light

Funding cost -3.98% Deposit cost -

1.98%

Spread - 9.52%

Spread - 3.93%

RDA yield -13.5%

Loan yield -5.90%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Cinda Chinese banks

1.00 0.98

Cinda RDA Bank loans

NPA ratio (%)

291275


NPA coverage ratio (%)

2.922.69


loan coverage ratio (%)

Source: Deutsche Bank, company data; Note: data of banks is the aggregate data of listed Chinese banks DB covers. Source: Deutsche Bank, company data; Note: data of banks is the aggregate data of listed Chinese

banks DB covers.

The asset quality of Cinda’s RDA business has started to deteriorate in 2H13, with the impaired loan balance soaring 114% hoh to account for 1.0% of gross RDA balance (1H13: 0.6%).

Looking ahead, we expect some smaller, weaker developer borrowers of Cinda’s RDA business to go under amid the property price correction and dried-up credit availability, and hence to push up its RDA impaired balance by 176% and 80% yoy to make up 1.8% and 2.5% of RDA gross balance in 2014E and 2015E respectively. As such, we expect Cinda to charge credit cost of 294bps and 287bps in 2014E and 2015E.

15 May 2014


China Cinda


Figure 38: We expect Cinda’s RDA impaired balance to

increase by 176% and 80% yoy to make up 1.8% and

2.5% of RDA gross balance in 2014E and 2015E

Figure 39: As a result, we expect Cinda to charge credit

cost of 294bps and 287bps in 2014E and 2015E

73 597 1,011

2,793

5,026

7,577

0.8%

1.2%1.0%

1.8%

2.5%

3.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2011 2012 2013 2014E 2015E 2016E

Rmb mn Impaired balance Impaired ratio (RHS)

20

1,472 1,501

3,873

5,312

5,921

41

494

194

294 287

257

-

100

200

300

400

500

600

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2011 2012 2013 2014E 2015E 2016E

bpsRmb mn New provision Credit cost on average RDA balance (RHS)

Source: Deutsche Bank estimates, company data Source: Deutsche Bank estimates, company data

15 May 2014


China Cinda


DES – A lower-than-expected margin of safety Cinda’s DES (debt-to-equity swap) portfolio was primarily converted from distressed assets of SOEs during the policy NPLs carve-out in 1999-2000. Premised on the low acquisition costs and the turnaround of many DES companies during the past economic cycles, Cinda realized a high exit multiple of 2.2x from the disposal of DES assets during 2010-13, translating into revenue contribution of 15% on average to the company. The market once perceived that there should be further potential for asset appreciation from Cinda’s DES portfolio, especially for its unlisted DES companies, as American Appraisal China Limited (AACL), an independent valuation specialist, valued Cinda’s top-20 unlisted DES companies at Rmb62.3bn as of 1H13, equivalent to 2.25 times the book value.

Nevertheless, our studies into 74 listed comparables to Cinda’s top-20 unlisted DES companies and financial data of six unlisted DES companies among the top-20, and Cinda’s heavy exposure to troubled coal sector (62%) lead us to apply a 30% haircut to total appraisal/market value of DES assets, translating into lower exit multiples from DES disposal in coming years and hence declining net gains.

Figure 40: Overview of Cinda’s DES portfolio – 62% exposure to coal sector

63%

15%

21%Listed DES

Other unlisted DES

Top 20 unlisted DES

Coal, 81%

Non-coal, 19%

Chemicals, 30%

Coal, 18%Metals,

37%

Manufacturing, 4%

Others, 11%

Coal, 62%

Chemical, 16%

Metals, 9%

Others, 13%

Total DES sector breakdown


Overall we apply 30% haircut to appraisal/market value of DES assets

As of end 2013, Cinda’s total DES book value amounted to Rmb42.3bn, accounting for 11% of total assets. Within its DES portfolio, 81% are unlisted with top-20 unlisted companies making up 65% of total DES book value.

We estimate the appraisal value of unlisted DES assets (based on the appraisal from AACL) and the market value of listed DES assets in combine amounted to Rmb79.3bn, equivalent to 1.8 times book value as of June 2013.

15 May 2014


China Cinda


However, in order to estimate the “true” fair value of Cinda’s DES assets, we believe a 30% discount should be applied to the total appraisal/market value, leading to a much lower margin of safety at 1.3 times book value as of December 2013. Our estimate reflects the following factors, which are elaborated in the subsequent sections:

32% haircut to appraisal value of unlisted DES assets, which was derived from 30% expected correction in share prices of 14 listed comparable coal companies since June 2013 and 10% discount due to lack of marketability, offset by relatively resilient share price of listed comparables to non-coal DES companies.

10% further decline to current market value of listed DES assets, due to heavy exposure to overcapacity sectors (85% of total listed DES).

Figures 40 and 41 illustrate how we derive the 30% haircut:

Figure 41: We believe the fair value of Cinda’s DES portfolio should be subject to a 30% haircut to its appraisal/market

value (32% haircut for unlisted DES and 10% for listed DES), leading to a lower safety of margin

Rmb mn Book va lue - 1H13Appra isa l / market

va lue Imp lied multip le

(x )Discount / further

MTM loss exp . Fa ir va lue - currentImplied multip le

(x ) - ad justedUnlis ted DES Appraisal value - 1H13 Discounts appliedTop 20 unlisted 27,689 62,300 2.25x 32% 42,321 1.53x - 13 coal companies 22,403 52,700 2.35x 37% 33,201 1.48x - 7 non-coal companies 5,286 9,600 1.82x 5% 9,120 1.73xOther unlisted 6,690 9,700 1.45x 33% 6,547 0.98xSub-tota l 34,378 72,000 2.09x 32% 48,868 1.42xLis ted DES Market value - current Further MTM loss exp.Top 20 listed 9,110 7,141 n.a. 10% 6,427 n.a.Other listed 167 131 n.a. 10% 117 n.a.Sub-tota l 9,277 7,271 n.a. 10% 6,544 n.a.

Tota l DES assets 43,655 79,271 1.82x 30% 55,412 DES book value 2013 42,275

Fair value % 2013 book value 1.31x

Source: Deutsche Bank estimates, company data。Note: Appraisal value is provided by American Appraisal China Limited.

Figure 42: Our analysis into 74 listed comparables for Cinda’s top-20 unlisted and listed DES portfolio points to

potential 30% haircut to total appraisal and market value

27.7

6.7

9.3

43.7

79.3

42.3

6.5

6.5

55.4

42.3

20.0

3.2

0.7

23.9

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Top 20 unlisted DES

Other unlisted DES

Listed DES Total DES - BV 1H13

Total DES -Appraisal +

market value

Top 20 unlisted DES

Other unlisted DES

Listed DES Total DES - fair value

Total DES - BV 2013

Rmb bn

1.82x

1.31x

30% hair-cut

32% discount

33% discount 10% further MTM lossThe market once perceived huge potential for asset appreciation...

But we believe significant discount should be applied


15 May 2014


China Cinda


As a result, we expect Cinda to record decreased exit multiples of 1.37 and 1.36 in 2014E and 15E (vs. 2.19x on average during 2010-13), translating into fewer net DES disposal gains and lower revenue contribution from DES portfolio of 6% on average during 2014E-16E (vs. 15% during 2010-13), as shown in Figures 42 and 43.

Figure 43: We expect the exit multiples of Cinda’s DES

assets to trend downward

Figure 44: In the meantime, total income from DES as a

percentage of total group income should also decrease

from 12% in 2013 to 5% in 2016E

2.27 2.162.66

1.851.37 1.36 1.36

2.73

2.12

2.86

2.20

1.42 1.42 1.421.68

3.44

1.10

1.55

1.20 1.10 1.10

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2010 2011 2012 2013 2014E 2015E 2016E

[x] Exit multiples of Cinda's DES portfolioTotal Unlisted Listed

3.6 4.1

5.6 5.0

4.5 3.9

3.3

15%

17%17%

12%

9%

6%

5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

-

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013 2014E 2015E 2016E

Rmb bn Total DES income As % of total income

Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data

32% haircut to appraisal value of unlisted DES assets

With stakes in 187 unlisted companies, Cinda’s unlisted DES book value amounted to Rmb34.1bn as of 2013, making up 81% of total DES book value. Cinda recorded unlisted DES companies at acquisition costs.

Its top-20 unlisted companies accounted for 80.5% of total unlisted DES book value as of June 2013. Among its top-20 unlisted DES companies, 13 are coal companies, whose book value and appraisal value by AACL make up 81% and 85% of the top-20, respectively.

15 May 2014


China Cinda


Figure 45: List of Cinda’s top-20 unlisted DES companies with total book value of Rmb27.7bn and appraisal value of

Rmb62.3bn (equivalent to 2.25x book value) Item Sector Investee company Stake

1 Coal Shenhua Group Zhungeer Energy Co., Ltd. 42.24%

2 Coal Datong Coal Mine Group Co., Ltd. 30.12%

3 Coal Huainan Mining Industry (Group) Co., Ltd. 24.84%

4 Coal Xishan Coal Electricity Group Co., Ltd. 35.47%

5 Coal Yangquan Coal Industry (Group) Co., Ltd. 40.42%

6 Chemicals Wengfu (Group) Co., Ltd. 47.16%

7 Coal Shanxi Jincheng Anthracite Mining Group Co., Ltd. 16.45%

8 Coal Tiefa Coal Industry (Group) Co., Ltd. 30.46%

9 Coal Huozhou Coal Electricity Group Co., Ltd. 36.97%

10 Coal Shanxi Fenxi Mining Industry (Group) Co., Ltd. 36.02%

11 Manufacturing China National Materials Co., Ltd. 8.96%

12 Coal Shandong Zhongxing Energy Co., Ltd. 20.74%

13 Transportation Ningxia Ningdong Railway Corporation Limited 25.90%

14 Metals Baiyin Nonferrous Metal Group Co., Ltd. 5.97%

15 Coal Ningxia Lingxin Coal Industry Co., Ltd. 52.46%

16 Manufacturing Tianjin Pipe (Group) Corporation 6.11%

17 Chemicals Shanghai Coking & Chemical Corporation 26.58%

18 Construction China Nuclear Engineering Corporation Limited 14.85%

19 Coal Guizhou Shuicheng Coal Mining (Group) Co., Ltd. 20.23%

20 Coal Huaibei Mining Co., Ltd. 6.79%

Book value of top-20 unlisted companies – 1H13 27,674

As % of total book value of unlisted companies – 1H13 80.5%

Acquisition cost of top-20 unlisted companies – 1H13 27,689

Calculated value by American Appraisal – 1H13 * 62,300

Calculated value / book value of top-20 unlisted companies (x) – 1H13 2.25Source: Deutsche Bank, Company data * Note: American Appraisal is an independent valuation specialist

We apply a 32% haircut to the appraisal value from AACL on Cinda’s unlisted DES assets and we take the following factors into consideration:

1) 74 listed comparables’ recent share price performance For Cinda’s top-20 unlisted DES companies, we collected 74 listed comparables, including 14 listed coal companies and 60 listed non-coal companies.

For Cinda’s 13 unlisted coal companies, which accounted for 81% of the top-20, the share prices of the 14 listed comparables have declined by 16% during June 2013 to 14 May 2014. In addition, these listed coal companies are trading at 5.87x EV/2013 EBITDA (according to data from Bloomberg Finance LP), representing a 24% decline from 7.72x EV/2012 EBITDA, which was employed by AACL to derive the appraisal value. As such, we applied a 20% discount to account for share price correction of listed comparables.

For non-coal companies, the share price and valuation of the 60 listed comparables have increased by 15% and 21% respectively since June 2013.

Please refer to Appendix B for the full list of the 74 listed comparables. Figures 46 and 47 showcase the share price performance of the selected listed comparables.

15 May 2014


China Cinda


Figure 46: An analysis into 74 listed comparables for Cinda’s top-20 unlisted DES portfolio – Valuation and market cap

of the 14 listed coal companies have decreased by 26.5% and 20.5% respectively, since June 2013

Listed comparab les to C inda's % of C inda's No. o f unlis ted DES companies unlis ted DES comparab les 28-Jun-13 14-May-14 Change % 28-Jun-13 14-May-14 Change %Coal 85% 14 625.98 526.22 -16% 7.72 5.87 -24%Non coal 15% 60 2,129.73 2,454.51 15% 11.22 13.62 21% - Phosphate compounds and fertilizer 8 40.06 41.24 3% 16.96 11.88 -30% - Coking chemicals 5 14.66 14.96 2% 71.15 30.71 -57% - Cement 10 154.37 190.53 23% 7.97 9.79 23% - Non-ferrous metals 10 120.46 108.20 -10% 16.28 16.99 4% - Steel pipes 8 53.67 53.09 -1% 13.37 11.21 -16% - Railway construction 12 1,383.40 1,702.98 23% 11.24 39.70 253% - Nuclear power plants 7 363.12 343.50 -5% 7.50 5.82 -22%

EV/EBITDA (x )Tota l market cap (Rmb bn)


Figure 47: For the 14 listed coal company comparables to Cinda’s unlisted

DES companies, weighted market capitalization has declined by 16% since

June 2013

-16%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%


14 listed coal comparables for unlisted DES - % change since Jun13

Source: Deutsche Bank, Bloomberg Finance LP. Note: Price updated on 14 May 2014.

2) Further downside on heavy exposure to coal sector and weakening financial conditions We expect further downside of 15% to the share price of listed comparables to Cinda’s top-20 unlisted DES companies, which reflects the following two reasons.

Firstly, Cinda’s DES portfolio is heavily concentrated in the coal sector with exposure of 62% as of 1H13. Our coal analyst remains bearish on the coal sector and expects a persistent oversupply imbalance with mounting supply pressure and slowed demand. Specifically, with anticipated GDP growth slowdown (vs. the past decade), structural changes in the economy, energy mix changes and energy efficiency improvements, Deutsche Bank believes China’s demand for thermal coal will rise, at most, 3-4% pa in the coming years. In the meantime, over-investment in the past years should still lead to high nameplate capacity addition (9% in 2013 and 7% in 2014, according to DB estimates). The structural overcapacity issue will likely trigger the Chinese thermal coal equilibrium price to trend lower than that in 2013.

15 May 2014


China Cinda


Figure 48: Coal price could continue to remain low

Figure 49: 13 listed coal companies recorded declines in

net profits in recent years

995

0

200

400

600

800

1000

1200

3-Mar-03 3-Mar-05 3-Mar-07 3-Mar-09 3-Mar-11 3-Mar-13 3-Mar-15

Rmb/t QHD 5500kcal FOB coal price (2003 - 2015E)

DB forecast

37

56 57

76 88 89

69

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0

10

20

30

40

50

60

70

80

90

100

2007 2008 2009 2010 2011 2012 2013

Sector net profit YoY growth (RHS)Rmb bn %

Source: Deutsche Bank estimates, WIND Source: Deutsche Bank, WIND

Secondly, our financial analysis of the six unlisted DES companies among the top-20 which have issued bonds points to worsening financial conditions with sluggish profitability and weakened debt servicing ability. As shown in Figure 50, the weighted average ROAE of the six companies has declined to negative 0.11% in 1H13 from 8.58% in 2011. Accordingly, EBIT coverage of the six companies weakened to 1.37x in 1H13 from 2.71x in 2011.

