Rising profit contribution from insurance business. Net profit of Dah Sing Financial’s (DSF) insurance business (including both life and general insurance in Hong Kong and Macau) fell 62.8% YoY to HKD58m in 1H13. This was mainly due to a net investment loss of HKD142m given the sharp rise in US long-bond yield. Growth in net insurance premium of Dah Sing Life (DSL) should remain stable in 2H13 compared with 1H13 (+15% YoY) as there was strong sales in bancassurance (accounting for 70% of the premium). As the rise in US long-term bond yield has moderated from 73bps in 1H13 to 35bps during Jul-mid-Dec 2013, we raise ou r net profit forecast of DSF’s insurance business from HKD90m to HKD120m for 2013. We anticipate the US long-term bond yield will rise slower by 30-40bps to 3.1-3.2% in 2014 under the QE tapering. Besides, DSL will shift towards high-margin long-dated products. We thus raised our net profit forecast of DSF’s insurance business from HKD155m to HKD200m for 2014. This will contribute 13% of group’s total net profit for 2014F (8.5% in 1H13).
Potential decline in profit contribution of BCQ. After the recent IPO of Bank of Chongqing (BCQ), DSB’s shareholding in BCQ has fallen from 20% to 17%. Due to our conservative assumptions on the NPLs and loan impairment allowances of BCQ during 2013-15, we forecast its effective net profit contribution (after factoring minority interest effect of DSB) will decline from 27.6% of DSF’s net profit in 2013 to 21% in 2014.
One-off deemed disposal gain from IPO of BCQ. Based on the IPO price of BCQ (HKD6.00 per share), we estimate that DSB (and DSF) will record a deemed disposal gain of about HKD250m in 2013. However, DSB will continue to dispose of the perpetual subordinated debt of financial institutions it invest ed before the financial crisis of 2008 (HKD1.7b in Jun 2013). We estimate potential disposal loss of HKD180m for these assets in 2013.
Upgrade to BUY with a higher TP of HKD59.70. To factor in higher profit forecast of DSB and the insurance business, we raised our net profit forecast of DSF by 5.5% fo r 2014. Based on our sum-of-the parts (SOTP) valuation and a holding company discount of 10%, we arrived at a higher TP of HKD59.70 for DSF, which translates to Dec 2014 P/B of 1x. We estimate that the current valuation of DSF has not factored in the fair value of DSL.
Rising profit contribution from insurance business. Net profit of Dah Sing Financial's (DSF) insurance business (including both life and general insurance in Hong Kong and Macau) fell 62.8% YoY to HKD58m in 1H13. This was mainly due to a net investment loss of HKD142m given the sharp rise in US long-bond yield. Growth in net insurance premium of Dah Sing Life (DSL) should remain stable in 2H13 compared with 1H13 (+ 15 YoY) as there was strong sales in bancassurance (accounting for 70 of the premium). As the rise in US long-term bond yield has moderated from 73bps in 1H13 to 35bps during Jul-mid-Dec 2013, we raise ou r net profit forecast of DSF's insurance business from HKD90m to HKD120m for 2013. We anticipate the US long-term bond yield will rise slower by 30-40bps to 3.1-3.2% in 2014 under the QE tapering. Besides, DSL will shift towards high-margin long-dated products. We thus raised our net profit forecast of DSF's insurance business from HKD155m to HKD200m for 2014. This will contribute 13% of group's total net profit for 2014F (8.5% in 1H13).
Potential decline in profit contribution of BCQ. After the recent IPO of Bank of Chongqing (BCQ), DSB's shareholding in BCQ has fallen from 20% to 17%. Due to our conservative assumptions on the NPLs and loan impairment allowances of BCQ during 2013-15, we forecast its effective net profit contribution (after factoring minority interest effect of DSB) will decline from 27.6% of DSF's net profit in 2013 to 21% in 2014.
One-off deemed disposal gain from IPO of BCQ. Based on the IPO price of BCQ (HKD6.00 per share), we estimate that DSB (and DSF) will record a deemed disposal gain of about HKD250m in 2013. However, DSB will continue to dispose of the perpetual subordinated debt of financial institutions it invest ed before the financial crisis of 2008 (HKD1.7b in Jun 2013). We estimate potential disposal loss of HKD180m for these assets in 2013.
Upgrade to BUY with a higher TP of HKD59.70. To factor in higher profit forecast of DSB and the insurance business, we raised our net profit forecast of DSF by 5.5% for 2014. Based on our sum-of-the parts (SOTP) valuation and a holding company discount of 10%, we arrived at a higher TP of HKD59.70 for DSF, which translates to Dec 2014 P of 1x. We estimate that the current valuation of DSF has not factored in the fair value of DSL.
