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China Huarong Releases 2020 Annual Results and 2021 Interim Results
On 29 August, China Huarong Asset Management Co., Ltd. (“the Group” or “the Company”, HK: 02799) released announcements of 2020 annual results and 2021 interim results. In 2020 and 1H21, China Huarong resolutely implemented the decision-making arrangements of the CPC Central Committee and the State Council. Under the correct leadership of the China Banking and Insurance Regulatory Commission, with the full support of its shareholders, investors, customers and peers, China Huarong adhered to the general principle of pursuing progress while maintaining stability, implemented the Central Government’s strategic decisions to ensure “six priorities” and “stability in six areas”, gave full play to the counter-cyclical financial bailout function, focused on main businesses and main responsibilities, accelerated business transformation, thoroughly eliminated the pernicious influence, promoted risk reduction and business streamlining, and strengthened internal management. Accordingly, its main business of core non-performing assets remained stable, and the foundation of operation and management was further consolidated.
In 2020, China Huarong comprehensively examined and assessed the risks, and confirmed the asset impairment loss of RMB 107.755 billion for the current period, which had a very significant impact on the operating results. The net loss of the Group was RMB 106.274 billion, and the net loss attributable to shareholders of the Company was RMB 102.903 billion. Main reasons are as follows:
First, the impairment test was conducted on the centralized disposal of the existing risk assets. Based on the integration of overseas business in 2019, Huarong Overseas Chinese Asset Management Co., Ltd. (“Huarong Overseas Chinese”) integrated part of the existing assets of branches and subsidiaries within the Company, and conducted centralized management. The Company completed the project registration and approval of the equity transfer of Huarong Overseas Chinese, and made an announcement on the potential disposal on 8 April 2020. However, by the end of 2020, the transfer had not been implemented according to the plan. Huarong Overseas Chinese had conducted the comprehensive review and assessment of the centralized management of assets, made provisions for credit impairment loss and loss from fair value changes.
Second, a prudent assessment was conducted on the credit impairment loss of current asset risks. The fast-growing acquisition-and-restructuring projects and fixed income projects from 2015 to 2017 matured centrally in 2020. Due to the historical reasons for the formation of risk assets and the effect of the current market environment, as well as the severe impact of COVID-19 pandemic and the “mine explosion” incidents in the market, the contract performance ability of customers was greatly affected and the relevant assets’ quality was also exposed to greater pressure than that in the previous period. After the comprehensive review and assessment of risks, the Company had made provision for credit impairment loss.
Third, the risks of some subsidiaries offset the Company’s operating results. The underlying assets in asset management plans of relevant financial service subsidiaries accelerated to expose to risks. Deterioration incurred on risk assets of some subsidiaries in asset management and investment segments. After the comprehensive review and assessment of risks, these subsidiaries had made provision for credit impairment loss and loss from fair value changes.
This is a concentrated manifestation of the existing risks accumulated during Lai Xiaomin’s tenure, and it is also a painful lesson to be learned forever in the Company’s development history. We will learn from the painful experience and strive to take it as the motivation to move forward.
At the same time, China Huarong actively responded to the complex and severe external environment and took the initiative to resist various risks and challenges in 2020. The Group’s operating revenue was generally stable, the business structure was continuously adjusted, and the contribution of its main business was improved.
Operating revenue retained stable. In 2020, it posted operating revenue of RMB 101.732 billion, 7.5% lower than that of the same dimension in 2019. After overcoming the impact of the pandemic, the operating revenue remained basically stable. After comprehensively examining and assessing risks and confirming unrealized changes in fair value of negative RMB 25.224 billion, the total revenue was RMB76.508 billion, a decrease of 32.1% over the previous year. Specifically, the main business of the Group’s core non-performing assets remained stable, and the non-performing assets operating segment registered a total revenue of RMB 60.37 billion, and the revenue contribution increased from 62.0% in 2019 to 78.9% in 2020; The total revenue of the financial services subsidiary remained stable, and the financial services segment posted revenue of RMB 33.288 billion, which was basically the same as the previous year. The asset management and investment segment continued to reduce the non-main business without advantages. After a comprehensive examination and assessment of risks, the loss of changes in fair value was confirmed, and the total revenue of such segment was negative RMB 11.50 billion.
