Fung family (21.68% ) DPS (HK$)

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1 Recommendation: HOLD TP: HK$ (+20.2%) Wing Hang Bank (302.HK) 07 December 2013 SECTOR: HK Banking HSI: 23, PRICE: HK$115.5 EARNINGS (HK$b) E 2014E 2015E Key Data Net interest income Issued capital (m shares): Non-interest income Market Cap (HK$b): Operating profit mths Avg. Daily Vol. (m Shares): 0.61 Operating expenses High/Low: / 67.7 Impairment charges LDR (% ): 73.1% Net profit Book value per share (HK$): EPS (HK$) Free float (% ): 47.93% % change (17.0%) (18.0%) (2.9%) 1.1% Major Shareholders: Fung family (21.68% ) DPS (HK$) Bank of New York Mellon Corp (20.4) Aberdeen Asset Management Plc Dividend yield (% ) 1.6% 1.8% 1.5% 1.4% 1.5% (9.1% ) Book value per share (HK$) % change 12.0% 2.6% 4.0% 4.5% 1H13 RESULTS (HK$b) 1H12 1H13 YoY(%) Net operating income % Impairment charges (6.9%) Net profit (1.8%) EPS (HK$) (2.9%) BVPS (HK$) % Note: Differences may arise due to rounding errors Source: Bloomberg, HKEx, Company data, Platinum estimates SECTION 1 RESULTS BRIEFING Fee growth weak. Mild growth in NAV Flat 1H13 results. Net interest income was up 7% YoY, but net income fell by 2% YoY to HK$1.01b. The China business grew 6% YoY, reporting revenue of HK$2.6b, but net profit was down 9.4% YoY to HK$440m. The group s net interest margin ( NIM ) was up 2bps YoY to 1.69%. Income structure saw little change, as non-interest income represented 21.45% of total operating income, down from 24.09% in FY12. The rise in interest income was attributable to a more rapid pace of loan growth vs deposit growth, held common amongst all Hong Kong banks during the reporting period. Rising operating costs overshadows positives. The Bank saw improvements in loan-deposit ratio ( LDR ) (up 3ppts HoH to 71%), NIM and capital adequancy ratio (up 90bps HoH to 16.8%). As one of the few banks to see NAV growth, book value per share mildly rose 2% HoH to HK$66.4 per share, compared to the industry which saw flat or negative growth. Despite income growth, cost-income ratio jumped from 47.6% in FY12 to 50% in 1H13, due to rising operating costs at both the Hong Kong and China businesses. Platinum Broking IMPORTANT DISCLOSURES ARE PROVIDED ON THE LAST PAGE OF THIS REPORT

2 SECTION 2 COMPANY BACKGROUND WHB has been approached by third parties regarding a possible sale Hong Kong s second-largest family-run lender. Wing Hang Bank ( WHB ) was founded by the Fung family in 1937 in Guangzhou as a money changing business. The Bank received a banking licence and began operations in Hong Kong in Bank of New York Mellon ( BNY ) became a major shareholder in 1988 after merging with Irving Trust Company, which held a majority interest in WHB prior to the merger. The Bank listed on the Hong Kong Stock Exchange in The Fung family still holds c.22% stake, while BNY still holds 20%. Since the early 1990s, WHB has re-entered Guangzhou and set up operations. In 2005, the Bank set up a branch in Shanghai, becoming one of the first Hong Kong banks to receive a branch license in China. By June 2013, WHB has 15 branches and many more sub-branches set up in Mainland China. In September 2013, the Bank announced that it has been approached by independent third parties regarding a possible sale of all the shares of WHB. No transaction has taken place. SECTION 3 BUSINESS OUTLOOK Fine management execution Gradual shift away from property loans, loan profile looks generally stable and healthy. WHB s loan profile has shown a gradual shift away from property related loans (Exhibit 1), which makes up 53% of its commercial loan book. The key takeaway here is that WHB is the only bank with property loans covered up to 95%, compared to the industry average of 86% in 1H13, thereby reducing risk of rising non-performing loans (Exhibit 2). The overall loan book looks healthy, with the highest collateralised loan book among Hong Kong banks (see Exhibit 3). Although slightly above market average, NPLs have consistently been well managed, with the ratio hovering between 0.30%-0.45% since 2010 (Exhibit 4). This reflects well on WHB s management, reducing NPL deterioration risk, mortgage exposure and potential subsequent major write downs. Exhibit 1 Property loans as a % of commercial loans (FY12 vs. 1H13) 8 Propoerty loans as a % of HK industrial, commercial and financial loans % 43.4% 65.7% 60.7% FY12 1H % 55.0% 53.8% 51.3% 52.3% 53.0% 43.5% 41.2% 52.7% 50.3% 3 BOCHK HSB BEA WHB DSFB / DSBG CHB Avg. Platinum Broking 2

