20131028-DBS_Group-BoCQ_IPO_casts_ne_gative_light_on_valuations_13页_258kb

DBS Group Research: Equity - HOLD Recommendation for DSBG

Core Content

This report outlines the downgrade of DBS Group Holdings (DSBG) from BUY to HOLD. The key factors behind the downgrade include the Bank of Chongqing (BoCQ) IPO and the resulting implications on DSBG's valuation and earnings. Despite a slight improvement in DSBG's Net Interest Margin (NIM) outlook, the report argues that the current share price is overvalued and that the BoCQ listing has negative effects on DSBG's financials and market perception.

Main Points

• Recommendation Downgrade: The recommendation is changed from BUY to HOLD due to the overvaluation of DSBG's share price and the negative impact of BoCQ's IPO on DSBG's earnings and valuation.
• Price Target: The updated price target is set at HK$14.00 (down from HK$13.70).
• BoCQ IPO Impact:
  • BoCQ's post-IPO contributions to DSBG will slow due to deleveraging, NIM pressure, and provision pressures.
  • BoCQ's ROE is expected to decline from 26% to 17-18% post-IPO.
  • DSBG's stake in BoCQ will dilute from 20% to 17.05%.
  • BoCQ's market value is expected to be 15% of DSBG's market cap, yet it contributes over 30% of DSBG's earnings, making the implied valuation of DSBG's core business appear overpriced.
• Share Price Analysis:
  • DSBG's share price has risen over 70% year-to-date (YTD), which is seen as excessive without an M&A catalyst.
  • The Wong family, which owns 74.6% of DSBG, is not expected to sell, thus DSBG should not carry an M&A premium.
• Valuation Metrics:
  • P/BV (Price to Book Value) for DSBG is 1.0-1.15x, while for BoCQ it is 0.93-0.67x.
  • ROE (Return on Equity) for DSBG is projected to rise from 8.6% to 11.4%, but the non-BoCQ portion is expected to have a lower ROE and lower earnings growth.
  • EPS (Earnings Per Share) is forecasted to increase slightly, from HK$1.37 to HK$1.56, with a 3-5% increase.
  • The Dividend Yield is expected to remain stable at 2.5-2.7%.
• Peer Comparison:
  • DSBG's P/E is 10.2-10.5x, which is lower than peers like Hang Seng (9.0x) and BOCHK (11.9x).
  • DSBG's ROE is 10.0-11.4%, which is in line with other banks.
  • The P/BV of DSBG is 1.09-1.16x, which is similar to other banks.
• DSBG Financials and Valuation:
  • Pre-provision Profit is expected to grow from HK$1,127m in 2012 to HK$1,967m in 2015.
  • Net Profit is forecasted to increase from HK$1,411m in 2012 to HK$1,951m in 2015.
  • Book Value is projected to increase slightly, from HK$15.46bn in 2012 to HK$13.158bn in 2015.
  • The Dividend Discount Model (DDM) is used to calculate the target price at HK$14.00, which is slightly higher than the current share price of HK$14.46.
• Key Assumptions:
  • NIM is expected to rise from 1.41% in 2011 to 1.84% in 2015.
  • Loan growth is projected to be 11% in 2011, 7% in 2012, and 5% in 2015.
  • Net fee growth is expected to be 8% in 2011, 27% in 2012, and 7% in 2015.
  • Cost-to-income ratio is forecasted to decline from 61.0% to 51.9%.
  • Credit cost is expected to rise from 0.24% in 2011 to 0.43% in 2015.
  • Yield on Earnings Assets is projected to increase from 2.43% to 3.08%.
  • Average Cost of Funds is expected to rise from 1.14% to 1.36%.
• Sensitivity Analysis:
  • A +/- 10bps change in NIM affects Net Profit by +/- 12.2%.
  • A +/- 10bps change in Credit cost affects Net Profit by +/- 7%.

Key Information

• DSBG is the banking arm of Dah Sing Financial.
• DSBG has 1,251m issued shares and a market cap of HK$18,095m.
• Major Shareholders include Dah Sing Financial (74.6%), Aberdeen Asset Management (8.0%), and Free Float (17.4%).
• Harold Wong, the Managing Director and CEO of DSBG, has been groomed for succession over the past decade.
• The IPO of BoCQ is expected to dilute DSBG's stake and reduce its earnings contribution.
• The DDM valuation is HK$14.00, which is slightly higher than the current price of HK$14.46.

Summary

The report concludes that despite a slight improvement in DSBG's NIM and EPS forecasts, the BoCQ IPO has negative implications on DSBG's valuation and earnings contribution. The excessive share price increase without an M&A catalyst is also a concern. Therefore, the recommendation is downgraded from BUY to HOLD.