Continuous optimization of business structure. In 2020, the total revenue from Acquisition-and-Restructuring Distressed Assets and Acquisition-and-Disposal Distressed Assets was RMB 41.051 billion, an increase of 1.8% over the previous year; At the end of 2020, the total amount of non-performing debt assets was RMB 551.41 billion, which was the same as that of the end of the previous year. The proportion of non-performing debt assets newly acquired from financial institutions increased from 26.3% in 2019 to 30.9% in 2020. The proportion of non-financial debt assets decreased, and the business structure continued to be optimized. Specifically, the market share of new acquisition scale of acquisition-and-disposal business remained the leading position in the industry, with the annual new acquisition cost of RMB 53.757 billion, an increase of 36.5% over the previous year, and the disposal speed of stock assets accelerated. The annual disposal of non-performing debt assets was RMB 38.939 billion, an increase of 26.0% over the previous year, and the disposal revenue was RMB7.24 billion, and the internal return rate of closed projects was 13.7%, maintaining a high level. The Acquisition-and-Restructuring business scale remained stable, with the annual revenue amounting to RMB33.812 billion, an increase of 6.8% over the previous year, and the average monthly annualized rate of return being 9.0%, an increase of 0.5% over the previous year. The Group vigorously expanded the restructuring of enterprises with substantive problems, made new breakthroughs in key business areas, and successfully implemented a number of innovative projects such as divestiture of non-core business from state-owned enterprises, relief of large entities, urban renewal, and acquisition of defaulted bonds. The total investment of the market-oriented debt-to-equity swap business amounted to RMB 34.189 billion, maintaining a high level among peers. In 2020, the Group posted revenue from such business of RMB 1.86 billion, closely followed the national strategy, and invested more than 60% of new projects in strategic emerging industries such as scientific and technological innovation and biomedicine, helping the transformation and upgrading of the real economy and further optimizing the business structure.
Solid results have been achieved in risk reduction and downsizing. China Huarong has actively implemented the principle of “seeking benefits from stocks”, resolutely won the tough battle against stock risks, improved the mechanism for hidden dangers of stock risks, accelerated the disposal of risky assets, and achieved significant results in the reduction of risk exposure. It has continued to reduce non-main business and non-advantageous assets, and orderly promoted the clean-up of non-financial subsidiaries and multiple-level subsidiary legal entities. The number of domestic and overseas non-financial subsidiaries directly managed by the Group was reduced from 27 at the end of 2017 to 13 at the end of 2020. Asset integration of overseas subsidiaries has been basically completed. The Group implemented unified management of liquidity, repaid maturing bonds and notes on schedule, and ensured normal and stable capital relationships with financial institutions and maintained a stable financing scale.
The internal management level has been continuously improved. China Huarong continued to promote the organic integration of the Party’s leadership and corporate governance, and improve the corporate governance structure. Based on the principle of complying with industry regulation provisions and respecting legal person status, China Huarong continued to optimize the management of branches and subsidiaries, and implement policies and classified management according to the actual situation of such branches and subsidiaries. It has promoted the construction of a comprehensive risk management system in an orderly manner, strengthened risk appetite and quota management, enhanced business access and review mechanisms, and improved the review of related party transactions and internal transactions. Meanwhile, it has continuously improved the internal control management system and strengthened compliance construction. China Huarong has also strengthened the planning and construction of information technology infrastructure, built a data center system of “one place and two centers”, and enhanced the hard power of science and technology support.
In the first half of 2021, faced with the delayed disclosure of 2020 annual results, stock suspension, severe and complicated internal and external situations, with the guidance and support of regulators, major shareholders and financial institutions, China Huarong took the initiative to focus on transformation and development and risk tackling, continued to develop main business, accelerated risk disposal, revitalized inefficient assets, maintained stable liquidity and normal operation.
