INVESTMENT HIGHLIGHTS

• The Group announced the formalization of its strategic partnership with China Galaxy Securities Co. Ltd

• Deal involves 50:50 partnerships for the Group’s exMalaysia stockbroking business

• China Galaxy will pay SGD167.0m (RM515.0m) based on 1.3x PBV

• Adjusting our call to NEUTRAL (from BUY) due to the price run-up. TP remains unchanged at RM7.10, based on pegging the stock to 1.3x to FY18 BVPS

Share purchase aggreement signed. The Group announced yesterday, that it had formalized the strategic partnership with China Galaxy Securities Co. Ltd (China Galaxy) via the signing of a share purchase agreement between the subsidiaries, CIMB Group Sdn Bhd and China Galaxy International Financial Holdings Limited (CGI).

Partnership for ex-Malaysia stockbroking business. The partnership will see China Galaxy becoming 50% shareholders in CIMB Securities International Pte Ltd (CSI), the holding company of the Group’s ex-Malaysia stockbroking business. This business comprises of institutional and retail brokerage, equities research and associated securities businesses across Indonesia, Singapore, Thailand, Hong Kong, South Korea, India, United Kingdom and the United States of America. For this deal, the Group will receive SGD167.0m (RM515.0m) which is based on 1.3x of CSI’s BV of SGD256.9m as at end Dec’15.

Good move for both. We believe it is a win-win move for both parties as it will give an opportunity for the Group to have a toehold in the Chinese market, including facilitating clients doing business in China, especially with the acceleration of the Chinese led “One Belt One Road” initiatives. This include capitalising on China-outbound M&As, China-ASEAN cross-border investments and infrastructure funding. China Galaxy will also mutually benefit from the Group’s presence in ASEAN. We believe that the Group have found a solid partner in China.

But direct impact will be felt only in FY18. Previously, management estimated that there is a potential uplift of 100bp to CI ratio. Nevertheless, we do not foresee the positive impact in the immediate future. We believe that the impact will only be felt in FY18 given the time it will take to clear the various jurisdictional issues.

FORECAST

We make no changes to our forecast as we have imputed lower CI ratio for FY18.

VALUATION AND RECOMMENDATION

Adjust to NEUTRAL. We believe that the partnership is positive for the Group, and will be a booster for the Group’s earnings going forward. In addition, we estimate that the Group could afford to give an extra 5-6 sen dividend based on the proceed from the share sale, but we believe that the Group retain the cash for other investments. Nevertheless, the Group’s share price have appreciated by +10.0% since our last report on 25 May 2017. As such, it had almost reached our TP of RM7.10, and due to this we have to adjust our call to NEUTRAL (from BUY). However, our NEUTRAL call is not a reflection of our view on the Group’s future prospect. It is based on share price moving ahead of funadamentals, and recommend investors to accumulate on any weakness. Our unchanged TP is based on pegging its FY18 BVPS to PBV multiple of 1.3x which is its 5-year historical PBV.

Source: MIDF Research - 7 Jun 2017