Banking operation delivers a strong performance
DSFH's banking operation, via DSBG, delivered a solid result, with NIM improvement of 13bps hoh, strong China loan growth of 34% hoh, and the NPL ratio falling by 12bps hoh. On the insurance side, shareholders' funds registered a 20% increase and embedded value an 8% rise, but insurance net profit was lower due to higher claims. As a whole, DSFH's FY12 net profit rose by 21% yoy, which was in line with our estimates. We reiterate Buy on DSFH as improving customer risk appetite and DSFH's insurance product mix shift to higher margin would be positive to the insurance business. DSFH's valuation still looks attractive at 0.6x P/B even after the 13% YTD share price increase.
As expected, lower funding costs give a boost to NIM
DSBG, from which DSFH derives 65% of its valuation, delivered a solid result on key areas that we have substantiated our Buy thesis on, namely improving NIM, better asset quality and stronger fee income growth. FY12 net profit rose by 29% yoy to HK$1.4bn, which was 17% above our estimate. Compared to 1H12, DSBG's 2H12 net profit was up 48%, driven by 13bps higher NIM, 12bps lower NPL ratio and 15% increase in non-interest income. NIM was helped by lower funding costs, and loan growth was driven by corporate loans and trade finance in China, which grew strongly at 34% hoh.
Insurance business undergoes product mix shift for higher profitability
Net profit from the insurance business was down by 5% yoy, due to higher claims. However, DSFH is undertaking measures for better bottom line growth. For example, its sales focus has shifted to higher-margin whole life and investment-linked products, which now account for 59% and 7% of sales, respectively. Meanwhile, the lower-margin endowment business fell to 34% of sales, compared to 41% in 2011. Better capital market performance translated to an 82% yoy increase in investment income. Value of in-force declined by 1% yoy, but embedded value rose by 8% yoy. Solvency ratio was strong at 332%.
Reiterating Buy; target price adjusted to HK$46.0
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$46.0. Downside risk: weakness in capital markets, which would negatively affect insurance sales and insurance investment yields.