Far East Horizon (LHS)

Transcription

1 China / Hong Kong Company Guide Version 2 Bloomberg: 3360 HK EQUITY Reuters: 3360.HK DBS Group Research. Equity 12 April 2016 Refer to important disclosures at the end of this report BUY Last Traded Price: HK$6.13 (HSI : 20,441) Price Target: HK$7.75 (26% upside) (Prev. HK$7.24) Potential Catalyst: Better-than-expected NIM trend; faster hospital acquistion and synergy Where we differ: We are more conservative for FY16-17F Analyst Nicole Wu nicole_wu@hk.dbsvickers.com Shujin CHEN CFA, shujin_chen@hk.dbsvickers.com Alfred He alfred_he@hk.dbsvickers.com What s New FY15 earnings largely in line with expectation NIM pressure may continue in FY16 but at a milder pace Asset quality holding up well Reiterate BUY for defensive portfolio and hospital spin-off catalyst Price Relative HK$ Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 (LHS) Relative HSI INDEX (RHS) Relative Index Forecasts and Valuation FY Dec (RMB m) 2014A 2015A 2016F 2017F Pre-prov. Profit 3,948 4,426 4,916 5,691 Pre-prov. Profit Gth (%) Pretax Profit 3,211 3,580 3,888 4,562 Net Profit 2,296 2,503 2,760 3,251 EPS (RMB) EPS (HK$) EPS Gth (%) 20 (1) 1 18 PE (X) DPS (HK$) Div Yield (%) BV Per Share (HK$) P/Book Value (x) ROAE (%) ROAE (ex-exceptional (%) ROA (%) Earnings Rev (%): (6.0) (4.5) Consensus EPS (RMB) Other Broker Recs: B: 5 S: 0 H: 1 Source of all data: Company, DBSV, Thomson Reuters, HKEX Solid results, sound asset quality Reiterate BUY for sound asset quality and hospital spin-off catalyst. (FEH) reported in-line FY15 results with sound asset quality. We continue to like FEH for its strategic positioning in defensive sectors and the potential spin-off of its hospital management arm. Interest-earning assets from defensive sectors accounted for 52% of total IEA at end 2015 compared to 49% at end Better asset quality and less NIM pressure should support healthy FY16 earnings growth. NIM contraction will only be mild this year as borrowing re-pricing will mainly kick in from 2016 and increasing fixed-rate contacts proportion (26% at end 2015 from 7% at end 2014) will also help to stabilize lease yield. Asset quality holding up well due to defensive approach and sector focus. NPA ratio inched up 3bps h-o-h or 6bps y-o-y to 0.97% at end 2015 without massive write-off, better than overall banking sector increase of 17bps/42bps respectively. >30D overdue ratio increase was also mild, up 17bps y-o-y to 1.08%. Provision coverage ratio remained relatively stable at 201%. We attribute the sound asset quality to the company s proactive strategy to focus on defensive sectors, to raise threshold continuously for clients especially in cyclical sectors, and internal fine-tuning on sub-sector opportunities even in overcapacity industries. Hospital management operation taking shape. FEH now has 9 hospitals with ~3,000 beds and is starting to see synergy from equipment purchasing, medical engineering, and operation. Hospital operation income more than tripled in FY15 to Rmb194m, accounting for ~3% of income. It is confident to achieve ROA of ~5% in the mid-term for overall hospital operation and is on track to increase bed count to more than 6,000 by end of 2016 and 10,000 by end of Valuation: Our DDM-based TP of HK$7.75 implies 1.05x FY16F P/BV. Valuations are attractive at 0.8x FY16F P/BV or 7.3x FY16F P/E. Key Risks to Our View: Worse-than-expected asset yield due to competition; execution risk during hospital business expansion. At A Glance Issued Capital (m shrs) 3,950 Mkt. Cap (HK$m/US$m) 24,216 / 3,123 Major Shareholders Greatpart Limited (%) 23.3 China Minsheng Investment (%) 13.4 KKR Future Holdings Limited (%) 10.0 Cathay Life Insurance Co., Ltd. (%) 9.0 Prime Capital Management (%) 5.2 Free Float (%) m Avg. Daily Val. (US$m) 2.1 ICB Industry : Financials / Hong Kong ed-th / sa- AH