Figure 50: Weighted average ROAE of the six unlisted

DES companies dropped to negative 0.11% in 1H13 from

8.58% in 2011

Figure 51: Weighted average EBIT coverage of the six

unlisted DES companies declined to 1.37x in 1H13 from

2.71x in 2011

2.47%

6.50%

8.58%

2.02%

-0.11%-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

2009 2010 2011 2012 1H13

ROAE - 6 unlisted DES weighted

2.36

3.19

2.71

2.07

1.37

1.00

1.50

2.00

2.50

3.00

3.50

2009 2010 2011 2012 1H13

EBIT coverage - 6 unlisted DES weighted

Source: Deutsche Bank, company data, WIND Source: Deutsche Bank, company data, WIND

15 May 2014


China Cinda


Figure 52: Financial summary of the six unlisted DES companies with deteriorating debt servicing capabilities and sharp

decline in profit and ROAE Unlisted DES Sector 2011 2012 1H13 2011 2012 1H13 2011 2012 1H13 2011 2012 1H13

Debt servicing EBIT coverage CFO coverage Leverage (A/E) Cash conversion days

China National Materials Co., Ltd. Manufacturing 4.85 2.28 1.99 -0.56 1.68 2.47 3.33 3.20 3.52 1.57 19.56 44.40

Tiefa Coal Industry (Group) Co., Ltd. Coal N.A. 3.91 1.85 N.A. -0.18 -2.35 1.87 2.21 2.17 3.85 15.69 60.56

Shanxi Jincheng Anthracite Mining Group Coal 2.85 1.85 1.39 3.06 1.36 0.41 4.19 4.34 4.42 -29.40 -17.64 -7.49

Wengfu (Group) Co., Ltd. Chemicals 4.07 1.77 1.05 -2.60 4.28 -6.53 3.35 4.23 3.93 38.54 14.77 26.88

Datong Coal Mine Group Co., Ltd. Coal 2.28 1.75 1.18 8.55 -1.41 7.45 3.24 3.70 4.19 3.80 1.80 15.21

Yangquan Coal Industry (Group) Co., Ltd. Coal 3.46 1.90 1.44 4.79 1.09 -0.62 3.57 4.21 3.82 -9.28 -6.53 5.11

Profitability Profit growth Cost-to-income ratio ROAA ROAE

China National Materials Co., Ltd. Manufacturing 31% -67% -60% 92.1% 98.3% 97.6% 5.49% 1.89% 1.27% 14.24% 4.39% 1.76%

Tiefa Coal Industry (Group) Co., Ltd. Coal 11% -78% -40% 88.9% 97.5% 99.2% 6.29% 1.16% 0.50% 11.84% 2.56% 1.51%

Shanxi Jincheng Anthracite Mining Group Coal 52% -22% -23% 95.2% 98.7% 99.4% 3.16% 1.35% 0.60% 14.65% 9.74% 6.83%

Wengfu (Group) Co., Ltd. Chemicals 27% -79% N.A. 97.6% 99.0% 100.0% 2.76% 0.64% 0.01% 8.91% 1.73% -0.73%

Datong Coal Mine Group Co., Ltd. Coal -14% N.A. N.A. 98.2% 99.4% 99.6% 0.49% -0.07% -0.39% 2.68% -1.55% -5.60%

Yangquan Coal Industry (Group) Co., Ltd. Coal 198% -85% -27% 96.7% 98.8% 99.3% 2.24% 0.35% 0.31% 10.01% 1.43% 2.02%Source: Deutsche Bank; Company data

3) Discount of 10% due to lack of marketability Cinda disposed its DES assets through IPOs, mergers and acquisitions and repurchases from controlling shareholders, with IPOs normally generating the highest exit multiples. However, due to unfavorable capital market conditions and IPO pipelines, we believe it would be quite difficult for Cinda to dispose unlisted DES assets through IPOs. Hence, we apply a further discount of 10% to reflect the lack of marketability.

China’s capital market has shifted towards smaller-sized deals and government-supported sectors over the past years. We estimate Cinda’s top-20 unlisted DES companies could potentially have an IPO size of Rmb1.28bn, which is much higher than the Rmb0.68bn on average in 2012, as shown in Figure 53. In addition, we collected the information of 186 companies in the IPO pipeline released by the CSRC and we found that there is only one mining company expected to go public (Figure 54). None of Cinda’s top-20 listed companies is included in the pipeline list.

15 May 2014


China Cinda


Figure 53: Average IPO size has been on the downtrend

since 2009, much smaller than the estimated IPO size of

Cinda’s top-20 unlisted DES companies

Figure 54: Unfavorable IPO pipelines – Only one mining

company is expected to go public

762 430

1,153

3,120

4,413

1,398

1,888

1,349 1,013

680

-

1,282

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Cinda

Rmb mn Average IPO size

Estimated potential IPO size of Cinda's top 20 unlisted DES companies

Manufacturing, 37, 20%

Technology, 19, 10%

Pharmaceutical&bio-tech, 18,

10%Machinery, 15, 8%

Electronics, 14, 8%

Chemical, 9, 5%

Food&beverage, 9, 5%

Automobile , 8, 4%

Design&decoration, 8, 4%

Transportation, 8, 4%

Mining, 1, 1%

Others, 40, 21%

Current IPO pipeline companies by sector

Source: Deutsche Bank estimate, CSRC Note: Estimated IPO size of Cinda’s top-20 unlisted DES companies = Average book value per company / percentage of Cinda’s shareholding (27%) * estimated average issuance contribution (25%)

Source: Deutsche Bank, CSRC

10% further decline to market value of listed DES assets

With shareholdings in 26 companies, Cinda’s listed DES book value amounted to Rmb8.1bn as of 2013. Cinda booked the value of listed DES assets based on trading prices and any mark-to-market losses (gains) are reflected in impairment losses (recoveries) charged on DES assets.

Figure 55: The list of Cinda’s top-20 listed DES companies – Total market capitalization attributable to Cinda has

decreased by 13.1% since June 2013 Item Sector Investee company BBG ticker Stake Market cap (RMB m) as of

As of 1H13 6/28/2013 12/31/2013 hoh chg 4/30/2014 Ytd chg

1 Chemicals Qinghai Salt Lake Industry Co., Ltd 000792 CH Equity 7.27% 1,959 1,934 -1.2% 1,665 -13.9%

2 Metals Aluminum Corporation of China 601600 CH Equity 5.92% 2,248 2,421 7.7% 2,297 -5.1%

3 Coal Henan Dayou Energy 600403 CH Equity 4.01% 817 683 -16.4% 517 -24.3%

4 Coal Jizhong Energy Resources 000937 CH Equity 2.82% 576 484 -16.0% 370 -23.5%

5 Chemicals Yangmei Chemical 600691 CH Equity 2.48% 308 226 -26.7% 167 -26.1%

6 Chemicals Yunan Yuntianhua 600096 CH Equity 2.29% 305 230 -24.6% 192 -16.6%

7 Metals Yunnan Copper 000878 CH Equity 2.20% 302 271 -10.2% 237 -12.6%

8 Coal Zhengzhou Coal Industry & Electric Power 600121 CH Equity 4.81% 248 246 -0.8% 201 -18.5%

9 Coal Guizhou Panjiang Refined Coal 600395 CH Equity 1.44% 218 173 -20.7% 164 -5.1%

10 Transportation Jiangsu Lianyungang Port 601008 CH Equity 5.75% 133 176 32.2% 237 34.3%

11 Transportation Erzhong Group (Deyang) Heavy Industries 601268 CH Equity 1.24% 121 72 -40.1% 67 -7.5%

12 Finance Bank of Communications 601328 CH Equity 0.04% 119 120 0.6% 113 -6.1%

13 Manufacturing Fujian Qingshan Paper Industry 600103 CH Equity 5.02% 116 123 6.0% 119 -3.0%

14 Chemicals Kailuan Energy Chemical 600997 CH Equity 1.61% 113 111 -2.3% 87 -21.4%

15 Construction China Gezhouba Group 600068 CH Equity 0.80% 110 110 0.5% 140 26.4%

16 Manufacturing CITIC Heavy Industries 601608 CH Equity 0.73% 66 67 2.4% 63 -6.2%

17 IT Shandong Ispur Software 600756 CH Equity 1.36% 32 50 57.9% 46 -8.4%

18 Manufacturing FAWER Automotive Parts 200030 CH Equity 1.79% 128 140 9.3% 150 6.8%

19 Coal Anyuan Coal Industry Group 600397 CH Equity 0.64% 29 27 -5.6% 25 -6.4%

20 IT China National Software & Service 600536 CH Equity 1.08% 27 101 270.2% 73 -27.3%

Subtotal of total 20 listed companies 7,975 7,766 -2.6% 6,930 -10.8%Source: Deutsche Bank; company data

15 May 2014


China Cinda


Since June 2013, the share price of Cinda’s top-20 listed DES companies, which combined made up 98% of total listed DES book value, has declined 14% on average.

Figure 56: Top 20 listed DES companies – Weighted market capitalization

attributable to Cinda has declined by 11% since June 2013

11%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


Top 20 listed DES - % change since Jun13

Source: Deutsche Bank, Bloomberg Finance LP. Note: Price updated on 14 May 2014.

We assume a further share price correction of 10% to Cinda’s listed DES, to reflect its heavy exposure on overcapacity sectors, i.e. chemical (30%), coal (18%) and metals (37%).

15 May 2014


China Cinda


TDA – Lower margin but faster turnover For Cinda’s Traditional Distressed Asset (TDA) business, the company acquires NPLs from commercial banks at a certain discount to NPL original value and disposes of them through various means for cash.

Figure 57: The deal structure of Cinda’s TDA business – Acquiring NPLs from

commercial banks and disposing NPLs through various means

Cinda

Commercial banks

Debtor Company

Cash Equity Real Assets

• Asset Securitization• Entrusted Disposal• Debt Restructuring• Sale• Recovery through Litigation• Regular Collection• Asset Swaps

• Negotiated Transfer• Issuer Repurchase• Equity Swap• Packaged Disposal• Public Auctions

• Debt Repayment in Real Assets

Formation of Distressed Debt Assets

Claims on Loans

Transfer of Distressed Assets

Payment

• Debt Repayment in Equity Holdings• Debt to Equity Swaps

• Lease and Transfer of Real Assets

• Conversion to Equity


We expect margin on NPL disposal to trend lower

Cinda’s TDA business has generated a decent return on disposal of 119% during 2010-13, contributing to 16% of group revenue. We believe such a high return was mainly attributable to cheap acquisition costs during 2004-05 when the big-four banks carved out NPLs commercially for IPOs, and also to secular asset appreciation in China over the past decade (10% CAGR during 2003-13).

Figure 58: Cinda’s TDA business has generated decent

return on disposal over the past few years

Figure 59: TDA’s strong profitability was attributable to

the asset appreciation over the past decade

119%

147%

112% 104%

24%

18%

12% 11%

0%

5%

10%

15%

20%

25%

30%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2010 2011 2012 2013

Return on disposal (LHS) TDA income as % of total income

-20%

-10%

0%

10%

20%

30%

40%

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

Feb-

01A

ug-0

1M

ar-0

2S

ep-0

2A

pr-0

3O

ct-0

3M

ay-0

4N

ov-0

4Ju

n-05

Dec

-05

Jul-0

6Fe

b-07

Aug

-07

Mar

-08

Sep

-08

Apr

-09

Oct

-09

May

-10

Nov

-10

Jun-

11D

ec-1

1Ju

l-12

Feb

13A

ug 1

3M

ar 1

4

Rmb/sqm National residential property price yoy % (RHS)

10% CAGR 2003-13

Source: Deutsche Bank, company data. Note: Return on disposal = disposal income acquisition cost - 1 Source: Deutsche Bank, NBS, Soufun

15 May 2014


China Cinda


Going forward, we expect Cinda’s TDA business to generate lower return on disposal, mainly premised on the below three factors:

1) 84 TDA resolution cases – Higher-return disposal means no longer workable We collected data on 84 Cinda’s TDA resolution cases from five books published by the company, with total NPL original value of Rmb63bn, or 6% of all NPLs acquired by Cinda during 1999-2012. These cases delivered an average NPL recovery rate of 36 cents in a dollar with 4.3 years on average to resolve.

More importantly, litigation (mainly through forced auction of collateral), auction of collateral and development of the land/property are the three means with the highest NPL recovery rate at 84-86 cents in a dollar, suggesting that the appreciation of land/property was the key driver to strong return on disposal in past years.

We believe that these higher-return disposal means will not likely be able to generate such a decent recovery rate going forward, as we believe the fast asset appreciation in China has largely come to an end due to slower economic growth (compared with the past decade) and elevated debt levels.

Figure 60: Our proprietary study into 84 NPL resolution cases by Cinda suggests that property price appreciation was

the key driver of high return on NPL disposal (sorted by NPL recovery rate) By disposal mean No. of cases Average NPL

amount (principal + accrued interest)

[Rmb m]

Average NPL recovery value [Rmb

m]

NPL recovery rate (cents in a dollar)

Average resolution time (years)

Litigation 3 52 45 86 3.9

Auction of collateral 7 1,193 1,013 85 2.7

Development of the land or property projects 5 120 101 84 5.1

Execution of guarantee 3 83 57 69 4.9

Debt restructuring 21 447 219 49 4.4

Multiple means 10 1,840 554 30 4.6

Repayment in real assets 2 402 83 21 5.0

Debt to equity swap 14 623 117 19 5.5

Sell to third-party buyers 19 922 153 17 3.6

TOTAL 84 764 272 36 4.3 Source: Deutsche Bank, NPL Disposal Case Selection of China Cinda Asset Management (Edited by Mr. TIAN Guoli, former President of the company)

2) Survey of listed banks – recently-sold NPLs may generate low return Our survey of listed banks suggests that the NPL packages recently sold by them were economically unfavorable to AMCs, given:

Sector wise, these packages are concentrated in overcapacity sectors, such as steel traders, and other manufacturing and wholesale & retail trade, pointing to potentially lower recovery rate. In FY13, new NPL formation was mostly concentrated in manufacturing (80% of total new NPLs) and wholesale & retail trade sectors (64%).

Banks are currently more inclined to dispose lower quality NPLs (mostly loss loans with 100% provision charged), as we are still at the early stages of an NPL uptrend cycle.

15 May 2014


China Cinda


Figure 61: Our survey of listed banks suggests that NPLs disposed in FY13 were largely located in overcapacity sectors

at an average price of 30-40 cents in a dollar Banks NPL transfer amount

(Rmb bn) % of NPL balance

2013 Avg. selling price (cents in a dollar)

Sector Region 2014 plan

ICBC 14.1 12.2% 30-40 N.A. N.A. Less transfer

CCB 6.0 7.0% 33 wholesale & retail, manufacturing Yangtze River Delta More transfer

ABC 4.1 4.7% 35 wholesale & retail, manufacturing Yangtze River Delta N.A.

BOC 4.0 5.5% N.A. wholesale & retail, manufacturing Yangtze River Delta More transfer

BoCom 12.0 35.0% N.A. Steel trade N.A. n.a.

MSB N.A. N.A. N.A. Steel trade N.A. N.A.

SPDB 1.9 14.5% Market average wholesale & retail, manufacturing Yangtze River Delta N.A.Source: Deutsche Bank, company data

Figure 62: NPL formations were mainly from manufacturing (80% of total new

NPLs) and retail & wholesale trade sectors (64%) in FY13

80%

64%

2% 8%11%

13%13%

100%

-30%

-10%

10%

30%

50%

70%

90%

110%

130%

150%

170%

Manufacturing Retail & wholesale

Construction Property Others Power supply Transportation Total changes

New NPL formation breakdown by sector - FY13

More concentrated inovercapacity sectors


Similarly, the 84 TDA resolution cases reveal that manufacturing and wholesale & retail trade sectors generated lower NPL recovery rates at 38 and 26 cents in a dollar, respectively.

Figure 63: The same study breakdown by sector with public utility (recovered 76 cents in a dollar) and transportation (60

cents recovered) delivering the highest recovery rates By sector No. of cases Average NPL

amount (principal + accrued interest)

[Rmb m]

Average NPL recovery value [Rmb

m]

NPL recovery rate (cents in a dollar)

Average resolution time (years)

Public utility 8 300 229 76 6.0

Transportation 3 104 63 60 4.8

Manufacturing 28 570 216 38 4.4

Others & mixed 24 1,440 512 36 2.8

Real Estate 11 355 106 30 4.8

Construction 3 494 135 27 4.8

Wholesale and retail trade 2 1,003 265 26 4.5

Mining 5 757 133 18 6.6

Grand Total 84 764 272 36 4.3 Source: Deutsche Bank, NPL Disposal Case Selection of China Cinda Asset Management (Edited by Mr. TIAN Guoli, former President of the company)

3) One Case One Approach – Constraints from human resources In our view, Cinda’s TDA cases are resolved in a “One Case One Approach” manner. As suggested by the 84 cases we collected, TDA is a labor-intensive and highly-specialized business as it took 4.3 years on average with harsh

15 May 2014


China Cinda


negotiations with dozens of stakeholders in order to achieve a recovery rate of 36 cents in a dollar for an average deal size of Rmb764m (much smaller than that of banks). Therefore, the fast growth of TDA or the entire DAM business needs the support from sufficient number of talents.

In contrast, with its DAM assets jumping 1.7 times during 2010-13, the company’s number of employees only rose by 19% during the same period. We think potentially Cinda might face constraints from human resources, which could lead to slower growth or weaker risk management.

