Bad Debts Are Good Opportunity for Country's AMCs
(Beijing) – One man's trash is another man's treasure. This is especially true of a company that makes money off assets others want to unload.
The amount of bad loans in the country's banks reached 598 billion yuan as of November 30, up nearly 108 billion yuan from the beginning of the year. That accounted for 1.05 percent of all outstanding loans, compared with 0.97 percent when the year began.
Regulators have warned that the risk exposure would continue rising as the economic growth slowed.
This seemingly dire situation, however, is an opportunity for asset management companies, said Zang Jingfan, president of China Cinda Asset Management Co. Ltd., one of the four AMCs established in 1999 to take over bad loans from big state-owned banks.
The other three are China Oriental Asset Management Corp., Huarong Asset Management Co. and Greatwall Asset Management Corp.
Leading expansion into other sectors, Cinda now handles toxic assets from not only banks and non-bank financial institutions but also industrial enterprises. The other three AMCs do not have permission yet to dispose of industrial companies' bad loans.
There are abundant opportunities to acquire bad loans in "areas of excessive production capacity, industries of environmental protection that need to be upgraded, steel trade and cement production, and the real estate sector," Zang said.
Also, he said non-financial enterprises' demand for asset restructuring was on the rise, as they get more account receivables that put a strain on cash flow. This would continue as reform deepens to rebalance the economic structure, he said.
By the end of June, Cinda' assets acquired from non-financial companies have replaced those from financial institutions as the biggest component of its bad loan business, accounting for 57 percent of its 86.4 billion yuan worth of toxic assets under management. At the end of 2010, the ratio was only 5.3 percent.
Another potential source of bad loans is trust products, Zang said. The industry had more than 10 trillion yuan worth of assets as of September 30, second to only the banking sector.
Cinda listed in Hong Kong in December, raising about US$ 2.8 billion. It planned to use 60 percent of the capital to acquire non-performing assets, another 20 percent for investment and portfolio management, and the rest for increasing holdings in subsidiaries.
"We have been talking with some international strategic investors about the possibility of exploring foreign markets and how Cinda's experience, technologies and its business model can be applied to the disposal of non-performing assets abroad," Zang said.
One way of the company's disposing of bad loans has won it particular attention. In the three years before it went public, Cinda made a combined net profit of 13 billion yuan by selling its holdings in companies, which were converted from debt that the companies had failed to repay.
It still has a good stock of debt-converted-shares, the top 20 of which, by the estimate of U.S. independent value assessor American Appraisal, were worth more than 62 billion yuan as of mid-2013. Cinda spent 27.7 billion yuan acquiring the debt.
"These converted shares still have great potential to appreciate," Zang said.
There have been concerns that some many of the debt-converted shares are in the industries such as coal mining that are struggling to maintain growth as the economy slows. More than 61 percent worth of those shares, for example, are in the coal industry, as Cinda holds a stake in seven of the top 50 coal mining companies and 24 of their subsidiaries.
Most of those companies' profits were falling while their production costs increased. In the first 11 months of last year, the operating cost of coal mining companies with annual revenue of more than 20 million yuan rose by 4.6 percent. The combined profit of all companies in the sector fell by nearly 40 percent, with the big ones losing more.
Cinda is also largely exposed to the risk of a downturn in the property market. As of July 2013, more than 60 percent of its investments in the form of buying companies' accounts receivables were in the real estate sector.
In its prospectus for the IPO in Hong Kong, Cinda said investors should be warned that any further tightening in the central government's policy on the property market would affect the value of assets it held that were tied to the sector.
Some analysts say Cinda may also find the competition fiercer now that local governments are permitted to set up their own AMCs to tackle non-performing assets held by local banks and industrial enterprises.
Jiangsu and Zhejiang provinces, which are both in the east, were among the first to act. And although their means of disposal are limited compared with the national AMCs, great hopes have been placed upon them, with some analysts saying they could be the solution to the mounting debt of local government financing vehicles.
"But Cinda has accumulated 15 years of experience in terms of technologies, talent pool, capital strength, an extensive network and a relatively mature profit model," Zang said. "That is where local AMCs will not be able to surpass it in a short time."
He said Cinda wants to cooperate with the local AMCs. "We can explore more market opportunities through their platforms, while they can take advantage of our strengths," he said.
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