2 CRITICAL DATA POINTS TO WATCH Earnings Drivers: Lease receivable growth. The outlook for defensive industries, such as healthcare, education and public utilities, is bright but we noticed that FEH has been slowing down its asset expansion in more cyclical sectors (shipping, printing). Lease growth will thus moderate due to a differentiated asset growth strategy and a larger base after high growth during But we still expect a healthy growth 10-15% during F. Net interest margin. NIM contracted 68bps in 2015 mainly due to 1) the central bank s benchmark rate cuts (~165bps since Nov 2014); 2) FEH s approach to choose high-quality clients with relatively lower yields. NIM pressure will ease in 2016F as funding cost will decline as well, following PBOC s benchmark rate cuts but has a longer re-pricing cycle compared to its lease receivable asset. 2017F will likely see NIM to stabilize. Non-interest income. Non-interest income should grow faster than net interest income, driven mainly by fee income and operating lease. We expect net non-nii to grow at a CAGR of 22% from F and to account for 61% of revenue in 2017F. Hospital management income may surprise on the upside as our current estimates for this segment are conservative. Operating cost. We expect operating cost to increase driven by 1) hospital management business which requires high-quality professionals; 2) education business exploration; 3) New lease sector development, such as public utility sector, etc. Overall increase will be mild. We expect cost-to-income ratio (excl. business tax) to creep up to 39-4 during F from 37% in Provision/credit cost. NPA ratio is expected to rise slightly during F and to reach 1.05% by end We have more confidence in FEH s asset quality compared to banks due to its focused industry strategy and high LTV ratio, evidenced by the company's lower NPA formation growth and stable asset quality during >9 historical NPA recovery ratio is another layer of buffer. We, thus forecast ~75bps credit cost for F with stable NPA provision coverage at above 20 level. 3,000 2,500 2,000 1,500 1,000 RMB m , , ,000 80,000 60,000 40,000 20, ,000 4,000 3,000 2,000 1,000 12,000 10,000 8,000 6,000 4,000 2, Margin Trends RMB m Net Interest Income Gross Loan& Growth Fee income Growth Cost & Income Structure 4.2% 3.7% 3.2% 2.7% 2.2% Net Interest Income Margin Gross Loan (LHS) RMB m Gross Loan Growth (%) (YoY) (RHS) Fees & Commissions Fees & Commissions Growth (%) (YoY) (RHS) 5 45% 4 35% 3 25% 2 15% 1 5% Net Interest Income Non-interest Income Cost-to-income Ratio Page 2

3 Balance Sheet: Leverage at comfortable level after placement in July. FEH issued 658m of new shares at HK$6.90ps to raise proceeds of HK$4.5bn in July The company s gearing level improved to 82.5% after the placement from 85% and leverage lowered to 5.8x. The company has been actively rolling out asset securitisation products to lower leverage and sold Rmb~15bn assets during We expect the company s gearing to stay below 85% and to sustain double-digit lease receivable growth during F without further funding raising due active ABS program. US$ borrowing basically fully hedged. 38% of FEH s borrowings were denominated in foreign currencies (25% in US$ at end 2015 from 28% as of Jun 2015). But we are not particularly worried about Rmb depreciation impact as the company has been hedging forex liability exposure, which may add cost by up to 1%. Fully hedged ratio increased to 96% at end 2015 from 87% a year ago. Share Price Drivers: Hospital management. The company previously targeted to acquire 10,000 beds in 3-5 years and is now fast tracking this goal to the end of 2017 with the placement proceeds on hand. It now owns nine hospitals with ~3,000 beds, mainly located in the more developed coastal regions. Bed number will hit 6,000 by end of FEH will consider spinning off a hospital management subsidiary when conditions are ripe, which will be a key catalyst. Better asset quality trend. FEH is usually considered as a bank but we argue that it differs itself from banks through strategic sector focus and growing hospital and education operations. As such, investors may be more willing to invest in this name if it can approve its edge in risk management. Key Risks: Competition risk Increasing competition from bank-affiliated leasing companies and new entrants may put pressure on pricing. Asset quality risk Asset quality may deteriorate if China s macro economy worsens Interest rate risk FEH has longer re-pricing cycle for funding and will be negatively impacted by the central bank s benchmark rate cuts Execution risk Execution risk during expansion into new sectors and hospital acquisitions Company Background: (FEH) is the largest independent lessor in China in terms of total assets at end It is also the second largest lessor in terms of registered capital behind ICBC Leasing. FEH has more than 20 years of experience in the leasing industry and focuses on eight industries, including healthcare, education and infrastructure construction. The company experienced rapid growth with an earnings CAGR of 18% from Asset Quality % % 0. NPL Ratio Provision Charge-Off Rate ROE PE Band (x) sd: 10.3x sd: 9.3x 8.5 Avg: 8.3x 7.5 1sd: 7.2x 6.5 2sd: 6.2x PB Band (x) sd: 1.3x sd: 1.18x 1.1 Avg: 1.06x 1.0 1sd: 0.93x sd: 0.81x 0.7 Apr-12 Apr-13 Apr-14 Apr-15 Page 3