Figure 64: While Cinda’s DAM assets jumped 1.7 times

during 2010-13, its number of employees has only

slightly increased by 19%

Figure 65: Hence, DAM assets per employee rose from

Rmb5.59m in 2010 to Rmb12.71m in 2013, suggesting

potential constraints of human resources

84.5 91.6

140.3

228.6

15,108

19,429 18,982

17,980

-

5,000

10,000

15,000

20,000

25,000

0.0

50.0

100.0

150.0

200.0

250.0

2010 2011 2012 2013

No.Rmb bn DAM assets (LHS) No. of employees (RHS)

5.59 4.71

7.39

12.71

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2010 2011 2012 2013

Rmb mnDAM assets per employee (Rmb mn)


Overall, we forecast Cinda’s TDA business to deliver lower recovery rates in coming years, hence dragging down its return on disposal, as shown in Figures 66 and 67.

On the other hand, we expect its TDA acquisition price to trend down slightly, mainly premised on increasing NPL supply from commercial banks, offset by intensifying competition from the other three AMCs, provincial AMCs and other distressed asset managers.

Figure 66: We expect Cinda’s TDA to deliver lower

recovery rate with largely stable acquisition price

Figure 67: As a result, its return on disposal is expected

to decrease

28 28 30 30 30 28 26

61

69

59 57 54

47 45

-

10

20

30

40

50

60

70

80

2010 2011 2012 2013 2014E 2015E 2016E

Acquisition price (cents in a dollar) * Recovery rate (cents in a dollar) *

119%

147%

112%104%

80%

57%50%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2010 2011 2012 2013 2014E 2015E 2016E

Return on disposal

Source: Deutsche Bank estimates. * Note: Estimated by Deutsche Bank. Source: Deutsche Bank estimates, company data

15 May 2014


China Cinda


Growth potential in NPL supply

We expect the supply of NPL transfer from commercial banks to grow strongly in coming years, given the modest asset quality of the entire banking sector and rising incentives for banks to sell off NPLs due to supportive policies and improving economics.

Firstly, we expect the asset quality of the entire Chinese banking sector to deteriorate modestly, with total NPL balance rising by 29% and 26% yoy to account for 1.92% and 2.15% in 2014E and 2015E, compared with 1.68% in 2013. Within the banking sector, commercial banks should deliver milder asset quality deterioration than other banking financial institutions (mostly rural credit cooperatives and village banks).

Figure 68: For the entire banking system, we expect the NPL balance to rise

by 29% and 26% yoy to reach 1.92% and 2.15% in 2014E and 2015E

434 428 493 592 768

975 1,258

810 625 582

697

891

1,121

1,389

1,244

1,053 1,075

1,289

1,659

2,096

2,647

1.14% 1.00% 0.95% 1.00%1.15%

1.30% 1.50%

6.29%

4.06%3.78%

4.00%

4.50%5.00%

5.50%

2.44%

1.81% 1.60%1.68% 1.92%

2.15% 2.43%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

-

500

1,000

1,500

2,000

2,500

3,000

2010 2011 2012 2013 2014E 2015E 2016E

Rmb bn NPL balance - other banking FIs NPL balance - commercial banks

NPL ratio - commercial banks (RHS) NPL ratio - other banking FIs (RHS)

NPL ratio - entire banking system (RHS)

Source: Deutsche Bank estimates, PBOC, CBRC

For listed banks under our coverage, we forecast NPL balance to increase by 20.1% and 18.5% yoy to account for 1.04% and 1.10% of total loans in 2014E and 2015E, respectively.

15 May 2014


China Cinda


Figure 69: We forecast listed banks to grow their NPL balance by 20.1% and 18.5% yoy to account for 1.04% and

1.10% of total loans in 2014E and 2015E, respectively NPL balance (Rmb m) NPL balance yoy growth NPL ratio (%)

2012 2013 2014E 2015E 2012 2013 2014E 2015E 2012 2013 2014E 2015E

ICBC 74,575 93,689 109,201 128,418 2.1% 25.6% 16.6% 17.6% 0.85% 0.94% 0.99% 1.05%

CCB 74,618 85,264 102,609 121,850 5.2% 14.3% 20.3% 18.8% 0.99% 0.99% 1.06% 1.12%

ABC 85,848 87,781 99,702 110,805 -1.7% 2.3% 13.6% 11.1% 1.33% 1.22% 1.22% 1.20%

BOC 65,455 73,119 82,993 93,589 3.4% 11.7% 13.5% 12.8% 0.95% 0.96% 0.97% 0.99%

BoCom 26,995 34,310 40,091 47,141 22.8% 27.1% 16.8% 17.6% 0.92% 1.05% 1.11% 1.18%

CMB 11,694 18,332 25,650 32,729 27.5% 56.8% 39.9% 27.6% 0.61% 0.83% 1.02% 1.15%

CNCB 12,255 19,966 25,467 31,635 43.5% 62.9% 27.6% 24.2% 0.74% 1.03% 1.15% 1.26%

MSB 10,523 13,404 17,907 22,119 39.6% 27.4% 33.6% 23.5% 0.76% 0.85% 1.01% 1.10%

CRCB 1,696 1,649 2,028 2,452 -18.6% -2.7% 23.0% 20.9% 0.98% 0.80% 0.85% 0.90%

Huishang 949 1,051 1,600 2,104 45.1% 10.8% 52.2% 31.5% 0.58% 0.54% 0.70% 0.80%

BOCQ 256 355 531 858 12.8% 38.5% 49.7% 61.6% 0.33% 0.39% 0.50% 0.70%

SPDB 8,940 13,061 19,116 24,953 53.4% 46.1% 46.4% 30.5% 0.58% 0.74% 0.95% 1.10%

INDB 5,286 10,331 13,669 17,704 42.3% 95.4% 32.3% 29.5% 0.43% 0.76% 0.90% 1.05%

PAB 6,866 7,541 9,653 12,211 108.4% 9.8% 28.0% 26.5% 0.95% 0.89% 0.98% 1.08%

BOBJ 2,931 3,788 5,459 7,793 37.3% 29.3% 44.1% 42.7% 0.59% 0.65% 0.80% 1.00%

BONJ 1,044 1,308 2,033 2,685 30.0% 25.3% 55.4% 32.1% 0.83% 0.89% 1.20% 1.40%

BONB 1,109 1,525 2,074 2,708 33.2% 37.6% 35.9% 30.6% 0.76% 0.89% 1.05% 1.20%

CEB 7,613 10,029 12,566 16,275 32.8% 31.7% 25.3% 29.5% 0.74% 0.86% 0.95% 1.10%

Sector 398,652 476,503 572,348 678,030 8.6% 19.5% 20.1% 18.5% 0.92% 0.98% 1.04% 1.10%Source: Deutsche Bank estimates, company data

Secondly, policies have been turned favorable for commercial banks to sell off NPL packages, as the CBRC and the MOF jointly issued a circular in June 2012 to encourage banks to transfer NPLs out in batches. This circular specifies the scope and procedures of NPL transfer in a commercial manner.

Thirdly, we believe the economics for banks to sell off NPLs are rising, given: (1) banks could free up capital and loan quota by selling off NPLs; and (2) banks could achieve higher return by selling NPLs than regular collection or write-off.

Therefore, under the backdrop of decreasing disposal margin and growing NPL supply, we believe Cinda will accelerate the turnover of its TDA business.

Figure 70: We expect Cinda to accelerate NPL

acquisition and disposal in coming years

Figure 71: As a results, we forecast the TDA income

would grow by 62% and 13% in 2014E and 2015E

3.5 2.9 3.5

12.3 15.7 18.5 19.3

(4.4) (2.9) (3.2) (4.1)(7.5)

(11.8)(15.8)

58%

40%43%

52% 46%47% 48%

0%

10%

20%

30%

40%

50%

60%

70%

(20.0)

(15.0)

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

2010 2011 2012 2013 2014E 2015E 2016E

Rmb bnNPLs disposed NPLs acquired NPL disposal % prior net balance (RHS)

5.9 4.5 3.9

4.6

6.7 7.7

9.2

24%

18%

12%11%

13% 13% 13%

0%

5%

10%

15%

20%

25%

30%

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2010 2011 2012 2013 2014E 2015E 2016E

Rmb bn Income from TDA TDA income % group income (RHS)

Source: Deutsche Bank estimates, company data Source: Deutsche Bank estimates, company data

15 May 2014


China Cinda


Jingu Trust – A higher-risk trust company

Jingu Trust – Rmb2.8bn high risk trust assets

Established in 2009, China Jingu International Trust (Jingu Trust) is 92.3% owned by Cinda and contributed 3% of Cinda’s PBT in 2013. AUM of Jingu Trust amounted to Rmb93.8bn as of end 2013, with 24% as collective trust assets, being the largest trust subsidiaries among big-4 AMCs. It ranked 43rd out of 68 trust companies in China in terms of trust AUM (down from 30th in 2012).

Our in-depth screening into 65 collective trust products issued by Jingu Trust (Figure 72) identified Rmb2.8bn trust assets with higher default risks. Together with Jingu’s unfavorable sector concentration in the real estate sector, recent regulatory penalty and management changes, we think Jingu Trust is a higher-risk trust company than peers and could pose potential event risk and earnings impact for Cinda in the near future.

Proprietary study into 65 collective trust products issued by Jingu Trust We collected a sample of 65 outstanding collective trust products issued by Jingu Trust with a total amount of Rmb13.4bn, accounting for 60% of its total collective product balance.

Out of this sample, we identified seven products carrying higher default risks amounting to a total of Rmb2.8bn, equivalent to 21% of our sample, or 87% of shareholders’ equity of Jingu. These higher-risk products mainly extended financing to property developers in undesirable locations (lower-tier cities), borrowers in coal sectors and risky SME loans.

In particular, there is one large-sized trust plan – named Longyuan No.2, maturing in September this year with a trust size of Rmb820m extended to a coal company in Shanxi – that we think is worth paying close attention to. Figure 73 summarize the seven higher-risk trust products.

Figure 73: 7 higher-risk trust products out of our sample of 65 collective trust products sample, totaling Rmb2.8bn Trust product Trust size

(Rmb m) Duration (month)

Maturity date Expected return (%)

Type Investment area

Comment

Longyuan No. 4 999 36 2016-02-06 N.A. Equity investment Coal Investment in a coal company in Inner Mongolia

Longyuan No. 2 820 24 2014-09-28 N.A. Equity investment Coal Investment in a coal company in Shanxi

Yinhe No. 2 263 36 2016-02-04 N.A. Equity investment Coal Investment in a coal company in Inner Mongolia

Xiangrikui No. 17 250 12 2014-07-05 N.A. Financing SME Loans to 13 SME in Guangxi Province, with high risk

Xiexin Taike 250 30 2016-03-25 N.A. Financing Real estate Real estate project in Wuxi, a tier 2 city, with recent average price down 37% compared to last year

Hebei Anlian 116 24 2015-11-28 9.50 Financing Real estate Real estate projects in tier 3/4 cities

Xiangrikui No. 5 100 12 2014-06-03 9.00 Financing SME Loans to SME in Zhejiang Province, with some debtors facing difficulties

Total 2,798 Source: Deutsche Bank, WIND, company data

Figure 72: Summary of our collective

product sample for Jingu Rmb m Our sample Jingu Trust-

FY13

No. of collective product

65 N.A.

Collective trust asset bal.

13,353 22,239

Real estate exposure 17% 23%

Infrastructure exposure

16% 39%

No. of high risk product

7 N.A.

High risk trust product bal.

2,798 N.A.

Source: Deutsche Bank, WIND, company data

15 May 2014


China Cinda


In addition, as suggested by our sample, 2014 will be the peak repayment period for Jingu Trust’s collective trust products, with Rmb6.8bn due, or 51% of the total sampled trust assets. For the investment area breakdown of maturing products in 2014, real estate takes a major portion of 19%, followed by coal (14%) and SME loans (9%).

Figure 74: 2014 will be the repayment peak for Jingu –

51% products in our sample will mature this year

Figure 75: Sector breakdown of trust plans to mature by

2014 with industry and commerce (53%) and real estate

(19%) making up the majority

6,827

2,812

1,782

654128

1,150

51%

21%

13%

5%1%

9%

0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2014 2015 2016 2017 >2017 Undated

Rmb mn Maturing amount - Jingu (LHS) % of total (RHS)

3,615, 53%

1,324, 19%

953, 14%

631, 9%

304, 5%

Investment areas of maturing products in 2014 (Rmb mn)

Industry and commerce

Real estate

Coal

SME

Infrastructure

Source: Deutsche Bank, WIND, company data Source: Deutsche Bank, WIND, company data

Higher concentration in real estate sector Total trust AUM of Jingu Trust declined by 8% yoy in 2013 (sector: up 46% yoy) to Rmb93.8bn, after a strong growth in 2012 of 41% yoy. In contrast, real estate exposure of Jingu Trust jumped 31% yoy to account for 23% of its total trust AUM, compared with a sector average of 9%.

Figure 76: Trust AUM of Jingu Trust grew by 41% yoy in

2012, but declined by 8% yoy in 2013, mainly due to

regulatory penalty and management change

Figure 77: Real estate exposure of Jingu Trust is

significantly higher than sector average (23% vs. 9% in

2013)

6 12

42 379

16 21

13

22 17

36

23

2117

12

72

10294517%

41%-8%

-100%

0%

100%

200%

300%

400%

500%

600%

-20

0

20

40

60

80

100

120

2010 2011 2012 2013

Rmb bn Others Financial institutionsIndustry and commerce Real estateInfrastructure Total AUM yoy (RHS)

2,514

9,427

16,272

21,239

21%

13%

16%

23%

14%14%

9% 9%

0%

5%

10%

15%

20%

25%

0

5,000

10,000

15,000

20,000

25,000

2010 2011 2012 2013

Rmb mn Jingu - Real estate trust outstanding (LHS)Jingu - Real estate % of total AUMSector - Real estate % of total AUM

Source: Deutsche Bank, company data Source: Deutsche Bank, company data, China Trust Association, CEIC

15 May 2014


China Cinda


Figure 78: Jingu has a high sector concentration in

infrastructure and real estate (39% and 23% in 2013)

Figure 79: In contrast, sector average exposure of

infrastructure and real estate is 24% and 9% only in 2013

53%

16%

41% 39%

21%

13%

16% 23%

10%

17%

22% 18%

12%

49%1% 2%

4% 4%21% 18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013Jingu Trust

Others Financial institutions Industry and commerceReal estate Infrastructure

33%21% 22% 24%

14%

14% 9% 9%

18%

20% 25% 27%

5%12% 10%

11%

30% 33% 34% 29%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013Trust sector

Others Financial institutions Industry and commerceReal estate Infrastructure

Source: Deutsche Bank, company data Source: Deutsche Bank, China Trust Association, CEIC

Among the 65 collective trust products of Jingu that we sampled, there are ten real estate trust products, with 62% of trust assets located in tier 3/4 cities and 60% to mature in 2014. As we’ve highlighted earlier, we see two real estate projects carrying higher default risks. Reflecting the emerging weaknesses in property sectors in lower-tiered cities, Jingu’s higher exposure to the real estate sector could pose potential event risks for Cinda.

Recent regulatory penalty and management change Elsewhere, we see potential risks from internal control and management changes of Jingu Trust. After strong growth in 2011 and 2012 with AUM jumping 517% yoy and 41% yoy, its trust AUM declined 8% yoy in 2013, most likely due to regulatory penalty on misconducts, as revealed in its annual report that the CBRC in February 2013 issued rectification notice to Jingu Trust, requiring strengthening of internal governance and control. In addition, the recent management change could create uncertainties regarding the proper management of outstanding trust products issued previously.

