China’s Huarong issues profit warning on property sector woes

China Huarong Asset Management, the country’s largest distressed debt investor, has issued a profit warning on surging credit impairments and property market jitters less than a year after a $6.6bn state-led restructuring.

Credit impairment losses “increased significantly” in the first six months of the year, Huarong said in a filing late on Tuesday, as it warned of a net loss of Rmb18.9mn ($2.8mn) for the first half of 2022.

The company attributed the loss to the “impact of volatility in the capital market and downturn in the real estate market”, adding that the recurrence of Covid-19 cases, geopolitical conflicts and pressure on the economy were also to blame.

Huarong, one of China’s “Big Four” asset management companies, needed a government-orchestrated bailout last year after delaying disclosure of a $16bn loss for months.

The company now counts state-owned investment company Citic Group as its largest shareholder and is divesting its non-core business units including banks, brokerage, trust and consumer finance entities as regulators urge big AMCs to streamline their operations to reduce financial risk.

In a separate filing on Tuesday, Huarong said it planned to transfer a 76.8 per cent stake in Huarong Trust to China Trust Protection Fund for about Rmb6.15bn.

Investors are divided over the long-term prospects for Huarong and the Chinese distressed debt industry. The company’s restructuring has been complicated by the 2021 execution of Lai Xiaomin, its former chair, who was found guilty of taking $280m of bribes during his tenure as chair.

The latest profit warning has added to concerns over the exposure of the big asset managers to cash-strapped property developers through their restructuring businesses for distressed companies. More than half of Huarong’s restructuring businesses’ assets were related to the real estate and construction sectors at the end of 2021, according to company filings.

That level is about the same at Cinda Asset Management, a smaller rival, which warned in July that its six-month profit would drop 30-35 per cent, citing “certain financial assets measured at amortised cost held by the company are under greater pressure”.

“Although most of these credit exposures are for projects and are well-collateralised with low loan-to-value ratios, they are vulnerable to a plunge in property sales and a decline in property prices,” analysts from Moody’s Investors Service said.

How Huarong restructures its business after the capital injection can set an example for other AMCs, said Yang Yewei, analyst at Guosun Securities.

Great Wall Asset Management, another asset manager that held off releasing its 2021 annual report in June, is also expected to gain similar support and go through debt restructuring, Yang said. The uncertainty has triggered turbulence in the offshore bonds of Chinese AMCs, sending some of Huarong’s perpetual bonds down nearly 20 per cent in July.

But Huarong remained optimistic about its prospects under Citic’s leadership.

One person close to the company said the past six months had “laid a solid financial foundation for subsequent disposals of its risk assets” despite the loss.

Huarong has lined up distressed assets worth Rmb100bn for resolution, the person added, which could contribute to the company’s future cash returns.

To show its determination to turn back to the core business, Huarong said it would “make every effort” to separate the risks, resolve them and relieve the difficulty for real estate-related projects, according to its filings.

Additional reporting by Edward White in Seoul