Cinda is one of four ‘bad banks’ originally set up to take nonperforming loans off the books of the major state-owned banks. In the weeks after its initial public offering in December its shares rose over 50%, but on Friday they closed below the IPO price for the first time.
Dow Jones/Beijing
Bad times in China are supposed to be good for China Cinda Asset Management. It’s not working out that way.
Cinda is one of four “bad banks” originally set up to take nonperforming loans off the books of the major state-owned banks. In the weeks after its initial public offering in December shares rose over 50%, but on Friday they closed below the IPO price for the first time.
Cinda buys nonperforming loans from banks, and debt from other sources, and turns them around, such as by recovering collateral or by swapping debt into equity. It was pitched as a countercyclical play: the more bad debt in the system, the more opportunity for profit.
So this should be Cinda’s moment. The banking system added 102bn yuan ($16.6bn) of nonperforming loans in the first half of the year, more than in all of 2013, according to CLSA.
In fact, the countercyclical case for Cinda was flawed from the start. A weakening economy increases the supply of distressed loans, but Cinda needs strong market conditions to nurse them back to health and exit its positions.
For instance, the company’s IPO prospectus revealed that 62% of its equity holdings from debt swaps were in the coal industry. With China’s benchmark coal price down 24% so far this year, these holdings are likely losing value.
The strains are showing up in Cinda’s results. By the end of June, its assets swelled by 70% from a year earlier, but return on equity fell to 13.3% in the first half from 14.6% a year earlier. Cinda is also expanding far beyond its core business. Earlier this month, it invested $1bn for a 1.7% stake in the retail gas station unit of China Petroleum & Chemical Corp, or Sinopec. It is also buying a small stake in power plant operator CGN Meiya Power Holdings Co.
These moves signal Cinda’s ambition to diversify beyond bad debt recovery, but they will make it more sensitive to China’s economic cycle, not less.
It is increasingly clear that Cinda is exposed to many of the same risks as the banks, which are cranking out much higher returns on equity of 15-20%. Yet even after the sharp decline in its share price, Cinda still trades at a premium valuation of 1.2 times book, compared with one times book or less for the major banks. This bad bank is still not a good bed for investors.