3 Exhibit 2 % of property loans covered by collateral 1 % of property loans covered by collateral % 80.5% 81.5% 95.6% 94.6% 93.9% 86.6% BOCHK HSB BEA WHB DSFB / DSBG CHB Avg. Exhibit 3 % of gross loans covered by collateral 10 % of overall gross loans covered by collateral % 75.7% 74.4% % 58.7% 51.6% 50.5% 5 3 BOCHK HSB BEA WHB DSFB / DSBG CHB Avg. Exhibit 4 NPL in 1H13 0.5% NPL (%) 0.4% 0.38% 0.38% 0.38% 0.36% 0.4% 0.29% 0.3% 0.26% 0.26% 0.3% 0.22% 0.2% 0.2% 0.1% 0.08% 0.1% Further pressure on costs Decent operating metrics, expect further pressure on costs. Key operating metrics show healthy performance; despite having the highest capital position and an above average NIM (Exhibit 5 & 6), concerns arise regarding: (1) weak fee generation due to increased competition from larger, international banks namely HSBC (5.HK), Hang Seng Bank (11.HK) and BOCHK (2388.HK) (Exhibit 7); (2) rising operating costs (Exhibit 8); and (3) relatively low LDR, undermining its competitiveness (Exhibit 9). The weak fee income is a result of WHB s company strategy, with smaller exposure to fee-related services compared to sector peers. Looking ahead, HK and China operations will continue to face accelerated rising costs. Exhibit 5 Capital Adequacy Ratio Exhibit 6 NIM Capital Adequacy Ratio (%) 2.5% Net Interest Margin (%) 18.0% 16.40% 16.80% 16.0% 14.80% 14.90% 14.00% 14.20% 14.63% 15.10% 15.25% 2.0% 1.77% 1.77% 1.69% 14.0% 12.0% 1.5% 1.32% 1.19% 1.08% 0.98% 8.0% 1.0% 0.91% 0.83% 6.0% 4.0% 0.5% 2.0% Platinum Broking 3

4 Exhibit 7 Non-interest income / Operating income Exhibit 8 Cost Income Ratio 14.0% Non-interest income / Operating income (%) Cost Income Ratio (%) 57.05% 12.20% 51.35% 12.0% 11.17% 11.20% 11.46% 49.55% 49.96% 10.80% 10.79% 10.88% % 10.00% 42.90% 8.0% 31.72% 31.92% 32.86% 28.76% 3 6.0% 4.0% 2.0% Exhibit 9 LDR comparison % 74.51% 76.75% 73.06% LDR (%) 79.54% 78.46% 61.99% 72.89% 71.11% Potential narrowing of NIM when US ceases tapering policy. HK banks face two major problems on the funding side: (1) US QE tapering; and (2) high deposit competition amongst HK banks due to sluggish deposit growth. Falling bond prices led by QE tapering fears will not only have a negative impact on a mark-to-market basis, but also put pressure on funding costs. Over the same time period, USD/HKD convertibility remained strong at the 7.75 mark, and HK deposits have stayed flat at the HK$ t region. The overall macro-economic environment suggests that M2 and deposit growth to stay flat or experience mild deceleration over the next few months. We anticipate that weak deposit growth may lead to higher deposit competition within the sector. As a result, we estimate that NIM may see a mild decline of about 5bps in 2H13, mostly stemming from the funding side. News regarding multiple prospective buyers unsurprising. In late November 2013, local unofficial news reported that China s Anbang Insurance Group and Canada s Scotiabank are the named potential buyers for WHB, in addition to Australia s ANZ Bank and Singapore s OCBC. This is hardly surprising. When WHB first announced that it has been approached, the wording specifically refers to parties, implying multiple potential buyers. Platinum Broking 4

