Legend Holdings:Leading investor in China but fairly valued; initiate at Neutral

Investment view.

With management capability proven by the success of its holdings inLenovo and China Auto Rental, Legend is widely recognized for valuecreation, generating above-peer CROCI of c.14%-17% in 2012-2014. Itsdiversified asset portfolio with industry-leading companies is wellpositionedto benefit from: 1) urbanization, 2) consumption upgrade, and3) other secular growth trends in China, while established investmentplatforms should help it attract new opportunities. However, we initiatecoverage with a Neutral rating as Legend is trading close to our 12-monthNAV-based target price of HK$36.2.

Core drivers of growth.

(1) We project 13% earnings CAGR for Legend in 2014-17E, driven byintegration of the Motorola Mobility and x86 businesses acquired byLenovo in 2014, and turnaround of the modern services, food and chemicaldivisions. (2) As with other holding companies, Legend enjoys the flexibilityto invest in new segments, leveraging its sizeable capital base andcashflow from more mature divisions. With group capex likely peaking thisyear, FCF should turn positive in 2017E. Leveraging up its net debt tocapital (ex-Lenovo) from 41% at end-2015E to 50% could raise Rmb17.5bn.

Risks to the investment case.

Capital market volatility, with 40% of FY15E NAV attributed to financial orlisted investments; regulatory & operational risks for portfolio assets.

Valuation.

Our NAV-based 12-month target price of HK$36.2 is based on a 25%discount to 2015E NAV/sh of HK$48.3, benchmarking the mid-cycle NAVdiscounts of closest comps Fosun and CITIC given similarities in sectorexposure and corporate strategy. Our TP implies 1.28x P/B and 10.2x P/E.

Industry context.

Diversified investment group Legend mainly conducts businesses in sevensegments. China conglomerates now trade at 41%-63% NAV discount.