Figure 81: Summary of 10 real estate collective trust products of Jingu Trust product Trust size

(Rmb m) Duration (month)

Maturity date Expected return (%)

Investment area City City tier Type

Juxin No.1 550 24 2014-08-03 9.20 Real estate Nantong 3 Debt investment

Kunshan Yonghengsheng 350 24 2015-06-08 9.00 Real estate Kunshan 4 Equity investment

Jiangsu Runao 297 24 2014-09-12 10.00 Real estate Nantong, Wuxi 2&3 Equity investment

Xiexin Taike 250 30 2016-03-25 N.A. Real estate Wuxi 2 Financing

Guanghui No.1 240 18 2014-08-07 9.00 Real estate N.A. N.A. Equity investment

Yanhang No.1 137 24 2014-07-30 9.50 Real estate Chongqing 2 Others

Hebei Anlian 116 24 2015-11-28 9.50 Real estate Xingtai 3 Financing

Wuhan Shengtang 105 24 2015-11-26 9.80 Real estate Wuhan 2 Financing

Hangsheng 100 24 2014-08-17 10.50 Real estate N.A. N.A. Equity investment

Anshan Red Star Macalline 70 24 2015-10-31 N.A. Real estate Anshan 3 Financing

Total 2,215 Source: Deutsche Bank, WIND, company data. Note: Highlight in blue refers to higher risk products.

Figure 80: Summary of real estate

exposure of our collective product

sample for Jingu Rmb m Our sample % of sample

No. of real estate trust products

10 15%

Total real estate trust asset size

2,215 17%

Location in tier 3/4 cities

1,383 62%

Maturing in 2014 1,324 60%Source: Deutsche Bank, WIND, company data

15 May 2014


China Cinda


Potential earnings impact on Cinda

As the controlling shareholder of Jingu Trust, Cinda could potentially suffer from losses at Jingu Trust due to default cases in trust products, as we believe the government and the shareholders of trust companies have high incentives to intervene and bail out troubled trust products at the moment. Also stated in Circular No. 99 issued by the CBRC in April 2014, the shareholders of trust companies should provide liquidity support to trust companies in the case of liquidity crisis, and inject additional capital if needed.

Assuming that the Jingu Trust’s entire collective trust portfolio would have the same high risk ratio as our sample at 21%, and single trust portfolio shows 2% high-risk ratio, we estimate the total high risk trust assets of Jingu Trust could amount to Rmb5.4bn, or 6.5% of total trust outstanding of Jingu Trust. As shown in Figure 82, our sensitivity analysis demonstrates that a 30% loss of Jingu’s high risk trust assets would translate into a 13% and 2% negative impact on FY14E PBT and total equity, respectively, of Cinda.

Figure 82: 30% loss of high risk trust assets will translate into 12% and 1.6%

negative impact on FY14E PBT and total equity of Cinda Rmb m % loss of high risk collective trust products

10% 20% 30% 40% 50%

Losses (609) (1,218) (1,828) (2,437) (3,046)

Impact on Cinda's FY14 PBT -4% -9% -13% -17% -22%

Impact on Cinda's FY14 common equity -1% -1% -2% -2% -3%

Impact on Jingu Trust's FY13 PBT -174% -348% -522% -695% -869%

Impact on Jingu Trust's FY13 net assets -19% -38% -57% -75% -94%

Collective trust products

Jingu's collective trust balance - FY13 22,240

Our 65 collective trust sample 13,353

Our sample % FY13 total collective trust bal. 60%

High risk collective trust of our sample 2,798

Total high risk collective trust for Jingu Trust 4,661

Single trust products

Jingu's single trust bal. - FY13 71,571

High risk ratio for single trust products 2%

High risk single trusts for Jingu Trust 1,431

Total

Total high risk trust assets for Jingu Trust 6,092

As % of total trust AUM of Jingu Trust 6.5%Source: Deutsche Bank estimates, company data, WIND

15 May 2014


China Cinda


Business lines and forecasts

Company profile and business overview

Established in Beijing on 19 April 1999 and wholly-owned by MOF then, Cinda was the first AMC to be set up to acquire, manage and dispose NPLs from state-owned banks, mainly for CCB and CDB.

As the leading AMC in China, Cinda focuses on three principal business lines, including: (1) Distressed Asset Management (DAM); (2) Financial Investment and Asset Management (FIAM); and (3) Financial Services (FS). Among these three principal businesses, DAM contributed the largest share (51.5% in 2013) to revenue, followed by FS (28.6%) and FIAM (21.2%). In terms of pre-tax profit, DAM contributed 70.6% of total, while FS and FIAM contributed 4.4% and 25.6%, respectively.

Figure 83: Overview of Cinda’s business lines – Three key businesses: Distressed Asset Management (DAM, 71% of

group net profit), Financial Investment and Asset Management (FIAM, 26%) and Financial Services (FS, 4%)

4%

18%

29%

22%

21%

19%

12%

11%

24%

26%

11%4%

Income FY13 Assets FY13

II. Financial Investment and

Asset Management

(FIAM)

I. Distressed Asset

Management (DAM)

III. Financial Services (FS)

Traditional Distressed Assets (TDA)• NPLs sourced from banks• Acquire at discount (c.30%)• Dispose to recover cash

Restructuring Distressed Assets (RDA)• NPAs sourced from banks, non-bank

FIs and non-financial enterprises• Restructure the debt or accounts

receivable with higher interest rates (13-15%), longer duration (~2 yr) and more collateral (LTV < 40%)

• Recovery through repayments

Debt-to-Equity Swap (DES)• 81% unlisted vs. 19% listed• Exit through IPOs, M&A and

repurchases

Key business lines:• Principal investments (including equity

investment, real estate investment and debt investment)

• Asset management (including private equity funds)

• Property development (Cinda Real Estate, 600657 CH)

Key subsidiaries:• Cinda Securities• Jingu Trust• Cinda Leasing• First State Cinda Fund• Cinda P & C• Happy Life

104%

29%

-9%

9%

3%

ROAE FY13

49%

218%

-9%

43%

32%

Asset CAGR FY11-13

Sector breakdown

Mostly concentrated in:• Overcapacity manufacturing sectors: steel

traders, shipbuilders• Wholesale and retails trade sectors

Real estate, 60%

Leasing & commerci

al, 10%

Public utilities,

6%

Manufacturing, 6%

Construction, 5%

Transportation, 3%

Mining, 1%

Others, 9%

RDA sector breakdown

Coal, 62%

Chemical, 16%

Metals, 9%

Others, 13%

DES sector breakdown – 1H13


15 May 2014


China Cinda


Figure 86: Summary of financial results of Cinda’s key business lines – We expect DAM to remain the key earnings

driver with net profit contribution rising from 71% in 2013 to 78% in 2015E

Rmb mn 2010 2011 2012 2013 2014E 2015E 2016E 2010 2011 2012 2013 2014E 2015E 2016ERevenue % totalDAM 9,813 9,957 14,392 21,850 28,667 34,846 40,352 40% 41% 45% 52% 55% 57% 57%FIAM 7,043 5,946 7,911 8,977 10,274 11,376 12,593 29% 24% 24% 21% 20% 18% 18%FS 7,718 9,231 10,553 12,134 14,008 15,936 18,077 32% 38% 33% 29% 27% 26% 26%Elimination (313) (751) (521) (547) (547) (547) (547) -1% -3% -2% -1% -1% -1% -1%Total 24,260 24,382 32,335 42,413 52,402 61,610 70,475 100% 100% 100% 100% 100% 100% 100%Profit before tax % totalDAM 7,465 7,202 6,234 8,314 9,812 12,213 15,270 75% 80% 65% 71% 72% 77% 81%FIAM 2,333 2,488 3,285 3,012 3,213 3,346 3,571 23% 27% 34% 26% 24% 21% 19%FS 180 (207) 164 515 605 375 191 2% -2% 2% 4% 4% 2% 1%Elimination (22) (425) (87) (69) (69) (69) (69) 0% -5% -1% -1% -1% 0% 0%Total 9,956 9,058 9,596 11,772 13,561 15,865 18,963 100% 100% 100% 100% 100% 100% 100%Net profit % totalDAM 5,625 5,396 4,689 6,428 7,555 9,404 11,758 76% 80% 64% 71% 73% 78% 81%FIAM 1,758 1,864 2,470 2,328 2,474 2,576 2,750 24% 28% 34% 26% 24% 21% 19%FS 136 (155) 124 398 466 289 147 2% -2% 2% 4% 4% 2% 1%Elimination (120) (342) 24 (127) (134) (142) (151) -2% -5% 0% -1% -1% -1% -1%Total 7,399 6,763 7,306 9,027 10,361 12,127 14,504 100% 100% 100% 100% 100% 100% 100%Total assets % totalDAM 84,476 91,551 140,328 228,604 285,643 331,401 365,026 56% 53% 55% 60% 62% 62% 61%FIAM 32,147 35,387 49,027 72,776 81,618 92,881 104,043 21% 20% 19% 19% 18% 17% 17%FS 36,418 49,786 69,352 86,248 99,254 113,707 130,416 24% 29% 27% 22% 21% 21% 22%Elimination (2,340) (3,600) (4,092) (3,843) (3,843) (3,843) (3,843) -2% -2% -2% -1% -1% -1% -1%Total 150,701 173,124 254,614 383,785 462,671 534,146 595,642 100% 100% 100% 100% 100% 100% 100%Net assets % totalDAM 17,350 14,990 24,778 39,237 44,005 48,778 55,559 41% 35% 41% 47% 47% 46% 47%FIAM 15,314 17,492 21,662 28,998 32,521 37,009 41,457 36% 41% 36% 35% 35% 35% 35%FS 8,687 9,635 13,802 14,555 16,750 19,189 22,009 20% 22% 23% 18% 18% 18% 18%Elimination 1,151 726 643 (28) (28) (28) (28) 3% 2% 1% 0% 0% 0% 0%Total 42,502 42,843 60,885 82,762 93,248 104,948 118,996 100% 100% 100% 100% 100% 100% 100%ROAADAM 6.1% 4.0% 3.5% 2.9% 3.0% 3.4%FIAM 5.5% 5.9% 3.8% 3.2% 3.0% 2.8%FS -0.4% 0.2% 0.5% 0.5% 0.3% 0.1%Total 4.2% 3.4% 2.8% 2.4% 2.4% 2.6%ROAEDAM 33.4% 23.6% 20.1% 18.2% 20.3% 22.5%FIAM 11.4% 12.6% 9.2% 8.0% 7.4% 7.0%FS -1.7% 1.1% 2.8% 3.0% 1.6% 0.7%Total 18.1% 15.8% 13.8% 12.8% 13.3% 14.0%Leverage (Asset/equity)DAM 4.9x 6.1x 5.7x 5.8x 6.5x 6.8x 6.6xFIAM 2.1x 2.0x 2.3x 2.5x 2.5x 2.5x 2.5xFS 4.2x 5.2x 5.0x 5.9x 5.9x 5.9x 5.9xTotal 3.5x 4.0x 4.2x 4.6x 5.0x 5.1x 5.0x


Figure 84: Revenue breakdown by business lines Figure 85: Pre-tax profit breakdown by business lines

40% 41%45%

52%29% 24%

24%

21%

32% 38%

33%

29%

24,260 24,382

32,335

42,413

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2010 2011 2012 2013

DAM FIAM FS(Rmb m)

16%

20%

8%

31%

CAGR

75% 80% 65%71%

23% 27%34%

26%2%

-2%

2%

4%9,956

9,058 9,596

11,772

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2010 2011 2012 2013

DAM FIAM FS(Rmb m)

42%

6%

9%

4%

CAGR

Source: Deutsche Bank, company data. Note: Due to the internal elimination, the sum up of proportions may not equal to 100%. Source: Deutsche Bank, company data. Note: Due to the internal elimination, the sum up of proportions

may not equal to 100%.

15 May 2014


China Cinda


Distressed asset management – Cinda’s core business

As the core business of Cinda, distressed asset management (DAM) mainly includes: (1) distressed debt assets management (DDA); (2) debt-to-equity swap (DES) assets management; and (3) custody, liquidation and restructuring of distressed entities & entrusted distressed asset management.

Distressed debt asset management (DDA) Cinda has grown its DDA assets strongly over the past years. As end of 2013, the net balance of DDA rose by 13.3x from that in 2010, due to the fast growth of DDA acquisition from Rmb3.5bn in 2010 to Rmb88.8bn in 2013.

Figure 87: The net balance of DDA has risen sharply at a

2010-13 CAGR of 143%

Figure 88: DDA acquisition has also grown strongly at a

CAGR of 193% from 2010 to 2013

8,03017,600

56,090

114,755

119%

219%

105%

0%

50%

100%

150%

200%

250%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2010 2011 2012 2013

Net balance of DDA yoy(Rmb mn)

3,532

12,460

52,191

88,813

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2010 2011 2012 2013

Non-Financial enterprises

Other banks*

Non-bank FIs

City/rural banks

Joint-stock banks

(Rmb mn)

Source: Deutsche Bank, company data Source: Deutsche Bank, company data; Note: Other banks include policy banks, Postal Saving Bank of China and foreign banks

Given the different business natures, we further divide Cinda’s DDA business into two sub categories, i.e. traditional distressed debt assets (TDA) and restructuring distressed debt assets (RDA).

Figure 89: Distressed debt assets – Traditional vs. Restructuring Acquisition source Income model Arrangement for the rights & obligation

TDA Primarily from banks Disposal gains, depending on the margins between acquisition cost and recovery rate

Assume the existing rights and obligations btw banks and debtors

RDA Non-financial enterprises, banks, and non-bank financial institutions (e.g. trust cos.)

Fixed interest income Entered restructuring agreement with debtor and related parties


Traditional distressed debt assets (TDA) Cinda acquires traditional distressed debt assets primarily from banks. After the acquisition, Cinda will assume the pre-existing rights and obligations between banks and debtors, and collect the debt based on the disposal of distressed assets. Cinda has realized relatively high returns on TDA disposal, ranging from 111% to 146% between 2010 and 2013.

Prior to 2012, Cinda’s traditional distressed debt asset was primarily from the commercial banks’ NPL carve-out before their IPOs. In February 2012, MOF and CBRC approved the packaged sale of distressed assets by PRC financial institutions, which provided a more market-driven source of distressed asset for Cinda. While the net balance of Cinda’s TDA remained largely stable during 2010-1H13, the TDA balance doubled in 2H13 to Rmb16.8bn, which was in line with the pace of commercial banks’ NPL disposal.

15 May 2014


China Cinda


Figure 90: Traditional distressed debt assets (company-level) data RMB m 2010 2011 2012 2013

Net balance of TDA 8,030 7,919 8,022 16,784

Acquisition cost of TDA for the period 3,532 2,867 2,942 12,279

Carrying amount of TDA disposed 4,261 3,189 3,205.9 3,810

Income from TDA 5,396 4,851 3,974 4,534

including - realized disposal gain 5,384 4,640 3,606 4,241

unrealized disposal gain 12 211 368 293

Return on disposal 126.4% 145.5% 112.5% 111.3%Source: Deutsche Bank, company data

Looking ahead, we estimate Cinda to further grow the net balance of TDA at a CAGR of 32% during 2013-16, thanks to the acceleration of NPL disposal from Chinese banks offset by Cinda’s lower market share. We expect revenue to post a GAGR of 26%. Key assumptions include:

Growing NPL supply from banks – This is due to the rising pressure on asset quality deterioration of Chinese banks. As such, we expect the NPL ratio of the entire Chinese banking system to rise from 1.7% in 2013 to 2.4% in 2016. Meanwhile, we expect banks to dispose of an increasing portion of NPLs from 6.5% of total NPL balance in 2013 to 8% of 2016.

Narrowing market share in TDA business – We expect Cinda’s current leading market share in TDA (c.50%) to trend down given the rising competition from the other three AMCs and local provincial AMCs. On our estimate, Cinda’s TDA market share should fall at a gradual pace from currently around 50% to 35% in 2016.

Lower recovery rate – While Cinda realized a collection rate of approximately 60-70 cents in a dollar during 2010-13 on our estimates, we expect lower the collection rate in the future, reflecting the slowed asset appreciation and lower-quality NPLs sold off by banks.

Dipping acquisition cost – We assume the TDA acquisition cost will decline modestly from the current 30% of original value to 26% in 2016 given the massive supply.