5 Investment case is event driven; M&A case is possible. There are several arguments for the M&A case of WHB. M&A investment case 1) Alleged buyers meet HKMA definitions of fitness. Unlike the case of Chong Hing Bank (1111.HK), concerns relating to fitness are ruled out, as all 4 suitors are experienced in the banking field, and are qualified candidates under HKMA s definition of fitness. WHB is well run. Our analysis above has indicated that WHB possesses many qualities, mainly: (1) good management, (2) a robust, highly collateralised loan book; and (3) a mainland China branch network in operation. 2) Perceived synergy exists, and motive suits both buyer and seller. WHB is a traditional bank, and company strategy is to cater Hong Kong s old money. The suitors in the deal hail from traditional havens for Chinese overseas investments and retirement homes, i.e. Australia, Singapore, Canada (and of course China itself). Opportunities exist for the overseas banks to serve this market, targeting the growing number of affluent Chinese with numerous and evident synergies. In addition, China s recent Third Plenum has set out an agenda to make the RMB a more liquid and internationalised currency, with the possibility of a complementary RMB cross-border business heightening the deal s attractiveness. 3) Added incentive. This point relates specifically to Canada s Scotiabank. Favourable factors, including (1) the Twelfth Five-Year Plan and Third Plenum outcomes relating to increased natural gas reliance and (2) recent Sino-Canadian transactions in the energy sector (eg. CNOOC-Nexen deal), suggest that Scotiabank has more incentive to make an offer. Scotia Waterous, the specialised oil and gas M&A department under Scotiabank, is ranked #1 in the world in the number of oil and gas M&A deals, according to Bloomberg. The investment bank has long been involved in high profile deals, the latest one being the sale of assets from Conoco Philips to Exxon Mobile, Esso and Imperial Oil (transaction value: US$709m). Scotiabank will gain exposure in the investment banking business on top of its retail banking business, advising on international transactions relating to oil and gas. Offer will propel share price appreciation Wait for offer from suitors. We have outlined strong reasons for WHB s suitors to make an offer, and such offer will propel share price upwards. Currently, WHB s valuation is at about 1.7x FY12 P/B, which suggests relative cheapness. We believe 2.0x target P/B represents a fair value, as it is consistent with the very recent offer made to Chong Hing Bank. In addition, a 2.0x P/B multiple falls in line with valuations of past transactions of HK-listed financials (Exhibit 10): Exhibit 10 Major transactions in the HK banking sector between Announcement Announcement Transaction value Acquirer Target Stake (%) Type P/B (x) date premium (%) (HKDm) Jan-11 Fubon Financial Fubon Bank (HK) 25.0% Privatisation % 1,524 Aug-10 ICBC ICBC (Asia) 27.2% Privatisation % 10,818 Jun-08 China Merchants Bank Wing Lung Bank 46.9% Acquisition % 17,035 Jun-08 CITIC Group CITIC Int'l Financial Hldgs 15.3% Privatisation % 13,563 Avg % Source: Company data, HKEX, Platinum Research, Bloomberg Platinum Broking 5

