9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 3608 8000 Research: 3608 8097 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Paul Sham 2 nd March 2015. CHONG HING BANK LIMITED ( 創興銀行 ) Sector : Banking Executive Director & CEO : Mr. Zhaoxing Zhang HKSE Code : 01111 Market Price : HK$17.90(02/03/2015) Shares Issued : 435m Managing Director & : Ms. Leung Ko May Yee Mkt. Cap. : HK$7,786.5m Deputy Chairman 52 weeks Hi/ Lo : HK$19.96 / HK$14.02 HSI : 24,887.44 (02/03/2015) Main Business : Banking and related financial services SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31 ST DECEMBER 2014 Final Results Highlights Vs FY2013 (%) Vs 30/06/2014 (%) Net interest income 1,372 +35.3% Non-interest income 458 +7.1% Total operating income 1,830 +26.9% Operating expenses (966) +23.6% Operating profit before impairment losses 864 +30.8% Reversal (Charge) of impairment allowances 32 NA Profit before taxation and non-core items 896 +43.4% Non-core items 2,012 +4404.3% Profit before taxation 2,908 +334.1% Taxation (166) +47.4% Attributable profit to equity holders 2,742 +392.0% Total loans 56,925 +26.2% +17.3% Total deposits 84,242 +17.4% +14.2% Total assets 108,046 +26.8% +24.4% Basic EPS (HK$) 1.82 +42.2% Final DPS (HK$) 0.33-5.7% Total DPS (HK$) 0.52 +6.1% Selected Ratios FY2014 FY2013 1H2014 Net interest margin 1.58% 1.26% 1.52% Cost-income ratio 52.8% 54.2% 50.5% Return on average assets 0.82% 0.67% 5.44% Return on average equity 9.35% 7.40% 59.47% Impaired loan ratio 0.04% 0.04% 0.06% Impaired advances coverage 1086.8% 1089.9% 737.2% Loan-deposit ratio 67.6% 62.9% 65.8% Common Equity tier 1 CAR 9.6% 10.8% 11.4% Tier 1 CAR 12.8% 10.8% 11.4% Total CAR 15.9% 14.6% 15.0% Average liquidity ratio 40.4% 41.7% 38.9% Record earnings boosted by one-off gain Chong Hing Bank (CHB) reported record full-year net profit of HK$2,742m in 2014, up 3.9 times y-o-y, boosted by the disposal gains of HK$1,961m from the sale of Chong Hing Bank Centre. The earnings were in-line with market consensus of HK$2,707m. Excluding such one-off gain, net profit should have increased by 42% y-o-y, translating into annualized return on equity of 9.35% (vs 7.40% in FY13). CHB raised the full-year dividend to HK$0.52 accordingly, up 6.1% y-o-y. This report has been prepared solely for information purposes and we, East Asia Securities Company Limited are not soliciting any action based upon it. Neither this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. This document is based upon information, which we consider reliable, but accuracy and completeness are not guaranteed. Opinions expressed herein are subject to change without notice. At the time of preparing this report, we have no position in securities of the company or companies mentioned herein, while other Bank of East Asia Group companies may from time to time have interests in securities of the company or companies mentioned herein.
EAST ASIA SECURITIES COMPANY LIMITED Net interest income jumped 35.3% y-o-y to HK$1,372m, on the back of NIM and loan portfolio expansion. CHB s NIM widened 32bps y-o-y to 1.58%, which started to catch up with peers like Hang Seng s 1.90% and BEA s 1.77%, benefited from the faster expansion in loan portfolio relative to the deposit base as well as increased investment in debt securities (+70.7% y-o-y). Meanwhile, CHB s loan book grew at a relatively fast pace of 26.2% y-o-y. Key drivers for loan book included trade finance (+167% y-o-y) and overseas loans (+53.7%). China loans recorded a y-o-y surge of 4.2 times while Macau loans also jumped by 80.9% y-o-y in 2014. Non-interest income rose 7.1% y-o-y to HK$458m. Net fee income advanced 7% y-o-y to HK$225m mainly because of the improvements in commission income arising from agency services in selling life insurance and wealth management products and fees from corporate lending and other banking services. Net trading income improved by 20% y-o-y to HK$99m due to strong growth in foreign exchange income. Operating expenses increased by 23.6% y-o-y to HK$966m partly due to the lease payment for Chong Hing Bank Centre, which was sold on 19 February 2014. Both staff costs and other operating expenses increased by around 20% y-o-y as the CHB aggressively expanded its business network on the Mainland. Asset quality CHB continued its ultra-prudent policy on the credit control during 2014. Impaired loan ratio maintained at the historical low of 0.04% at end-2014, which was the lowest level among peers. Provision coverage also stood at an exceptionally high level of 1087%, and again, topped peers. Compared with the net charge of HK$35m on asset impairment in 2013, CHB recorded a net writeback of HK$32m in 2014. Profitability and financial position Although CHB remained at the bottom of the league among Hong Kong-based listed banks in terms of ROE, its