China Cinda Asset Management Co. Ltd. (01359.HK) has seen its share price tumble after its inclusion in the MSCI China Index in February.
The stock has dropped 25 percent from its peak on Jan. 21 to a record low of HK$4.17 (53.73 US cents) as of Thursday. The plunge is surprising, considering that it has become a constituent of a major stock index and plays the role of a counter-cyclical stock to mainland banks.
Why did this happen? The answer can actually be found in its prospectus, the Hong Kong Economic Journal’s EJ tactics column points out.
Cinda is a bad-asset bank, which buys non-performing debts and accounts receivable from lenders. Theoretically, the more the assets it accumulates, the better will be its profit, because most of these bad assets have already been provided for and banks are unloading them at distressed prices.
However, despite a sharp rise in the amount of its assets, Cinda’s earnings have remained stagnant.
Over the past three years, the company has seen a 68.4 percent growth in assets to 283.6 billion yuan (US$46.38 billion) as of June 2013, from 149.8 billion yuan in 2010. But its net profit fell to 7.2 billion yuan in 2012 from 7.4 billion yuan in 2010.
A look at its prospectus will show that return on equity and return on assets have deteriorated.
The group’s average return on equity stood at 25.5 percent in 2010, then it declined to 18.1 percent in 2011 and 15.8 percent in 2012, while the average return on assets went down from 6.3 percent to 4.2 percent and 3.4 percent in those years. In short, Cinda’s average return on equity plunged nearly 10 percentage points during the three-year period, while return on assets plummeted 46 percent.
The downtrend continued in the first half in 2013, with annualized return on equity coming in at 14.6 percent and annualized return on assets at 3 percent.
All this data can be found in the prospectus. But investors chose to ignore the warning signals and fell for the investment bankers’ marketing campaign during the initial public offering.
The biggest risk in any newly listed counter is that no one knows how much fat has been added to the stock before its trading debut.
As mainland media reported, citing middle-level executives at a state-backed asset management company, Cinda has been snapping up non-performing assets at high costs since last summer to pump up its size.
In one instance, the company reportedly offered 150 million yuan for a package of assets from a Guangdong bank, which had only asked for 50 million yuan, thus derailing the market price mechanism.
Also working against Cinda are its high debt level and heavy reliance on government subsidy for interest payments.
The group had liabilities of 220.81 billion yuan at the end of June 2013, doubling the level of 108.2 billion yuan in 2010. The portion borrowed from the central government surged 13 times to 104.1 billion yuan from 7.83 billion yuan. Almost half of the amount will mature in 12 months, with 90 percent being unsecured.
The group still owes the People’s Bank of China and the Ministry of Finance 40 billion yuan in low-interest loans that are due by the end of this year. Whether it can continue to acquire low-cost loans from the government is highly doubtful.
Furthermore, relatively risky property-related loans have long been a major contributor to Cinda’s non-performing assets, which accounted for 60.4 percent of the group’s bad loans as of the end of June 2013. In 2012, the group formed a 10 billion yuan fund to acquire trust products investing in non-performing real estate assets, which deepened its exposure to the sector.
The sharp drop in Cinda’s share price suggests that investors have learned a thing or two from the company’s prospectus.
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