6 SECTION 4 VALUATION Exhibit 11 Relative valuation Name Ticker FY12 Total Assets (HK$m) Mkt cap (HK$m) Closing price (HK$) 52-week High/Low (HK$) 6M Volume (m shrs) 6M Turnover (HK$m) FY12 PER (x) FY13E PER (x) FY14E PER (x) FY15E PER (x) FY12 PBR (x) FY13E PBR (x) FY14E PBR (x) FY15E PBR (x) FY12 Yield (%) FY13E Yield (%) FY14E Yield (%) FY15E Yield (%) HK Listed Financial Institutions 1 Hsbc Holdings Plc 5 HK 2,692,538 1,632, / , Standard Chartered Plc 2888 HK 636, , / Simple avg Mkt cap wtd avg HK Banks 1 Boc Hong Kong Holdings Ltd 2388 HK 1,830, , / Hang Seng Bank Ltd 11 HK 1,077, , / Bank Of East Asia 23 HK 692,114 78, / Wing Hang Bank Ltd 302 HK 197,364 35, / Dah Sing Financial Holdings 440 HK 172,981 13, / Dah Sing Banking Group Ltd 2356 hk 158,586 17, / Chong Hing Bank Ltd 1111 hk 80,755 15, / Simple avg Mkt cap wtd avg Overall avg Overall mkt wtd avg Sources: Company data, IBES, Bloomberg, Platinum estimates M&A investment case with the right set pieces TP: HK$ % HOLD. M&A is the main catalyst that will support share price momentum. Key operating metrics are generally decent. WHB is a well-run bank with attractive operating metrics ready to be exploited by deal suitors. We value WHB at 2.0x 2014E P/B, arriving at a TP of HK$138.78, representing an upside of 20.2%. Scotiabank is likely to be the first to make an offer, as it is the only suitor that has a specialised oil and gas M&A advisory department, and as such will yield synergies from the purchase beyond the banking business. HOLD. Exhibit 12 WHB 2-year share price performance Source: Bloomberg, Platinum estimates Platinum Broking 6

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8 IMPORTANT HONG KONG REGULATORY DISCLOSURES ON HONG KONG LISTED COMPANIES OF WHICH WE HAVE COMMENTED ON. Research Certification. No part of the compensation of the analyst(s) who are primarily responsible for producing this report was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research. Market Making. This firm does not make a market in securities of the companies covered in this report. Conflicts of Interest. This firm does not own 1% or more of the common class of securities of the companies covered in this report. The analysts involved in the preparation of this report do not have financial interests in the common class of securities of the companies covered in this report. Investment Banking. Within the past 12 months a company controlled by the holding company of this firm has not provided investment banking services to, and received compensation from, one of the companies covered in this report. Relevant relationships. This firm and individuals employed by or associated with the firm are not officers of the companies covered in this report. GENERAL DISCLOSURES. This report is for distribution only under such circumstances and in such jurisdictions as may be permitted by applicable law. This report is not intended to offer or solicit purchase or sale of any financial instrument in any jurisdiction where such an offer or solicitation would be illegal, including but not limited to the United States of America and the United Kingdom and the rest of Europe. It does not take into account the specific investment objectives, financial situation or needs of any specific recipient. While reasonable effort has been made to ensure the information contained herein is not untrue or misleading at the time of publication, its correctness and completeness are not guaranteed, and they are subject to change without notice. Neither Platinum Broking Company Limited, nor any of its holding or affiliated companies, nor any of its or their directors or employees, represent or warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which may be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents thereof. Use of any information herein shall be at the sole discretion and risk of the user. Investors are expected to make their own investment decisions without relying on this publication. This report is produced by Platinum Broking Company Limited Hong Kong Office: 21/F LHT Tower, 31 Queen s Road Central, Hong Kong Telephone: Fax: Website: Shanghai Office: Platinum Holdings Company Ltd (Shanghai Representative Office), 11B Jin Ming Building, Block 2, 8 South Zun Yi Road, Shanghai Tel: Fax: Singapore Office: Platinum Securities Company Ltd, 1 Scotts Road, #24-14 Shaw Centre, Singapore Tel: Fax: Platinum Broking Company Limited. All rights reserved. This publication may not be reproduced, distributed or published by any person for any purpose without the prior express consent of Platinum Broking Company Limited. Platinum Broking 8