Raising TP to HKD47.0; stronger fee income and insurance sales expected
Following its 57% share price rise in 2012, DSFH continues to be the best-performing stock in the sector, rising 16% YTD. We have highlighted DSFH as our sector top pick since November last year, believing that a better credit outlook would eliminate the discount put on its investment securities book. While the valuation recovery from this seems to have played out already, we expect another leg of outperformance, driven by a recovery in customer appetite for investment products. Continued fund inflows and rising stock market turnover value are positive for fee income growth and insurance sales. We increase our FY13E earnings by 8% and raise our target price to HKD47.0.
Raising FY13E earnings by 8% on higher insurance sales and fee income
Despite the HSI Index rising 23% last year, customer appetite for investment remained stubbornly low, which led to depressed fee income for banks. For DSFH, the revenue contribution from non-interest income peaked at 40% in 2007, but fell to as low as 14% in 2009, and was 22% in both 2010 and 2011. With stock market turnover value continuing to improve, from HKD 54bn in 2012 to HKD 78.5bn in January and HKD 84.3bn in February, we have raised our fee income growth assumptions. As a result, we raise FY13E earnings by 8%, and now expect non-interest income to contribute 31% of revenue in 2013. On the insurance side, we forecast new business value to increase by 45%, to HKD340m.
Another potential positive upside could come from Bank of Chongqing stake
DSFH, via DSBG, owns a 20% stake in Bank of Chonqing (BOQ), which could offer positive upside if BOQ were listed, although it is difficult to estimate the timing, as BOQ has been awaiting regulatory approval for some time. Exposure to Chonqing is positive, since the region is growing faster than on a nationwide basis, registering a 20% CAGR (2007-2012) vs. 14% nationwide. Since 2008, associate income has registered a 43% CAGR, contributing more than 20% of pre-tax profit.
Reiterating Buy and raising target price to HK$47.0; risks
We use an SOTP valuation for DSFH. For the banking business, we use a Gordon Growth Model to obtain a target price-to-book ratio. For the insurance business, we use the embedded value methodology, applying 1.5x EV and 2x the FY13E new business value. We apply a holding company discount of 20% to arrive at our target price, which we have raised to HK$47.0. Downside risks: weakness in capital markets, which would negatively affect insurance sales and insurance investment yields.