15 May 2014


China Cinda


Figure 91: Financial overview and forecasts on traditional distressed debt assets (TDA)

Rmb mn 2010 2011 2012 2013 2014E 2015E 2016ENPL acquisitionSystem loan balance 50,922,595 58,189,250 67,287,461 76,632,664 86,594,910 97,419,274 109,109,587 Commercial banks 38,035,088 42,790,000 51,884,211 59,210,000 66,788,880 75,003,912 83,854,374 Other banking Fis 12,887,507 15,399,250 15,403,250 17,422,664 19,806,030 22,415,361 25,255,213 System NPL ratio 2.44% 1.81% 1.60% 1.68% 1.92% 2.15% 2.43% Commercial banks 1.14% 1.00% 0.95% 1.00% 1.15% 1.30% 1.50% Other banking Fis 6.29% 4.06% 3.78% 4.00% 4.50% 5.00% 5.50%

% of NPLs sold from banks 2.0% 2.0% 2.5% 6.5% 7.0% 7.5% 8.0%NPLs sold from banks - original value 24,874 21,067 26,866 83,785 116,154 157,186 211,748 Market share of Cinda in buying NPLs (%) 51% 49% 43% 49% 45% 42% 35%NPLs purchased by Cinda - original value 12,668 10,335 11,520 40,932 52,269 66,018 74,112 NPLs purchased by Cinda - acquisition cost 3,547 2,894 3,456 12,280 15,681 18,485 19,269 Acquisition price (cents in a dollar) 28 28 30 30 30 28 26

NPL disposalNPL disposed - at carrying value 4,446 2,934 3,209 4,148 7,540 11,838 15,764 Unrealized fair value change 571 162 298 300 656 1,008 1,314 Beginning balance - TDA 7,622 7,294 7,415 7,960 16,392 25,188 32,842 Net balance - TDA 7,294 7,415 7,960 16,392 25,188 32,842 37,661

Income from TDA 5,851 4,463 3,878 4,618 6,688 7,716 9,196 Return on disposal 118.8% 146.6% 111.6% 104.1% 80.0% 56.7% 50.0%Implied collection rate (cents in a dollar) 61 69 59 57 54 47 45 TDA income as % of total Group income 24% 18% 12% 11% 13% 13% 13%


Restructuring distressed debt assets (RDA) Cinda acquires restructuring distressed debt assets primarily from non-financial enterprises (over 60%) as well as financial institutions (e.g. banks and trust companies). Unlike TDA, RDA is a quasi-loan business. Cinda enters into a restructuring agreement with the debtor and related parties to fix the restructuring returns and payment schedule for each RDA deal. The typical underlying asset of RDA is account receivable assets, and the debtors of these receivables are mainly from real estate sector (60% of gross balance).

Cinda started its RDA business after Cinda received CBRC’s approval to acquire distressed assets (account receivables and other receivables) from non-financial enterprises (NFE) in June 2010. The net balance of RDA has grown from Rmb9.68bn as of 2011 to Rmb97.97bn as of 2013 to account for 25.5% of total assets. More than 60% of RDA was acquired from non-financial enterprises. Since Cinda is the only AMC who has the license for NFE RDA business until now, Cinda should be able to continue to grow its RDA via asset acquisition from NFE at a fast pace.

Compared with bank loans, the yield of Cinda’s RDA was relatively high given the higher risk nature of the business. Cinda’s average monthly yield of RDA was 17.2%, 16.0% and 13.5% for 2011, 2012 and 2013, respectively. Meanwhile, Cinda’s impaired RDA rate remained low at 1% as of 2013, which was similar the NPL ratio of commercial banks, but much less than the NPL ratio of non-commercial banks (4% as of 2013 on our estimate). As of 2013, Cinda’s gross RDA coverage ratio was 2.9%, which looks light given the high-risk nature of RDA business amid challenging macro economy.

Figure 92: 60% of RDA from real

estate sector

Real estate, 60%


10%


Manufacturing, 6%

Construction, 5%

Transportation, 3%

Mining, 1%

Others, 9%

Source: Deutsche Bank, company data; Note: as of 2013

15 May 2014


China Cinda


Figure 93: Cinda charges a high yield on RDA given the

high-risk nature of the business

Figure 94: Gross RDA coverage ratio of 2.9% looks

insufficient given the high-risk nature of the business

17.2%16.0%

13.5%

6.65% 6.15% 6.15%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2011 2012 2013

Annualized yield of RDA PBOC 3Y lending rate

27%

248%291%

0.4%

2.1%

2.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0%

100%

200%

300%

400%

500%

600%

2011 2012 2013

Impaired RDA coverage ratio (LHS) Gross RDA coverage ratio (RHS)


We expect the net RDA balance would continue to grow at CAGR of 31% from 2013 to 2016, contributing to RDA revenue CAGR of 34% during the same period. Our key assumptions on RDA include:

Enlarging RDA market – Given the rising pressure of asset quality deterioration, we expect Chinese banks and other non-bank financial institutions to seek more financial restructuring for their non-performing assets. Meanwhile, reflecting the slower economic growth, we see rising cash flow pressure and rising burden on receivables for non-financial enterprises. Hence, Cinda should be able to further grow its RDA balance given the enlarging market size.

Declining market share in RDA from non-financial enterprise – While Cinda is the only AMC approved to engage in acquiring receivables from non-financial enterprises as of now, we expect the other three AMCs to receive regulatory approval soon to step into the business, leading to reduced market share for Cinda.

Declining yield on RDA – Its average yield of RDA lending fell from 17.2% in 2011 to 13.5% in 2013. We expect the yield to make further modest declines given the rising competition in the business.

Rising impaired RDA ratio with high credit cost – We expect the impaired RDA ratio will rise from the current low level of 1.0% to 3.2% in 2016 to reflect its heavy exposure on the real estate sector and the higher-risk nature of RDA business compared with bank loans. On our estimates, gross RDA coverage ratio will rise to 7.4% in 2016 from 2.9% currently, with impaired RDA coverage ratio at 230%. As a result, Cinda should charge higher credit cost on RDA business of 2.94%, 2.87% and 2.57% for 2014-16, respectively.

15 May 2014


China Cinda


Figure 95: Financial overview and forecasts on restructuring distressed debt assets (RDA)

Rmb mn 2011 2012 2013 2014E 2015E 2016ERDA from FIsTotal trust AUM 4,811,438 7,470,555 10,907,111 13,088,533 15,051,813 16,556,994 yoy 58% 55% 46% 20% 15% 10%Non-performing trust ratio 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%Non-performing trust assets 24,057 74,706 163,607 261,771 376,295 496,710 % of non-performing trust assets purchased by Cinda 5% 11% 7% 6% 6% 5%RDA acquired from non-bank FIs 1,184 8,045 12,135 15,706 20,696 22,352

System NPL balance 1,053,340 1,074,630 1,289,007 1,659,343 2,095,819 2,646,852 % of system NPLs refinanced by Cinda 0.17% 1.03% 1.39% 1.50% 1.60% 1.70%RDA acquired from banks 1,745 11,020 17,917 24,890 33,533 44,996

RDA acquired from Fis (Banks + non-bank FIs) 2,928 19,065 30,053 40,596 54,229 67,348 RDA balance from Fis 2,920 18,322 39,467 66,565 96,900 128,505

RDA from NFETotal account receivables from industrial enterprises 7,050,200 8,404,314 9,569,344 10,909,052 12,218,138 13,439,952 Troubled account receivables % total account receivables 1.0% 1.0% 1.5% 1.8% 2.0% 2.2%% of troubled account receivables purchased by Cinda 9% 36% 32% 25% 20% 15%RDA acquired from NFE 6,665 30,185 46,482 49,091 48,873 44,352 RDA balance from NFE 6,781 31,229 61,446 88,588 104,151 108,277

TOTAL RDARDA acquired by Cinda - FIs + NFE 9,593 49,250 76,534 89,687 103,102 111,700 Aggregate repayment 73 12,909 35,316 50,457 77,577 100,525 Accured interest 181 3,509 10,144 15,009 20,372 24,556 Total RDA assets - FIs + NFE 9,701 49,550 100,913 155,153 201,051 236,782 Allowance for impairment losses (20) (1,482) (2,943) (6,703) (11,812) (17,427) Net RDA balance 9,681 48,068 97,971 148,450 189,239 219,355

Income from RDA 181 3,518 10,144 15,009 20,372 24,556 Income from FI RDA 15 1,363 3,871 6,235 9,388 12,707 Income from NFE RDA 166 2,155 6,273 8,774 10,984 11,850 Annualized return on monthly average balance 17.2% 16.0% 13.5% 13.0% 12.7% 12.5%

Asset qualityImpaired RDA 73 597 1,011 2,793 5,026 7,577 Impaired RDA ratio 0.75% 1.20% 1.00% 1.80% 2.50% 3.20%Allowance for impairment losses 20 1,482 2,943 6,703 11,812 17,427 Impaired RDA coverage ratio 27.4% 248.4% 291.1% 240.0% 235.0% 230.0%Gross RDA coverage ratio 0.2% 3.0% 2.9% 4.3% 5.9% 7.4%Credit cost 0.41% 4.94% 1.94% 2.94% 2.87% 2.57%


DES asset management Cinda obtains DES assets primarily via debt-to-equity swaps, receipt of equity in satisfaction of debt, and other distressed asset-related transactions. As at the end of 1H13, DES assets amounted to Rmb43.7bn (down 9.5% hoh), or 15.4% of total assets. The majority of Cinda’s DES assets were obtained before 2010, while during the period from 2010 to 1H13, Cinda only acquired additional DES worth Rmb1.71bn, or 4% of total DES asset as of 1H13. In 2H13, Cinda further compressed its DES asset to Rmb42.3bn (down 3.2% hoh) by disposing DES through capital market or issuer repurchase, or 11% of total assets.

Cinda’s DES assets concentrated on some sectors with overcapacity, including coal (61.5% of total book value as of 1H13), chemicals (16.2%) and metals industry (9.1%).

15 May 2014


China Cinda


Figure 96: Cinda has reduced its DES assets by disposing

them through capital market and other means

Figure 97: Over 60% of DES assets were allocated to the

coal sector (1H13)

52.3 50.6 48.243.7 42.3

35%

29%

19%

15%

11%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2010 2011 2012 1H13 2013

BV of DES assets (LHS) As % of total assets (RHS)(Rmb bn)

Coal, 61.5%Chemicals, 16.2%

Metal industry, 9.1%

Others, 13.2%

BV mix of DES assets (1H13)


As at the end of 1H13, Cinda had total DES assets in 249 DES companies, including 182 unlisted companies (book value of Rmb34.4bn) and 67 listed companies (Rmb9.3bn). Although Cinda divested in 41 listed DES companies in 2H13, and added five unlisted DES companies to its DES asset portfolios during the same period, the book value of listed and unlisted portfolio remained largely stable in 2H13.

Figure 98: Book value of DES assets

Figure 99: Book value mix of DES

assets

Figure 100: Number of DES

investees

39.0 38.8 36.4 34.4 34.1

13.3 11.811.8

9.3 8.1

52.350.6

48.243.7

42.3

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2010 2011 2012 1H13 2013

Listed Unlisted(Rmb bn)

75% 77% 76% 79% 81%

25% 23% 24% 21% 19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 1H13 2013

Listed Unlisted

215 204 186 182 187

2570

69 6726

240

274255 249

213

0

50

100

150

200

250

300

2010 2011 2012 1H13 2013

Listed Unlisted

Source: Deutsche Bank; company data Source: Deutsche Bank; company data Source: Deutsche Bank; company data

Both unlisted and listed DES assets are highly concentrated in the top-20. As at the end of 1H13, the top-20 unlisted DES assets had a book value of Rmb27.7bn, accounting for 80.5% of total BV of unlisted DES asset. For listed DES assets, the top-20 made up 98% of book value of listed DES assets as of 1H13.

The revenue of DES assets management is mainly comprised of the dividend income and net gains from DES assets disposal. For FY13, the dividend income and net disposal gains of DES assets amounted to Rmb3.6bn and Rmb1.35bn, accounting for 8.6% and 3.2% of total revenue, respectively. Historically, while the dividend income of DES assets was largely stable, the net disposal gain of DES assets varied, with the exit multiple ranging from 2.1-2.7x on average (listed: 1.1-6.2x; unlisted: 2.1-2.9x).

15 May 2014


China Cinda


Figure 101: Net disposal gains of DES assets Figure 102: Dividend income of DES assets

3,1112,589

4,683

3,645

12.8%

10.6%

14.5%

8.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

2010 2011 2012 2013

Net disposal gain As % of revenue (RHS)(Rmb mn)

451

1,469

965

1,3511.9%

6.0%

3.0%3.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0

500

1,000

1,500

2,000

2010 2011 2012 2013

Dividend income As % of revenue (RHS)(Rmb mn)


Figure 103: Summary of DES assets disposal – listed vs. unlisted Number of DES companies

disposed Acquisition costs of DES assets

disposed (Rmb m) Net gain on DES assets disposed

(Rmb m) Exit multiples (x)

2010 2011 2012 1H13 2010 2011 2012 1H13 2010 2011 2012 1H13 2010 2011 2012 1H13

Unlisted 17 47 32 8 1,373 2,149 2,499 2,369 2,369 2,401 4,650 2,525 2.7 2.1 2.9 2.1

Listed 10 7 11 4 1,086 77 328 26 743 188 33 135 1.7 3.4 1.1 6.2

Total 27 54 43 12 2,458 2,227 2,827 2,395 3,111 2,589 4,683 2,660 2.3 2.2 2.7 2.1Source: Deutsche Bank, company data. Note: exit multiple = (net gain + acquisition costs) / acquisition cost of DES asset disposed

Figure 104: Summary of DES assets disposal by sector Number of DES companies

disposed Acquisition costs of DES assets

disposed (Rmb m) Net gain on DES assets disposed

(Rmb m) Exit multiples (x)

2010 2011 2012 1H13 2010 2011 2012 1H13 2010 2011 2012 1H13 2010 2011 2012 1H13

Coal 5 7 7 1 709 1,028 977 1,804 1,784 1,011 2,565 1,996 3.5 2.0 3.6 2.1

Chemicals 3 2 5 1 504 116 197 229 459 63 244 208 1.9 1.5 2.2 1.9

Metals 1 4 3 1 876 462 439 4 362 435 395 0 1.4 1.9 1.9 1.0

Others 18 41 28 9 370 620 1,215 358 506 1,081 1,479 456 2.4 2.7 2.2 2.3

Total 27 54 43 12 2,458 2,227 2,827 2,395 3,111 2,589 4,683 2,660 2.3 2.2 2.7 2.1Source: Deutsche Bank, company data. Note: exit multiple = (net gain + acquisition costs) / acquisition cost of DES asset disposed

We expect Cinda to continue to divest its DES assets. The book value of DES would further decline from Rmb42.3bn to Rmb14.8bn in 2016. The revenue contribution of DES would also decline from 12% in 2013 to 5% in 2016. Key assumptions include:

Acceleration in DES disposal – We expect Cinda to accelerate the divestment in DES given the lower profitability of the business compared with other businesses such as TDA and RDA.

Lowered exit multiple – Although Cinda achieved exit multiples for DES as high as 2.66x in 2012, the multiple declined to 1.85x in 2013. We expect the exit multiple to further decline to 1.37x, 1.36x, and 1.36x for 2014-16E given the challenging industry outlook for coal sectors.

Relatively stable dividend yield for DES asset – We expected the dividend yield for the DES asset would be largely stable at 2.82%-2.91% during the next three years.

