News

• CIMB Group Holdings (CIMB) is looking at acquiring Jupiter Securities Sdn Bhd (Jupiter) from Olympia Industries Bhd for more than RM50mil as part of a larger corporate exercise to facilitate its joint venture (JV) with China Galaxy Securities Co Ltd (source: Starbiz, 17 March 2017).

• Sources said that CIMB was looking at acquiring Jupiter Securities mainly to get an additional license for its stock broking business that would eventually merge with China Galaxy Securities as part of a wider exercise to expand its reach and reduce cost (source: Starbiz, 17 March 2017).

Comment

• Loss making Jupiter. While Jupiter has been loss making for several years, we are positive on the new development as this will enable CIMB to leverage on the stockbroking license owned by Jupiter, and place all stockbroking businesses in the region under the JV with China Galaxy.

• JV with China Galaxy. Note that CIMB owns a stockbroking license parked under its investment banking arm, and the JV will need a new stockbroking license to operate in Malaysia.

• Synergies. Through the JV with China Galaxy, it allows CIMB to tap on China Galaxy’s experience. Post-acquisition, CIMB will focus its efforts in investment banking, capital market products and services whilst the China Galaxy JV will be positioned as a pure play stockbroker with universal bank client base.

• Rationale. While the JV may boost CIMB’s presence outside Asia, we believe the deal is primarily targeted to further reduce CIMB’s opex and drive its CIR to below 53% (reduction of circa RM300m per annum). To note, the stockbroking business posted ~RM30m loss in FY15. However, it turned around to a profit of ~RM20m in FY16, chiefly from its Malaysian and Indonesian operations.

• Positive tied up. While the monetary benefits remain sketchy at this point, we are optimistic the JV with China Galaxy will be able to turn around CIMB’s stockbroking business outside the Asian regions as the lacking of commercial bank presence has hampered the stockbroking opportunity.

Risks

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

Forecasts

• Unchanged, as we already imputed lower opex as guided from the initial announcement.

Rating

HOLD ( ↔ )

We opine that FY17 will be a year of further tweaking of business operation with priority of cost and capital optimization. Management’s guidance for a sustainable 40%-60% payout should entice the shareholders moving forward.

Valuation

• Due to favourable outlook, we upgrade our TP on CIMB to RM5.60. We revised higher our parameters based on Gordon Growth (ROE 9.3% and P/BV of 1.0x). We maintain HOLD rating on the stock.

Source: Hong Leong Investment Bank Research - 20 Mar 2017