INVESTMENT HIGHLIGHTS

• The Group announced last Friday that it is divesting its 18.2% stake in the Bank of Yingkou Co., Ltd. (BYK).

• Total consideration is RMB1.507b (approx. RM972m). Accordingly, this values the stake at approximately 1x PBV ratio of BYK.

• The 9MFY16 contribution from BYK was approximately RM93m. This is the bulk of the share of results of associates of RM96.1m.

• We are neutral on the news given that BYK is a profitable associate, but believe that it has ample room to grow in its core markets.

• We believe that the move is also to adhere to Basel III framework where financial institutions are required to deduct the entire value of the overseas investments from Tier 1 capital, in order to protect a bank against potential losses. Formerly, only half of the value of the investment was deducted.

• Tweak slightly our FY17 forecast, downward by -1.0%.

• Maintain BUY with unchanged TP of RM5.90 pegging the stock to 1.1X Price-to-Book multiple.

Divesting its stake in a Chinese bank. The Group announced last Friday that it had entered into a Share Transfer Agreement to sell its 18.2% stake in the Bank of Yingkou Co., Ltd. (BYK) to Shanghai Guozhijie Investment Development Co., Ltd. Total consideration of the divestment is RMB1.507b (approximately RM972m). Accordingly, this values the stake at approximately 1x PBV ratio of BYK.

A profitable associate. The 9MFY16 contribution from BYK was approximately RM93m. This is the bulk of the share of results of associates of RM96.1m when compared with its 9MFY16 financial result. The management also considered it to be one of the Group’s best investments. Since the Group’s entry in 2009, this investment has yielded an IRR of 17.4%.

Neutral on the divestment. We are neutral on the divestment given that the Group will be divesting a profitable associate. However, we understand that this is part of the Group’s plan to focus on its core markets, namely ASEAN. We believe that there is ample room to grow in this market.

Possibly also to adhere to Basel III. We also believe that the move to divest its stake in BYK is to adhere to Basel III framework. Financial institutions are required to deduct the entire value of the overseas investments from Tier 1 capital, in order to protect a bank against potential losses. Formerly, only half of the value of the investment was deducted. This mean that the cost associated may be too high and outweighs the returns.

Potential extra dividends. With the all cash consideration from the divestment, we are not ruling out the potential for the additional cash to be rewarded to shareholders. Based on current no. of issued shares, we estimate that the potential extra dividends are the region of 10 per share, giving a yield of approximately 2.2%.

FORECAST

We tweak our FY17 forecast downwards slightly by -1.0% in light of the announcement.

VALUATION AND RECOMMENDATION

We continue to be cautiously optimistic on the prospect of the Group given its surprising faster loans growth and improved liquidity. Coupled with its relatively cheap valuation where it is significantly below its 5-year average PBV of 1.8x, we maintain our BUY recommendation. The dividend yield of 4.0% is also expected to limit the downside risk to the share price, and there could be a potential additional reward for shareholders. Our unchanged TP of RM5.90 is based on PB multiple to 1.1x which is 1 standard deviation below its 5-year historical PBV.

Source: MIDF Research - 3 Jan 2017