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China Cinda


Figure 105: Financial overview and forecasts on DES portfolio

Rmb mn 2010 2011 2012 2013 2014E 2015E 2016EDES asset disposalDES disposed - acquisition cost 2,458 2,227 2,827 4,274 9,545 9,074 7,871

Unlisted 1,373 2,149 2,499 2,000 7,510 7,286 6,438 Listed 1,086 77 328 2,274 2,035 1,788 1,433

Net gain from DES disposal 3,111 2,589 4,683 3,645 3,572 3,250 2,857 Unlisted 2,369 2,401 4,650 2,400 3,165 3,071 2,714 Listed 743 188 33 1,245 407 179 143

Exit multiple of DES disposed 2.27 2.16 2.66 1.85 1.37 1.36 1.36Unlisted 2.73 2.12 2.86 2.20 1.42 1.42 1.42 Listed 1.68 3.44 1.10 1.55 1.20 1.10 1.10

Book value 52,312 50,595 48,239 42,275 31,982 22,489 14,881 Unlisted 39,007 38,840 36,449 34,135 26,021 18,395 12,172 Listed 13,306 11,755 11,789 8,140 5,961 4,095 2,709

Fair value change & new acquisitions 755 3,811 2,317 2,000 1,500 1,500 Unlisted - - - 1,615 1,220 1,227 Listed - - - 385 280 273

Impairment losses on DES assets (454) (246) (3,340) (4,007) (2,748) (1,919) (1,237)% of beginning book value 0.5% 6.6% 8.3% 6.5% 6.0% 5.5%

DES incomeDividend income 451 1,469 965 1,351 930 634 419

Unlisted 442 1,432 913 1,024 781 552 365 Listed 10 38 52 327 149 82 54

Dividend yield 0.86% 2.90% 2.00% 3.20% 2.91% 2.82% 2.82%Unlisted 1.13% 3.69% 2.50% 3.00% 3.00% 3.00% 3.00%Listed 0.07% 0.32% 0.44% 4.01% 2.50% 2.00% 2.00%

Total DES income 3,562 4,059 5,648 4,995 4,502 3,884 3,276 Unlisted 2,810 3,833 5,563 3,424 3,946 3,623 3,079 Listed 752 226 85 1,571 556 261 197

DES income as % of total Group income 15% 17% 17% 12% 9% 6% 5%


Restructuring services for distressed asset/entities By the end of 1H13, Cinda had been commissioned by government agencies to conduct the custody, liquidation and restructuring of eight distressed non-bank financial institutions including securities, trust and leasing companies. In addition, Cinda was entrusted by a large commercial bank to provide custody, liquidation and disposal services for its investments in 2,400 commercial enterprises and nearly 1,000 investment projects. While the revenue contribution is relatively small (less than 0.03% of total revenue from 2010-1H13), custody, liquidation and disposal services enhanced Cinda’s business relationship with government agencies and corporate clients, risk management capabilities, and accumulation of industry experience.

Financial investment and asset management business

Cinda’s financial investment and asset management business (FIAM) is the extension of its DDA business and serves as an important functional platform to maximize the value appreciation potential achieved in DDA business. FIAM contributed 21% of total revenue and 26% of pre-tax profit in 2013.

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China Cinda


Figure 106: Revenue from FIAM contributed 21% of

group revenue

Figure 107: Profit before tax from FIAM contributed 26%

of group profit before tax

7,043

5,946

7,911

8,977 29%

24%

24%21%

0%

5%

10%

15%

20%

25%

30%

35%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2010 2011 2012 2013

Revenue from FIAM As % of total(Rmb mn)

2,333 2,488

3,285 3,012

23%27%

34%

26%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2010 2011 2012 2013

PBT from FIAM As % of total(Rmb mn)


While FIAM business is highly related to its distressed asset management, Cinda’s FIAM businesses include: (1) principal investment in equity, real estate, and other financial products through its parent-level company, Cinda Investment, Well Kent International, and Zhongrun Development; (2) asset management (primarily PE funds) through Cinda Capital (controlled by Cinda Investment); and (3) others business including consulting and advisory business.

Principal investment The outstanding amount of Cinda’s principal investment rose by 42% yoy to Rmb19.7bn, or 5.1% of its total asset as of 2013. 55% of principal investment asset went for equity investment, 9% for real estate investment, 18% for fund investment (primarily PE fund), and 17% for others.

Figure 108: Outstanding amount of principal investment Figure 109: Mix of principal investment

10,17311,178

13,871

19,670

10%

24%

42%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0

5,000

10,000

15,000

20,000

25,000

2010 2011 2012 2013

The outstanding amount of principal investment yoy(Rmb mn)

67% 66% 63%55%

23% 21%15%

9%

1% 6%11%

18%

9% 8% 11%17%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013

Other investments

Fund investments

Real estate investments

Equity investments


1) Equity investment. The four investment entities (parent-level company, Cinda Investment, Well Kent International, and Zhongrun Development) all engaged in equity investment, but with a different focus.

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China Cinda


Figure 110: Equity investment overview Entities Business focus Outstanding equity investment

Parent-level company Primarily focuses on minority financial investments (usually less than 20% stake in a company); Targets companies with rich experience in mining, energy, construction and environmental protection industries.

Rmb3.76bn

Cinda Investment Primarily invests in real estate projects related to Cinda’s distressed asset management business.

Rmb2.51bn

Well Kent Invests in oversea distressed assets in relation to Cinda's distressed asset management. Rmb2.84bn

Zhongrun Development Equity investments closely related to its custody, liquidation and restructuring business. Rmb650mSource: Deutsche Bank, company data; Note: outstanding amount of equity investment was as of 2013.

2) Real estate investment & development. Cinda integrates the real estate investment and real estate development businesses with its distress asset management business. Cinda acquired real properties in satisfaction of debt through the distressed asset management business, and in order to maximize the returns in disposal of the properties, Cinda may make additional investments to support the restructuring of the real estate company and the development of the property.

Real estate investment – Cinda Investment is the platform for real estate investment. The value of real estate investment has declined from Rmb2.4bn in 2011 to Rmb1.86bn in 2013. The main property investments are commercial buildings and hotels.

Real estate Development – Cinda Real estate, an A-share listed company controlled by Cinda Investment (58.5% stake), handles the real estate development business for Cinda. The total asset of Cinda Real Estate reached Rmb24.4bn, or 6.4% of total Cinda’s consolidated assets as of 2013. We show the key financials for Cinda Real Estate in Figure 111.

Figure 111: Key financial summary of Cinda Real Estate Rmb m 2010 2011 2012 2013

Revenue 4,133 3,307 4,007 4,480

As % of Group assets 17.0% 13.6% 12.4% 10.6%

Contracted sales value 3,173 2,878 3,765 5,139

NPAT 418 563 614 704

Asset 13,938 15,081 19,564 24,410

As % of Group assets 9.2% 8.7% 7.7% 6.4%

Liabilities 7,678 8,355 12,439 16,800

Shareholders' equity 5,747 6,159 6,600 7,150

DuPont Analysis

Net profit margin 10.1% 17.0% 15.3% 15.7%

Asset turnover (Year) 0.30 0.22 0.20 0.18

Leverage ratio (Asset / SH equity) (x) 2.43 2.45 2.96 3.41

ROE 7.28% 9.14% 9.30% 9.84%Source: Deutsche Bank, company data

3) Fund investment & other investment. The fund investment is primarily made as seed capital in funds managed by Cinda, in order to attract third-party funds and to support the development of the asset management business. The outstanding fund investment reached Rmb3.58bn in 2013 (2010: Rmb84m).

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China Cinda


Other investment reached Rmb3.43bn, which primarily included debt securities (Rmb528m), and WMPs (issued by banks and brokers) and trust products (Rmb2.21bn) as of 2013.

Forecast for principal investment. The major income of principal investment includes investment gain/income, and interest income from the financial products. Going forward, we expect the income generated from principal investment to grow at a stable pace, up by 20% yoy, 9% yoy, and 8% yoy for 2014-16E, respectively.

Figure 112: Financial summary and forecasts for principal investment

RMB, m 2010 2011 2012 2013 2014E 2015E 2016EPrincipal investmentBalanceEquity investments 6,792 7,339 8,691 10,798 11,877 13,659 15,708 Real estate investments 2,364 2,339 2,100 1,858 1,765 1,765 1,765 Fund investments - - 1,582 3,585 4,301 4,947 5,441 Other investments 1,016 1,499 1,498 3,430 4,115 4,733 5,206 Total 10,173 11,178 13,871 19,670 22,059 25,103 28,120 yoy growthEquity investments 8% 18% 24% 10% 15% 15%Real estate investments -1% -10% -12% -5% 0% 0%Fund investments 127% 20% 15% 10%Other investments 48% 0% 129% 20% 15% 10%Total 10% 24% 42% 12% 14% 12%Income from principal investmentInvestment income 535 643 407 770 1,043 1,179 1,198 Investment income as % of average investment balance 6.0% 3.3% 4.6% 4.5% 4.5% 4.5%Interest income 114 105 297 1,494 1,669 1,769 1,996 Average interest rate 1.0% 2.4% 8.9% 7.5% 7.5% 7.5%Total income (investment income + interest income) 649 748 705 2,264 2,712 2,948 3,193 yoy growth 15% -6% 221% 20% 9% 8%


Asset management The asset management business under FIAM business primarily includes the private equity fund management, which is managed by Cinda Capital. By the end of 2013, 25 private equity funds had been established under the management of Cinda. The total AUM reached Rmb61.2bn as of 2013, up by 4.3x from 2012. We believe it will be some time before the PE fund investment/management bears fruit, so the asset management business will likely have limited revenue contribution in the near future.

Figure 113: Summary of Cinda’s PE fund management 2012 2013

Number of funds 9 25

Total committed capital AUM (Rmb m) 11,500 61,170

Total paid-in capital (Rmb m) 4,780 23,070

Paid-in capital from third parties (Rmb m) 3,890 20,080

Fund management income (Rmb m) 18 85

Fund management fee rate 0.46% 0.71%

Accumulated number of projects invested 20 59

Number of third-party investors 79 102 Source: Deutsche Bank, company data

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China Cinda


Financial service business

Cinda conducts the financial service business (FS), including securities & futures, trust, mutual fund, financial leasing, and insurance business, via controlled subsidiaries. Most of these subsidiaries were acquired from restructuring distressed financial entities.

While the revenue contribution of these subsidiaries was as high as 28.6% in 2013, these subsidiaries only contributed to 4.4% of total pre-tax profit of the group, indicating unrealized potential profitability of the segment. The drag comes mainly from the less developed insurance business, which realized only Rmb3m pre-tax profit for P&C insurance and Rmb780m pre-tax loss for life insurance. We believe it may still take some time to unfold selling opportunities and synergies cross the different financial service subsidiaries in addition to providing a wide range of financial products for its clients.

Figure 114: Business overview of Cinda’s Financial Service business

Financial Service Platform

Securities & Futures

Trust Mutual Fund Financial Leasing P&C Insurance Life Insurance

Cinda Securities (Stake: 99.33%)

Cinda Futures (100% held by CindaSecurities)

Cinda Int’l (63.87%)

Jingu Trust (92.29%)

Trust AUM: Rmb102bn as of 2013

First State CindaFund (54%)

Fund AUM: Rmb5.31bn as of 2013

Cinda Leasing (99.56%)

Net leasing receivables: Rmb25.16bn as of 2013

Cinda P&C (51%)

Focus on motor vehicle insurance

Happy Life (61.59%)

Aggregate contribution to asset - 22.9% Aggregate contribution to revenue - 28.6%

2.08

1.00

1.76

0.17

3.07

4.05

-0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50


Jingu Trust

Cinda Leasing

Mutual Fund

Cinda P&C

Happy Life

Revenue - 2013(Rmb bn)

17.65

3.52

30.76

0.26

6.05

29.81

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00


Jingu Trust

Cinda Leasing

Mutual Fund

Cinda P&C

Happy Life

Asset - 2013(Rmb bn)

450 350

479

15 3

(780)(1,000)

(800)

(600)

(400)

(200)

-

200

400

600


Jingu Trust

Cinda Leasing

Mutual Fund

Cinda P&C

Happy Life

Pre-tax profit - 2013(Rmb mn)

Aggregate contribution to pre-tax profit - 4.4%


Going forward, we expect Cinda will slow the growth in its FS business with revenue up by 15%, 14% and 13% yoy for 2014-16E, respectively. With relatively high cost-to-income ratio (over 90%), the profit contribution should remained limited. We summarize our earnings forecast in Figure 115.

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China Cinda


Figure 115: Financial summary and forecasts for FS business

RMB mn 2010 2011 2012 2013 2014E 2015E 2016ERevenue of FS business 7,718 9,231 10,565 12,143 14,008 15,936 18,077

yoy growth 20% 14% 15% 15% 14% 13%Cinda Securities 1,884 1,539 1,691 2,084 2,357 2,618 2,914

yoy growth -18% 10% 23% 13% 11% 11%Jingu Trust 187 441 946 1,004 1,079 1,208 1,329

Total trust AUM 11,743 72,406 101,835 93,811 107,883 120,829 132,911 yoy growth 517% 41% -8% 15% 12% 10%Revenue % average AUM 0.00% 1.05% 1.09% 1.03% 1.00% 1.00% 1.00%

Financial leasing 130 623 1,317 1,760 2,467 2,887 3,331 Total finance lease receivables 1,565 8,441 18,003 25,701 30,841 37,009 44,411 yoy growth 439% 113% 43% 20% 20% 20%Revenue % average receivbales 12.5% 10.0% 8.1% 8.0% 7.8% 7.5%

Cinda P & C 169 838 1,755 3,072 3,491 4,137 4,900 Original premium income - P & C 351 1,216 2,422 3,043 3,591 4,237 5,000 yoy growth 247% 99% 26% 18% 18% 18%Other income/expenses (182) (378) (668) 29 (100) (100) (100)

Happy Life 5,219 5,673 4,762 4,053 4,427 4,879 5,377 Original premium income - Life 4,491 5,046 5,707 4,115 4,527 4,979 5,477 yoy growth 12% 13% -28% 10% 10% 10%Other income/expenses 728 627 (945) (62) (100) (100) (100)

First State Cinda Fund 129 118 93 170 187 206 227 yoy growth -8% -21% 83% 10% 10% 10%

Operating expense (7,506) (9,230) (9,940) (11,167) (12,882) (14,964) (17,202)Impairment losses on assets (32) (207) (448) (469) (540) (618) (709)Share of results of associates 0 0 0 17 19 22 25Profit before tax 180 (207) 164 515 605 375 191Net profit 136 (155) 124 398 466 289 147As % of group's net profit 1.8% -2.3% 1.7% 4.4% 4.5% 2.4% 1.0%

Pre-tax ROAA -0.48% 0.28% 0.66% 0.65% 0.35% 0.16%Pre-tax ROAE -2.26% 1.40% 3.63% 3.87% 2.09% 0.93%ROAA -0.36% 0.21% 0.51% 0.50% 0.27% 0.12%ROAE -1.69% 1.05% 2.81% 2.98% 1.61% 0.71%


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China Cinda


Appendix A – AMC Industry in China

A bit of history

Historically, most SOEs in China did not establish sound risk management and internal control, and NPL disposal policy was very strict for Chinese banks. As a result, banks accumulated large amounts of NPLs in the late 1990s, after SOE reforms and the Asian financial crisis. In 1999, the PRC government founded four AMCs, i.e. Cinda, Huarong, Orient and Great Wall, to help carve NPLs from state-owned commercial banks. As of 31 December 2012, the four AMCs had acquired distressed assets with an Original Value of more than Rmb3.1tr (46% were policy distressed assets).

The four big AMCs have undergone a structural change in the past 14 years, transforming from policy distress asset management business to commercialized business and expanding to comprehensive financial services. Figure 116 shows the three-stage development of the distressed asset management industry in China over the past 14 years.

Figure 116: Historical development of the AMC industry

Policy phase

1999-2000 20022001

Big 4 AMCs were set up

1st round of NPA carve-outs from big 4 banks and CDB,totaling Rmb1.4tr

Huarong for the first time sold NPA packages to overseas investors; set up JVs with Morgan Stanley and Goldman Sachs

Huarong became the 1st AMC to underwrite IPO

Orient completed220 debt-to-equity swap deals, totalling Rmb 63bn

Cinda was entrusted by MOF to liquidate China Trust and Investment Corporation for Economic Development

Commercial phase

Cinda was the first AMC to complete the conversion into a joint stock company

Cinda became the1st AMC to completeintroduction of strategic investors

2010-2011 2012 - 20132012

Cinda was the 1st AMC to complete IPO

Cinda was the only AMC permitted to acquire NPA from non-financial enterprises, and the 1st AMC borrowing from interbank

Huarong also complete conversion into a joint stock company

As 2012, the 4 AMCs had cumulatively acquired distressed assets of more than Rmb 3.1tr

Huarong issued Rmb 12bn financial bond

Transition phase

Cinda and Huarong first met the MOF's performance evaluation benchmark

2004-2005 2007-20082006

2nd round of NPA carve-outs from BoCom, BOC, CCB, and ICBC prior to their listings, with book value of Rmb 1.0tr

The 4 AMCs started to record their Policy Business and Commercial Business on separate accounts as required by the MOF

The MOF allowed AMCs to conduct commerical acquisition of NPA and make follow-up investments

Orient issued the 1st ABS backed by distressed assets, named Dongyuan 2006-1

ABC carved out Rmb 816bn NPA to the MOF

2,343 2,279 2,104

1,718

1,313 1,255 1,268

560 497 434 428 493 592

25% 24%

18%

13%

9%7% 6%

2% 2% 1% 1% 1% 1%

0%

5%

10%

15%

20%

25%

30%

-

500

1,000

1,500

2,000

2,500

1999 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Commercial banks' NPL outstanding (LHS) NPL ratio (RHS)

Source: Deutsche Bank, company websites, Cinda prospectus

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China Cinda


From distressed asset managers to financial holding companies

Figure 117: Multi-financial platforms help to generate synergies Cinda Huarong Orient Great Wall

Bank N.A. Huarong Xiangjiang Bank N.A. N.A.