First, main financial indicators showed positive changes. In the first half of 2021, the total revenue was RMB 46.063 billion, presenting a YOY increase of 0.8%; The net profit was RMB1.624 billion, representing a YOY increase of 105.0%, and the net profit attributable to shareholders of the Company was RMB 158 million. Specifically, in 1H, the non-performing assets operating segment posted the total revenue of RMB 27.045 billion and a pre-tax profit of RMB 5.767 billion, accounting for 134.2% of the Group’s total pre-tax profit; the financial services segment registered the total revenue of RMB 16.744 billion and a pre-tax profit of RMB 3.496 billion, remaining basically stable; the asset management and investment segment achieved the total revenue of RMB 4.84 billion (representing a YOY increase of 6.6%) and a pre-tax loss of RMB 4.19 billion (representing a YOY decrease of RMB 1.437 billion). The financial indicators of Huarong Trust and Huarong International exhibited improvement.
Second, the core advantages of the main business have been constantly enhanced. In the first half of 2021, the main business of non-performing assets continued to maintain steady development, with its revenue and structure further optimized. The acquisition-and-disposal business completed the first deal featured by one single customer entrusting a state-owned company to dispose non-performing assets and the first deal pertaining to the acquisition of personal loan non-performing assets package, continued to accelerate the disposal of stock assets. In 1H, the amount of the assets disposed by the acquisition-and-disposal business was RMB 12.416 billion, and the newly added acquisition cost was RMB 11.418 billion, showing that the total amount of disposed assets exceeded the newly added acquisition cost; The realized disposal income amounted to RMB 3.896 billion, representing a YOY increase of 77.9%, and the internal rate of return of closed projects was 14.5%, still at a high level. The Acquisition-and-Restructuring business closely followed the national strategy, optimized the layout, implemented the regulatory requirements, reduced the investments in non-financial and housing projects and other projects, and achieved the revenue of RMB 15.211 billion in 1H, still maintaining a large revenue contribution. The profit contribution of debt-to-equity swap business increased significantly, the net income increased year-on-year, the disposal of policy-based debt-to-equity swap assets accelerated, and the net income from disposal was RMB 273 million; The market-oriented debt-to-equity swap business realized the revenue of RMB 1.263 billion against the backdrop of continuous fluctuations in the capital market.
Third, asset quality has been continuously consolidated. China Huarong continued to carry out liquidation for resolving risks, seized market opportunities and accelerated disposal. The effect of risk resolution was obvious, and made every effort to reduce the amount of ultimate loss. In the first half of 2021, the credit impairment loss was RMB 7.92 billion, representing a YOY increase of 30.3%, which was mainly the impairment losses recognized based on the expected credit loss model according to the risk conditions of acquisition-and-restructuring distressed debt assets, customer loans, advances and other debt assets. As of the end of June, the balance of provision for impairment loss of acquisition-and-restructuring distressed assets and other debt assets was RMB143.103 billion, a decrease of 0.8% over the end of the previous year, the provision rate increased from 16.5% at the end of 2020 to 17.3%, indicating that the risk buffer remained reasonable.
Fourth, solvency remained stable. In the first half of 2021, with the support of various financial institutions, China Huarong steadily responded to changes in the situation, stabilized financing channels and financing costs, redeemed domestic and overseas bonds on schedule, and maintained the Group’s liquidity stability. By the end of June, the Group’s loan balance was RMB 781.985 billion, an increase of 0.5% over the end of the previous year; Maturing bonds and notes were repaid on schedule, with a closing balance of RMB 284.967 billion, a decrease of 15.4% over the end of the previous year. In the first half of the year, the Group’s interest expenditure on borrowings and bonds and notes payable was RMB 23.261 billion, a year-on-year decrease of 5.2%.
Since the construction of New Huarong kicked off in 2018, China Huarong has made painstaking efforts in reducing risks and streamlining businesses, returning to the main business, improving governance, etc., and made a series of structural and trend changes, laying a solid foundation and creating necessary conditions for the implementation of introducing strategic investors and capital increase and subsequent high-quality development. Recently, the Company has signed investment framework agreements with CITIC Group and other enterprises, planning to introduce strategic investors to increase capital for itself, aiming to effectively replenish capital and optimize governance structure. In the next step, China Huarong will take the opportunity of attracting strategic investors and increasing capital, and at the new starting point of the construction of New Huarong, it will focus on the transformation of its main business on the one hand and tackling risks on the other hand. With the determination to deepen reform and the courage to overcome difficulties, the Company will work together to tackling difficulties, take on new actions and reshape a new image in serving the national strategy and the real economy, better give back to the country, shareholders and investors, and write a new chapter worthy of history and the times.
