News

• CIMB Group Holdings Bhd (CIMB) announced that it had entered into Share Transfer Agreement to sell its 18.21% stake in the Bank of Yingkou Co. Ltd (BYK) to Shanghai Guozhijie Investment Development Co. Ltd for a total consideration of RMB1.5bn or RM972m.

• At the same time, CIMB also inked a Long Term Collaboration Agreement with BYK for both entities to continue collaborating in areas of staff exchanges, product development, training and sharing of market intelligence.

Comment

• We are positive on this development as it is in line with CIMB’s T18 effort to continue with its divestment activity to achieve operating and capital target. To note, the sale of BYK is the third divestment in 2016 made by CIMB after sale of 1) PT Sun Life for RM169m 2) Singapore Real Estate Funds for RM122.8m.

• The disposal of BYK stake is valued at 1x P/B. Based on selling price of RM972m, CIMB is expected to realise a one off disposal gain of RM792m or circa 17.8% of our forecasted earnings in 2017 since it entered the investment in 2009 at circa RM180m.

• There is minimal impact to the earnings in the long term as BYK only contributed 3.3% to CIMB Group’s 9M16 earnings. However, we opine that CIMB will prioritize its partnership with China Galaxy Securities given the latter’s presence in the Asia Pacific’s capital markets.

• We also opine that the divestment of BYK is timely and positive to CIMB given the increasing capital requirement for BYK’s business (concentration in SME segment in the regional of Yingkou).

Risks

• Further impairment in Singapore and Thailand, especially exposure in the oil & gas sector and not meeting CET1 ratio target.

Forecasts

• Unchanged, pending clarity of the announcement.

Rating

HOLD ( ↔ )

• While CIMB has charted encouraging recovery in its earnings, we remain cautious on its near-term outlook due to its exposure in weak operating environment in Singapore and Indonesia, especially in the oil & gas sector.

Valuation

• Our Gordon Growth derived TP of RM4.52 is unchanged (ROE of 9.3% and WACC of 10.1%). Maintain HOLD rating on the stock.

Source: Hong Leong Investment Bank Research - 3 Jan 2017