Insurance Cinda P&C, Happy Life N.A. China Insurance Nissay-Great Wall Life

Brokers Cinda Securities, Cinda Futures Huarong Securities, Huarong Futures

Dongxing Securities Great Wall Xinsheng Trust

Trust Jingu Trust Huarong International Trust Daye Trust N.A.

Leasing Cinda Leasing Huarong Financial Leasing China National Foreign Trade Financial & Leasing

Great Wall Guoxing Financial Leasing

Fund management First State Cinda Fund Huarong Yufu Capital Bangxin Asset Management Great Wall Fund Management

Investment & advisory Cinda Investment, Zhongrun Development, Cinda Capital, Sino-Rock Investment Management, Shanghai Tongda Venture Capital

Huarong Huitong Asset Management, Huarong Rongde Asset Management

China Orient Bangxin Management Co.

Great Wall Goldenbridge Financial Consulting, Great Wall Guorong Investment, Great Wall (Ningxia) Asset Management

Real estate Cinda Real Estate Huarong Real Estate, Huarong Zhiyuan Investment & Management

Great Wall Guofu Real Estate N.A.

Credit rating N.A. N.A. Golden Credit Rating International

N.A.

Small loans N.A. N.A. Banghui Holding N.A.

Guarantee N.A. N.A. N.A. Great Wall Guarantee

Asset exchange N.A. N.A. N.A. Tianjin Financial Assets Exchange

Overseas subsidiaries Well Kent International, Cinda International

Huarong (Hong Kong) International

Dong Yin Development, China Orient Asset Management International

Great Wall Pan Asia Int'l Investment

Source: Deutsche Bank, company websites

Figure 118: Four AMCs’ business licenses Trust Financial

leasing Future brokerage

Mutual fund

Securities Microfinance

Bank Life Insurance

Property insurance

Private equity

Property develop’t

Financial guarantee

Total

Cinda √ √ √ √ √ √ √ √ √ 9

Huarong √ √ √ √ √ √ √ √ 8

Orient √ √ √ √ √ √ √ √ 8

Great Wall √ √ √ √ √ √ 6 Source: Deutsche Bank, company websites

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China Cinda


Financial overview of big-four AMCs

Figure 119: Big 4 AMCs' total assets – Group level Figure 120: Big 4 AMCs' total assets – Company level

89151 173

255 28446

152242

309324

53

78

74

193198

63

23

55

107116

251

404

543

864921

0

100

200

300

400

500

600

700

800

900

1,000

2009 2010 2011 2012 1H13

Rmb bn Great Wall Orient Huarong Cinda

43102 112

165 18822

6890

116119

35

5760

139140

58

14

39

8181

159

240

301

501528

0

100

200

300

400

500

600

2009 2010 2011 2012 1H13


Source: Deutsche Bank, company data, Chinabond.com.cn Note: Orient AMC’s data is estimated based on its 1Q13 numbers Source: Deutsche Bank, company data, Chinabond.com.cn

Note: Orient AMC’s data is estimated based on its 1Q13 numbers

Figure 121: Big 4 AMCs' ROAE – Company level Figure 122: Big 4 AMCs' ROAA – Company level

5.7%

12.8%14.6%

15.5%20.2%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2009 2010 2011 2012 1H13

Cinda Huarong Orient Great Wall Total

1.9%

4.1% 4.4%3.9%

4.8%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2009 2010 2011 2012 1H13




Figure 123: Big 4 AMCs' NPAT – Group level Figure 124: Big 4 AMCs' NPAT – Company level

5,739

11,089

15,609

21,209

16,831

93.2%

40.8%35.9%

58.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

5,000

10,000

15,000

20,000

25,000

2009 2010 2011 2012 1H13

Rmb mn NPAT - group yoy

2,996

8,281

12,030

15,650

12,431

176.4%

45.3%30.1%

58.9%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2009 2010 2011 2012 1H13

Rmb mn NPAT - company yoy



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China Cinda


Figure 125: Big 4 AMCs' total funding – Company level Figure 126: Big 4 AMCs' leverage (D/E) – Company level

2867 76

115 136

4

4763

8586

27

4850

127116

47

1

24

61 59

107

163

213

387 397

0

50

100

150

200

250

300

350

400

450

2009 2010 2011 2012 1H13


2.02 2.11 2.44

3.403.02

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2009 2010 2011 2012 1H13




Figure 127: Big 4 AMCs' funding source – Company level Figure 128: Each AMC's funding source (1H13) –

Company level

1%

40% 35%49% 49%41%

2% 15%

22%28%35%

17%10%

5%2%1% 3% 3%

21%

42% 40%

22% 18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 1H13

Other liabilities Bonds Due to central banksLong-term borrowing Short-term borrowing

24%

46%

83%

46% 49%

35%

24%

12%

50%

28%5%

2%

2%

8%

28% 28%

5% 4%18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Other liabilities Bonds Due to central banksLong-term borrowing Short-term borrowing



Figure 129: Share holding structure of 4 AMCs

MOF, 67.8%

Strategic investors,

15.3%

H-share, 16.9%

Cinda

MOF, 98.1%

China Life, 1.9%

Huarong

MOF , 100%

Orient & Great Wall


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China Cinda


Appendix B – More about Cinda

Funding mix shifting towards bank loans and bonds

Figure 130: We expect Cinda’s funding mix to continue

to shift towards bank borrowings and bonds

Figure 131: As a result, interest expenses would be

dominated by bank borrowing costs

9

25

50

72 78 80 77

74

59

30

11 4 0 00 0 8 6 9 12 141

78 8 7 7 616

8 4 3 2 2 2

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014E 2015E 2016E

Others

Interbank

Bonds issued

Amount due to the MOF & central bank

Borrowings

33 30

60

7885 85 83

60 59

27

93 1 0

21 3 8 8 11 13

1 7 9 5 3 3 34 3 1 1 1 1 0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014E 2015E 2016E

Others

Interbank

Bonds issued

Amount due to the MOF & central bank

Borrowings


Figure 132: Sensitivity suggests Cinda is more sensitive to bank lending rate,

with 30bps increase in bank rate to knock off 6.8% FY14E net profit Interest rate change NPAT impact

+/- bps Bank rate Bond rate Interbank rate Overall

30 -5.4% -0.6% -0.5% -6.8%

20 -3.6% -0.4% -0.3% -4.6%

10 -1.8% -0.2% -0.2% -2.3%

0 0.0% 0.0% 0.0% 0.0%

-10 1.8% 0.2% 0.2% 2.3%

-20 3.6% 0.4% 0.3% 4.6%

-30 5.4% 0.6% 0.5% 6.8%Source: Deutsche Bank estimates, company data

Synergies

Cinda achieved cross-selling income of Rmb1.5bn from synergies between segments and subsidiaries in 2013, accounting for 3.5% of total income, with financing leasing subsidiary contributing c.80%. We expect the synergies between the DAM and FIAM to be the strongest, while synergies elsewhere within the group should remain limited, given relatively weaker subsidiaries in terms of market positions.

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China Cinda


Figure 133: We expect the synergies between the DAM and FIAM to be the

strongest, while synergies elsewhere within the group should remain limited,

given relatively weaker subsidiaries in terms of market positions

Distressed Asset Management

(DAM)

FinancialInvestment &

Asset Management

(FIAM)

Financial Service (FS)

Strong synergies: - DAM provides extensive network and client base- FIAM makes value-appreciation investment and enhances total return from distressed assets- Cinda Real Estate helpes DAM to manage real estate related assets- Well Kent Int'l provides overseas services

Modest synergies:- DAM provides extensive network client base- FS provies value-added services to DAM clients and enables them to get access to capital market- cross selling opportunities including insurance products, and trust and leasing projects

Weak synergies:- Share client and branch network- FS provides customized financial solutions to portfolio companies in PE funds - Well Kent Int'l provides overseas services

Common synergies:- Business network synergy: 31 Company branches, 300 insurance branches and 70 brokerage branches- Client synergy: 1.5mn retail client base from FS; Company's cooperation agreements with 343 local governments, financial institutions, enterprises and other entities- Branding, talent & experties sharing, and information system synergies


Figure 134: Compared with CITIC Group, Cinda’s subsidiaries are generally weaker in terms of market positions and

have made lower profit contribution to the group Cinda Group CITIC Group

Subsidiaries Industry ranking

PBT - 2013 (Rmb m)

PBT contribution

to group

Subsidiaries Industry ranking

PBT - 2013 (Rmb m)

PBT contribution

to group

Broker Cinda Securities 32 450 3.8% CITIC Securities 1 6,846 9.7%

Trust Jingu Trust 43 350 3.0% CITIC Trust 1 4,194 6.4%

Fund First State Cinda 57 15 0.1% China AMC 1 1,285 2.3%

Insurance Cinda P&C 21 3 0.0% CITIC-Prudential 24 261 0.6%

Happy Life 25 780 -6.6%

Bank N.A. CITIC Bank 9 52,549 73.8%

Leasing Cinda Leasing N.A. 479 4.1% N.A. Source: Deutsche Bank, company data, company websites

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China Cinda


Cinda’s history

Figure 135: Key milestones for Cinda over different development stages

Policy phase

Incorporated in Beijing; acquired Rmb250bn NPLs from CCB and Rmb100bn NPLs from CDB

Sold 3 batches distressed assets to overseas investors with a total amount of Rmb12.3bn; entrusted by the MOF to liquidate China Trust and Investment Corporation for Economic Development

1999 2001 20032002

Acquired Rmb14bn NPLs from CDB

Entrusted to dispose of distressed assets of 12 subsidiaries of one of the largest telecomoperators in China

Transition phase

Acquired Rmb64bn NPLs from BoCom before its listing; acquired Rmb278.7 NPLs from CCB and BOC through bidding; entrusted by regulators to take over 2 securities firm and dispose Rmb56.9bn NPLs from CCB

Expanded into fund management business; issued the first batch of distressed assets securitization product of Rmb3bn in the PRC

2004 2005 2007-20092006

Became the 1st AMC to meet the MOF's performance evaluation benchmarks on disposal of Policy Distressed Assets; acquired Rmb58.1bn NPLs from ICBC

Expanded into businesses including onshore/offshore securities, trust, life/P&C insurance, futures, PE and real estate; advised CCB on issuing subordinated asset-backed securities

Commercial phase

Approved by State Council to become the 1st AMC to complete joint-stock reform; expanded into financial leasing business; approved to start distressed assets acquisition from non-financial enterprises

Became the 1st AMC to completed introduction of strategic investments by NSSF, UBS, CITIC Capital and SCB; 1st AMC to issue financial bonds with total amount of Rmb10bn

2010 2011 2012-20132012

Participated in interbank borrowing market with approval of PBOC

1st AMC to issue offshore RMB bonds in HK with total amount of Rmb2bn; 1st AMC to complete IPO, raising HK$18.5bn in HK in Dec 2013


Corporate structure of Cinda

Figure 136: Cinda’s shareholding structure post Global Offering after over-allotment option was exercised

Cinda

CITIC CapitalUBSNSSFMOFStandard Chartered

Public: H Shareholders

First State Cinda

Cinda Securities

Jingu TrustCinda

LeasingWell Kent

InternationalCinda

InvestmentHappy LifeCinda P&C

Zhongrun Development

67.8% 8.2% 4.2% 1.7% 1.3% 16.9%

99.3% 92.3% 99.6% 54% 51% 61.6% 100% 100%

10%90%

Cinda Futures

100%

Cinda Real Estate

Shanghai Tongda

Cinda International

54.8% 40.7%

63.9% indirect holding

Source: Deutsche Bank, company data Note: 9 principal subsidiaries of Cinda are in dark blue boxes and 4 indirect controlled financial companies are in light blue boxes

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China Cinda


Cinda management profile

A large proportion of Cinda’s senior management team is from CCB and many of them have worked in Cinda for more than 10 years.

Figure 137: Directors and senior management profile – Cinda Name Age Position/Title Key profile

HOU Jianhang 57 Chairman of the Board, Executive Director

Joined in 1999, and has been the Chairman of Board since May 2011. Mr. Hou had held various positions with CCB before joining Cinda including general manager of Credit Risk Management Department. He graduated from Liaoning Finance and Economics College in 1979.

ZANG Jingfan 58 Executive Director, President Joined in 2000, and has been ED and President since May 2011. Mr. Zang served as various roles in PBOC, SAFE and CBRC before joining Cinda including director of Cooperative Finance Supervision Department of the CBRC from 2005-10. He graduated from Shaanxi Institute of Finance and Economics in 1990.

XU Zhichao 53 Executive Director, Vice President

Joined in 2000, and has been ED and VP since June 2010. Mr. Xu worked as deputy director of the Macro-economy Research Institute of China Society of Economic Reform in 1987-91. He graduated from Huazhong University of Science & Technology in 2003 with a doctoral degree.

WANG Shurong 58 Non-executive Director Joined in 2010 as non-executive Director. Ms. Wang served various roles in 1985-2010 in the MOF and was accredited as an economist and a senior accountant by the MOF. She graduated from Tianjin College of Finance & Economics in 1980.

YIN Boqin 57 Non-executive Director Joined in 2010 as non-executive Director. Mr. Yin served as various senior roles in Department of Taxation of the MOF in the past and was the Vice Mayor of Longkou City, Shandong Province in 1997-1998. He graduated from Shanghai College of Finance and Economics in 1983.

XIAO Yuping 53 Non-executive Director Joined in 2010 as non-executive Director. Ms. Xiao served various roles in the PBOC in 1986-2010, and was accredited as a senior economist by PBOC in 1999. She graduated from Peking University in 1986 with a Bachelor's degree in law.

YUAN Hong 49 Non-executive Director Joined in 2013 as non-executive Director. Ms. Yuan served various roles in PBOC, SAFE, CBRC, ADBC etc. before joining Cinda. She graduated from Nankai University in 1987 with an economics degree.

LU Shengliang 46 Non-executive Director Joined in 2012 as non-executive Director. Mr. Lu served various roles in CASS, NSSF, China UnionPay, etc. before joining Cinda. He graduated from CASS Graduate School with a doctoral degree in economics in 1999.

LI Xikui 69 Independent non-executive Director

Joined in 2010 as independent non-executive Director. Mr. Li served various senior roles in CCB, Shougang Group, Huaxia Bank, China Galaxy Securities Galaxy Fund Management, etc. before joining Cinda. He graduated from the Finance Science Institute of the MOF with a Masters degree in 1982.

QIU Dong 56 Independent non-executive Director

Joined in 2010 as independent non-executive Director. Mr. Qiu served as professor in Dongbei University of Finance and Economics and Central University of Finance and Economics in 1985-2009. He is currently an independent non-executive director of ABC and distinguished guest professor of Changjiang Scholars Program. Mr. Qiu graduated from Dongbei University of Finance and Economics with a doctoral degree in 1990.

CHANG Tso Tung, Stephen

65 Independent non-executive Director

Joined in 2013 as independent non-executive Director. Mr. Chang was the deputy chairman of Ernst & Young HK and China until 2003 and has about 30 years extensive experience in accounting, auditing and financial management. Mr. Chang graduated from University of London in 1973.

XU Dingbo 50 Independent non-executive Director

Joined in 2013 as independent non-executive Director. Mr. Xu served as independent non-executive director and chairman of the audit committee for various companies in the past including The People's Insurance Company of China. Mr. Xu is a member of the American Accounting Association and graduated from University of Minnesota in 1996 with a doctoral degree in accounting.

CHEN Xiaozhou 51 Member of the senior management

Joined in 1999, and has been a member of the senior management of Cinda since 2000, responsible for the investment and asset management business. Before joining Cinda, Mr. Chen had held various positions in CCB including deputy general manager of the Business Department of Head Office. He graduated from Graduate School of Finance Research Institute of PBOC in 1988 and from University of new South Wales in 2002 with a Master's degree in business.

