The smaller earnings beat. Dah Sing Financial (DSF) has reported HKD1.24bn netprofits in FY2012, which is 21% higher y-o-y and 5% ahead of our expectation. Themagnitude of earnings beat is lighter than that in DSBG . This indicates a tepid performance in the non-bankingbusiness (mainly the life insurance business in related to Dah Sing Life).
Banking outweighs insurance. The 74%-owned banking subsidiary DSBG has contributed tonearly 85% of DSF’s earnings in 2012 (after excluding the minority interest) and a similarpercentage of our estimated valuation in DSF. On the other hand, the insurance business is asmaller contributor and its outlook is murkier in view of its small scale and unclear growthprofile. Having said that, thanks to a more stable macro backdrop (and potentially higherinvestment return) we think a smaller valuation discount is justified (and this translates into ourhigher P/EV target from 0.4x to 0.5x on the insurance business). Overall, we now think the lifeinsurance business has a more stable outlook, but it is still unlikely to be a key value-driverunless with a more effective capital usage plan.
Revised forecast and valuation. We have lifted earning forecasts by 21% in 2013 and 23% in2014, driven mainly by the higher earning forecasts in DSBG but partly offset by a lowerinsurance business return; the latter remains difficult to predict given the various moving parts.Our target price is lifted from HKD35 to HKD42 (based on 0.7x 2013 PB that derived from aSOTP approach). In spite of our earning/target price upgrade, we think the share price of DSFnow looks fair (since the share price has risen 13% YTD and 70% from the beginning of2012); we hence downgrade the stock from Overweight (V), removing the V-flag, to Neutral(given a Neutral band of 3.5%-13.5% potential return). Our revised forecasts are roughly 10%above the consensus forecasts.Catalysts and risks. Better banking business performance and M&A expectation mightcarry the share price higher. Deterioration in macro and credit quality, and substantial lossin investment/trading business are the key downside risks.