4 Key Assumptions FY Dec NIM (%) Lease growth (%) Net fee growth (%) Cost-to-income (%) Credit cost (%) Yld. On Earnings Assets (%) Avg Cost Of Funds (%) Income Statement (RMB m) FY Dec Net Interest Income 2,726 2,861 2,641 2,967 3,311 Non-Interest Income 2,725 3,734 4,894 5,496 6,349 Operating Income 5,451 6,594 7,534 8,463 9,660 Operating Expenses (2,324) (2,646) (3,108) (3,547) (3,969) Pre-provision Profit 3,127 3,948 4,426 4,916 5,691 Provisions (535) (750) (846) (1,027) (1,129) Associates Exceptionals Pre-tax Profit 2,601 3,211 3,580 3,888 4,562 Taxation (685) (869) (1,000) (1,050) (1,232) Minority Interests (3) (10) (4) (5) (6) Preference Dividend 0 (36) (73) (73) (73) Net Profit 1,913 2,296 2,503 2,760 3,251 Net Profit bef Except 1,913 2,296 2,503 2,760 3,251 Growth (%) Net Interest Income Gth (7.69) Net Profit Gth Margins, Costs & Efficiency (%) Spread Net Interest Margin Cost-to-Income Ratio Business Mix (%) Net Int. Inc / Opg Inc Non-Int. Inc / Opg inc Fee Inc / Opg Income Oth Non-Int Inc/Opg Inc Profitability (%) ROAE Pre Ex ROAE ROA Pre Ex ROA Page 4

5 Interim Income Statement (RMB m) FY Dec 2H2013 1H2014 2H2014 1H2015 2H2015 Net Interest Income 1,404 1,424 1,436 1,308 1,333 Non-Interest Income 1,355 1,813 1,804 2,376 2,518 Operating Income 2,759 3,237 3,241 3,684 3,851 Operating Expenses (1,261) (1,236) (1,294) (1,448) (1,660) Pre-Provision Profit 1,498 2,001 1,947 2,236 2,190 Provisions (277) (395) (355) (693) (153) Associates (2) Exceptionals Pretax Profit 1,228 1,611 1,601 1,545 2,035 Taxation (346) (440) (429) (505) (495) Minority Interests (4) (4) (6) (3) (1) Net Profit 879 1,165 1,131 1,003 1,500 Growth (%) Net Interest Income Gth (8.2) (7.2) Net Profit Gth (13.9) 32.7 Page 5

6 Balance Sheet (RMB m) FY Dec Cash/Bank Balance 2,673 3,318 2,501 1,565 3,678 Government Securities Inter Bank Assets Total Net Loans & Advs. 79,687 99, , , ,409 Investment Associates ,188 2,388 3,887 Fixed Assets 964 1,733 3,358 2,855 3,214 Goodwill Other Assets 3,108 6,059 11,700 11,258 12,040 Total Assets 86, , , , ,229 Customer Deposits Inter Bank Deposits Debts/Borrowings 56,554 71,778 83,429 95, ,216 Others 15,794 21,498 32,923 34,880 36,691 Minorities Shareholders' Funds 14,125 17,371 22,618 24,667 27,228 Total Liab& S/H s Funds 86, , , , ,229 Financial Stability Measures (%) FY Dec Balance Sheet Structure Loan-to-Deposit Ratio Net Loans / Total Assets Investment / Total Assets Cust. Dep./Int. Bear. Liab Interbank Dep / Int. Bear Asset Quality NPL / Total Gross Loans NPL / Total Assets Loan Loss Reserve Coverage Provision Charge-Off Rate Capital Strength Total CAR Tier-1 CAR Page 6

7 Target Price & Ratings History HK$ S.No. Date Closing Target Rating Price Price 1: 3-Jul-15 HK$6.80 HK$7.92 Buy 2: 27-Aug-15 HK$6.04 HK$7.92 Buy 3: 28-Oct-15 HK$6.42 HK$7.24 Buy Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Source: DBS Vickers Page 7

8 DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>2 total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >1 for large caps) HOLD (-1 to +15% total return over the next 12 months for small caps, -1 to +1 for large caps) FULLY VALUED (negative total return i.e. > -1 over the next 12 months) SELL (negative total return of > -2 over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited ( DBSVHK ) This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd and DBSVHK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK. 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