YANG Junhua 56 Member of the senior management

Joined in 1999, and has been a member of the senior management since 2005, responsible for the general affairs of the Head Office. Mr Yang had held various positions in CCB before joining Cinda, including vice general manager of Shaanxi Provincial Branch. He graduated from the University of International Business and Economics in 2005 with an EMBA degree and from University of Science and Technology of China in 2011 with a doctoral degree in management.


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China Cinda


Figure 137: Directors and senior management profile – Cinda (cont’d) Name Age Position/Title Key profile

XIAO Lin 58 Vice President Joined in 1999, and has been VP since 2013, responsible for labor union. Mr. Xiao had held various positions in CCB prior to joining Cinda, including deputy general manager of Staff Education Department and was accredited as a senior political engineer by CCB in 1997. He graduated from the University of International Business and Economics in 2006 with an EMBA degree.

ZHUANG Enyue 52 Vice President Joined in 2003, and has been VP since 2007, responsible for the custody, liquidation and restructuring business. Mr. Zhuang had held various positions in the National Audit Office in 1990-2001, and ICBC in 2001-2003. He graduated from Renmin University of China in 1990 with a Master's degree in economics.

LI Yuejin 55 Vice President Joined in 1999, and has been VP since 2011, responsible for DES Asset management and information technology. Mr. Li had held various positions in CCB prior to joining Cinda, including branch general manager of Tai'an Branch. He graduated from Peking University in 2007 with an EMBA degree.

WU Songyun 49 Vice President Joined in 1999, and has been VP since 2013, responsible for distressed debt asset management. Mr. Wu had held various positions in CCB prior to joining Cinda, including deputy director of Credit Risk Management Department. He graduated from Tsinghua University in 2012 with an EMBA degree.

GU Jianguo 51 Vice President Joined in 2011, and has been VP since 2013, responsible for asset/liability management and financial/accounting. Mr. Gu had held various positions in China Cinda Trust Investment, CCB, and Well Kent International prior to joining Cinda. He received a doctoral degree in economics from the Research Institute for Fiscal Science of the MOF in 1994.

ZHANG Weidong 46 Assistant to President, Board Secretary

Joined in 1999, and has been Assistant to President since 2011, responsible for investor relationship management. Mr. Zhang served as officer of the Real Estate Credit Department in CCB in 1992-1999. He graduated from Remin University in 1992 with a Master's degree in economics.

LUO Zhenhong 48 Chief Risk Officer Joined in 1999, and has been the Chief Risk Officer since 2013, responsible for risk management. Mr. Luo had worked in various positions in CCB in 1988-99. He received a Master's degree in Law in 2002 and an EMBA degree in 2012 from Peking University.


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China Cinda


Appendix C

The list of the 74 listed comparables to Cinda’s top-20 unlisted DES companies

Figure 138: The list of the 74 listed comparables to Cinda’s top-20 unlisted DES companies – Part 1

I tem Comparab le companies Ticker BBG ticker6/28/2013 12/31/2013 hoh chg 5/14/2014 Ytd chg

Coa l p roduction for trade and power generation1 China Shenhua Energy Co Ltd. 1088 HK 1088 HK Equity 332,608 325,750 -2.1% 298,963 -8.2%2 China Coal Energy Co., Ltd. 1898 HK 1898 HK Equity 57,960 57,619 -0.6% 53,858 -6.5%3 Yanzhou Coal Mining Co., Ltd. 1171 HK 1171 HK Equity 36,448 37,100 1.8% 32,789 -11.6%4 Shanxi Lu'An Environmental Energy Development Co., Ltd. 601699 CH 601699 CH Equity 27,521 24,553 -10.8% 19,329 -21.3%5 Shanxi Xishan Coal and Electricity Power Co., Ltd. 000983 CH 000983 CH Equity 25,714 22,374 -13.0% 17,710 -20.8%6 Yangquan Coal Industry (Group) Co., Ltd. 600348 CH 600348 CH Equity 21,741 16,979 -21.9% 14,815 -12.7%7 Jizhong Energy Resources Co., Ltd. 000937 CH 000937 CH Equity 20,423 17,162 -16.0% 14,432 -15.9%8 Guizhou Panjiang Refined Coal Co., Ltd. 600395 CH 600395 CH Equity 15,144 12,016 -20.7% 13,224 10.1%9 DaTong Coal Industry Co., Ltd. 601001 CH 601001 CH Equity 9,590 9,674 0.9% 10,394 7.4%10 Huolinhe Opencut Coal Industry Corp Ltd. 002128 CH 002128 CH Equity 11,595 10,640 -8.2% 9,618 -9.6%11 Shougang Fushan Resources Group Limited 639 HK 639 HK Equity 12,628 11,257 -10.9% 10,439 -7.3%12 Mongolian Mining Corporation 975 HK 975 HK Equity 4,222 2,979 -29.4% 1,787 -40.0%13 Hidili Industrial International Development Ltd. 1393 HK 1393 HK Equity 2,282 1,884 -17.4% 1,512 -19.7%14 Inner Mongolian Yitai Coal Co., Ltd. 3948 HK 3948 HK Equity 48,103 34,708 -27.8% 27,346 -21.2%Subtotal 625,979 584,694 -6.6% 526,216 -10.0%Sales and production of phosphate compounds and ferti l izer1 Jiangsu Chengxing Phosph-chemicals Co., Ltd. 600078 CH 600078 CH Equity 3,903 3,850 -1.4% 3,664 -4.8%2 Hubei Xingfa Chemicals Group Co., Ltd. 600141 CH 600141 CH Equity 4,876 5,434 11.4% 4,332 -20.3%3 Anhui Liuguo Chemical Co., Ltd. 600470 CH 600470 CH Equity 3,051 3,390 11.1% 3,004 -11.4%4 Shandong Kingenta Ecological Engineering Co., Ltd. 002470 CH 002470 CH Equity 9,856 14,910 51.3% 13,041 -12.5%5 Hubei Yihua Chemical Industry Co., Ltd. 000422 CH 000422 CH Equity 6,061 5,630 -7.1% 4,732 -15.9%6 Sichuan Lutianhua Co., Ltd. 000912 CH 000912 CH Equity 2,381 2,668 12.0% 2,586 -3.1%7 Shenzhen Batian Ecotypic Engineering Co., Ltd. 002170 CH 002170 CH Equity 4,590 5,433 18.4% 4,684 -13.8%8 Luxi Chemical Group Co., Ltd. 000830 CH 000830 CH Equity 5,347 6,050 13.2% 5,200 -14.0%Subtotal 40,064 47,364 18.2% 41,243 -12.9%Sale and production of coking chemicals 7/19/20131 Shanxi Coking Co., Ltd. 600740 CH 600740 CH Equity 4,487 4,594 2.4% 4,181 -9.0%2 Taiyuan Coal Gasification Co., Ltd. 000968 CS 000968 CS Equity 3,740 4,197 12.2% 3,802 -9.4%3 Inner Mongolia Yuan Xing Energy Co., Ltd. 000683 CH 000683 CH Equity 3,209 3,064 -4.5% 2,803 -8.5%4 Huscoke Resources Holdings Limited 704 HK 704 HK Equity 376 282 -24.8% 207 -26.6%5 Qitaihe Baotailong Coal & Coal Chemicals Public Co., Ltd. 601011 CG 601011 CG Equity 2,844 3,878 36.3% 3,967 2.3%Subtotal 14,657 16,015 9.3% 14,959 -6.6%Prov is ion o f cement equipment and eng ineering serv ices, p roduction and sa les of cement1 Anhui Conch Cement Co., Ltd. 914 HK 914 HK Equity 75,127 96,981 29.1% 97,496 0.5%2 Asia Cement China Holdings Corp. 743 HK 743 HK Equity 3,916 5,940 51.7% 7,054 18.7%3 China Shanshui Cement Group. Ltd. 691 HK 691 HK Equity 7,777 7,320 -5.9% 6,880 -6.0%4 West China Cement Ltd. 2233 HK 2233 HK Equity 4,138 4,082 -1.4% 3,070 -24.8%5 Dongwu Cement International Ltd. 695 HK 695 HK Equity 478 508 6.2% 531 4.6%6 TCC International Holdings Ltd. 1136 HK 1136 HK Equity 4,773 9,775 104.8% 7,628 -22.0%7 China Resources Cement Holdigns Ltd. 1313 HK 1313 HK Equity 20,120 26,568 32.1% 27,511 3.5%8 China Tianrui Group Cement Co., Ltd. 1252 HK 1252 HK Equity 4,275 4,498 5.2% 4,091 -9.1%9 China National Building Material Co., Ltd. 3323 HK 3323 HK Equity 29,693 35,148 18.4% 31,935 -9.1%10 China National Material Co., Ltd. 1893 HK 1893 HK Equity 4,070 4,656 14.4% 4,334 -6.9%Subtotal 154,366 195,474 26.6% 190,528 -2.5%Sale and production of nonferrous meta ls1 Jiangxi Copper Co., Ltd. 358 HK 358 HK Equity 47,100 44,581 -5.3% 39,974 -10.3%2 Xinjiang Xinxin Mining Industry Co., Ltd. 3833 HK 3833 HK Equity 2,221 2,001 -9.9% 2,682 34.0%3 MMG Ltd. 1208 HK 1208 HK Equity 8,497 6,771 -20.3% 8,119 19.9%4 China Nonferrous Mining Corp. Ltd. 1258 HK 1258 HK Equity 7,537 6,046 -19.8% 5,047 -16.5%5 China Daye Non-ferrous Metals Mining Ltd. 661 HK 661 HK Equity 2,715 2,638 -2.9% 1,796 -31.9%6 Yunnan Copper Industry Co., Ltd. 000878 CH 000878 CH Equity 13,739 12,337 -10.2% 10,779 -12.6%7 Shengda Mining Co., Ltd. 000603 CH 000603 CH Equity 6,454 6,509 0.9% 5,615 -13.7%8 Tongling Nonferrous Metals Group Co., Ltd. 000630 CH 000630 CH Equity 15,325 14,244 -7.1% 13,676 -4.0%9 Sichuan Western Resources Holdings Co., Ltd. 600139 CH 600139 CH Equity 3,978 4,885 22.8% 7,671 57.0%10 Western Mining Co. Ltd. 601168 CH 601168 CH Equity 12,892 12,844 -0.4% 12,844 0.0%Subtotal 120,459 112,857 -6.3% 108,205 -4.1%

Market cap (RMB mn) as o f

Source: Deutsche Bank, Bloomberg Finance LP, company data

15 May 2014


China Cinda


Figure 139: The list of the 74 listed comparables to Cinda’s top-20 unlisted DES companies – Part 2

I tem Comparab le companies Ticker BBG ticker6/28/2013 12/31/2013 hoh chg 5/14/2014 Ytd chg

Sa le and production of steel p ipes1 Shandong Molong Petroleum Machinery Co., Ltd. 568 HK 568 HK Equity 4,940 6,315 27.8% 6,132 -2.9%2 Zhejiang Jiuli Hi-Tech Metals Co., Ltd. 002318 CH 002318 CH Equity 5,345 5,585 4.5% 5,292 -5.3%3 Zhejiang Kingland Pipeline and Technologies Co., Ltd. 002443 CH 002443 CH Equity 2,881 3,288 14.1% 3,097 -5.8%4 Jiangsu Changbao Steel Tube Co., Ltd. 002478 CH 002478 CH Equity 3,341 4,081 22.2% 3,761 -7.8%5 Inner Mongolian Baotou Steel Union Co., Ltd. 600010 CH 600010 CH Equity 32,811 34,491 5.1% 30,890 -10.4%6 Chu Kong Petroleum & Natural Gas Steel Pipe Holding Ltd. 1938 HK 1938 HK Equity 1,760 2,139 21.5% 1,910 -10.7%7 Shengli Oil& Gas Pipe Holdings Ltd. 1080 HK 1080 HK Equity 1,610 1,046 -35.0% 787 -24.7%8 Anhui Tianda Oil Pipe Co., Ltd. 839 HK 839 HK Equity 981 967 -1.4% 1,223 26.4%Subtotal 53,668 57,912 7.9% 53,092 -8.3%Railway construction and management1 Daqin Railway Co., Ltd. 601006 CH 601006 CH Equity 88,309 109,866 24.4% 100,351 -8.7%2 China Railway Tielong Container Logistics Co., Ltd. 600125 CH 600125 CH Equity 6,919 7,428 7.4% 6,723 -9.5%3 Aurizon Holdings Ltd. AZJ AU AZJ AU Equity 49,773 56,353 13.2% 61,951 9.9%4 Asciano Ltd. AIO AU AIO AU Equity 27,411 30,355 10.7% 33,127 9.1%5 CSX Corp. CSX US CSX US Equity 145,457 176,509 21.3% 184,760 4.7%6 Genesee& Wyoming Inc. GWR US GWR US Equity 27,725 31,092 12.1% 32,152 3.4%7 Norfolk Southern Corp. NSC US NSC US Equity 140,497 173,560 23.5% 188,226 8.5%8 Canadian Pacific Railway Ltd. CP US CP US Equity 130,192 160,579 23.3% 174,896 8.9%9 Canadian National Railway Ltd. CNR CN CNR CN Equity 252,997 288,297 14.0% 305,720 6.0%10 Union Pacific Corporation UNP US UNP US Equity 441,997 468,308 6.0% 544,251 16.2%11 Kansas City Southern KSU US KSU US Equity 71,656 82,598 15.3% 70,273 -14.9%12 Providence and Worcester Railroad Co. PWX US PWX US Equity 470 574 22.0% 549 -4.3%Subtotal 1,383,401 1,585,518 14.6% 1,702,980 7.4%Engineering and construction of nuclear power p lants and o ther inf ras tructure pro jects1 China Communication Construction Co., Ltd. 1800 HK 1800 HK Equity 68,856 69,045 0.3% 63,384 -8.2%2 Sinohydro Group Ltd. 601669 CH 601669 CH Equity 27,648 29,472 6.6% 26,784 -9.1%3 China Railway Group Ltd. 390 HK 390 HK Equity 53,625 58,945 9.9% 57,766 -2.0%4 China Railway Construction Corp. Ltd. 1186 HK 1186 HK Equity 54,183 60,624 11.9% 58,888 -2.9%5 China National Chemical Engineering Co., Ltd. 601117 CH 601117 CH Equity 46,962 39,464 -16.0% 29,253 -25.9%6 China Gezhouba Group Co., Ltd. 600068 CH 600068 CH Equity 13,741 13,810 0.5% 17,728 28.4%7 China State Construction Engineering Corporation Ltd. 601668 CH 601668 CH Equity 98,100 94,200 -4.0% 89,700 -4.8%Subtotal 363,115 365,560 0.7% 343,503 -6.0%

Market cap (RMB mn) as o f

Source: Deutsche Bank, Bloomberg Finance LP, company data

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China Cinda


Appendix 1

Important Disclosures Additional information available upon request Disclosure checklist

Company Ticker Recent price* Disclosure

China Cinda 1359.HK 3.91 (HKD) 15 May 14 NA *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies

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/Disclosure.eqsr?ricCode=1359.HK Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Hans Fan

Historical recommendations and target price: China Cinda (1359.HK) (as of 5/15/2014)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Dec 13 Mar 14

Sec

uri

ty P

rice

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

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China Cinda


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. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

54 %

39 %

7 %25 %

22 %11 %

050

100150200250300350400450

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

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China Cinda


Regulatory Disclosures

1. Important Additional Conflict Disclosures

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.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures

Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. 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, The Financial Futures Association of Japan, Japan Investment Advisers Association. 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. "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 Deutsche Securities Inc. (DSI) are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. 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 only undertake the financial services activities that fall within the scope of its existing QFCRA license. 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 to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia: This 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 only undertake the financial services activities that fall within the scope of its existing CMA license. 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 only undertake the financial services activities that fall within the scope of its existing DFSA license. 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 only available to Professional Clients, as defined by the Dubai Financial Services Authority.

GRCM2014PROD032069

David Folkerts-Landau

Group Chief Economist Member of the Group Executive Committee

Guy Ashton

Global Chief Operating Officer Research

Marcel Cassard Global Head

FICC Research & Global Macro Economics

Richard Smith and Steve Pollard Co-Global Heads Equity Research

Michael Spencer Regional Head

Asia Pacific Research

Ralf Hoffmann Regional Head

Deutsche Bank Research, Germany

Andreas Neubauer Regional Head

Equity Research, Germany

Steve Pollard Regional Head

Americas Research

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