profitability was indeed catching up with peers. The ROE improved from 7.40% in FY13 to 9.35% in FY14, which became comparable to BEA s 10.1% and Hang Seng s 13.0%. On the other hand, CET1 ratio fell to 9.6% from 10.8% during FY14, largely due to the rapid expansion of risk-weighted assets. Meanwhile, tier 1 capital ratio improved to 12.8% from 10.8% in 2014, thanks to the issuance of US$300m additional tier 1 capital securities offering in September 2014. Outlook & Prospect Catching up with peers Stripping out the one-off gain from the disposal of Chong Hing Bank Centre, CHB s ROE improved from 7.40% in FY13 to 9.35% in FY14. After the takeover by Yue Xiu Group, CHB actively expanded its loan portfolio by increasing business referral and linkages to China. Given its relatively low loan-to-deposit ratio, CHB should be able to boost the interest income further by deploying more free fund to interest-earning assets. Its exceptionally low impaired loan ratio and high coverage ratio should provide CHB enough cushions to absorb potential loan impairment loss. Therefore, we believe CHB should be able to maintain its growth momentum in the coming one or two years. Rapid expansion in China CHB opened the Guangzhou and the Foshan sub-branches in only a few months after the acquisition. Management revealed CHB will continue to accelerate the setup of the Mainland business network and enhance its cross-border integrated financial services. Chairman Zhang Zhaoxing used to mention that there may be plans to consolidate the securities firms run by both Chong Hing Bank and Yue Xiu's existing financial arm in the future. Therefore, we believe the rapid expansion in China or business injection by its parent company will continue to be the key earnings drivers in 2015. Change of shareholding structure Guangzhou Friendship Group (000987 CH) announced in Dec 2014 that it will acquire 100% stake in Yuexiu Financial Holdings, the parent company of CHB, which runs securities brokerage, leasing, financial guarantee, micro-finance and private equity businesses. The restructure of parent company may lead to the shift of business strategy in the future but no detail was disclosed by Management at the moment. Valuation In terms of profitability and overseas exposure, CHB has long been the weakest bank among local peers and Management should take some years to reform and catch up with peers,. Trading at FY14E P/B of 0.87x and FY14E P/E of 7.9x, valuations are currently the lowest in the local banking sector and we recommend a Buy rating on the counter. Recommendation: Buy 2
Appendix I I. Impairment allowances, overdue and rescheduled advances of Chong Hing Bank As % of total customer advances Individual allowance Portfolio Non-performing allowance loans Overdue and rescheduled advances As of 31/12/2014 0.04% 0.42% 0.04% 0.10% As of 30/6/2014 0.06% 0.42% 0.06% 0.19% As of 31/12/2013 0.03% 0.42% 0.04% 0.79% II. Comparison of Chong Hing Bank s loan book: 31/12/2014 vs 31/12/2013 Loans-by industry 31 st Dec, 2014 Up/(down) 31 st Dec, 2013 Property related 9,192-6.1% 9,787 Financial concerns 3,408 +41.6% 2,407 Wholesale & retail trade 2,416 +24.9% 1,934 Manufacturing 2,020 +5.0% 1,924 Transport & transport equipment 866 +14.7% 755 Residential mortgages, HOS/PSPS 7,824 +3.9% 7,528 Credit card 102-6.9% 109 Others 10,510 +6.4% 9,875 Trade finance 8,767 +166.7% 3,288 Stockbrokers 1,461 +89.0% 773 Loans outside HK 10,359 +53.7% 6,740 56,926 +26.2% 45,120 III. Comparison of Chong Hing Bank s loan book: 31/12/2014 vs 30/06/2014 Loans-by industry 31 st Dec, 2014 Up/(down) 30 th Jun, 2014 Property related 9,192 +3.1% 8,919 Financial concerns 3,408 +92.2% 1,773 Wholesale & retail trade 2,416 +8.7% 2,222 Manufacturing 2,020 +1.2% 1,995 Transport & transport equipment 866 +2.2% 848 Residential mortgages, HOS/PSPS 7,824 +0.5% 7,789 Credit card 102 +23.4% 82 Others 10,510 +3.6% 10,142 Trade finance 8,767 +46.1% 6,001 Stockbrokers 1,461-37.2% 2,327 Loans outside HK 10,359 +60.7% 6,447 56,926 +17.3% 48,546 3
Appendix II Breakdown of loan book of Chong Hing Bank Breakdown of Loan Book as of 31/12/2014 Total customer advances: HK$56,926 million Stockbrokers 2.6% Loans outside HK 18.2% Property related 16.1% Financial concerns 6.0% Whoelsale & retail trade 4.2% Trade finance 15.4% Manufacturing 3.5% Others 18.5% Credit card 0.2% Residential mortgages, HOS/PSPS/TPS 13.7% Transport and transport equipment 1.5% Breakdown of Loan Book as of 31/12/2013 Total customer advances: HK$45,120 million Stockbrokers 1.7% Trade finance 7.3% Loans outside HK 14.9% Others 21.9% Property related 21.7% Financial concerns 5.3% Whoelsale & retail trade 4.3% Credit card 0.2% Residential mortgages, HOS/PSPS/TPS Transport and 16.7% transport equipment 1.7% Manufacturing 4.3% 4
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