Tapping into the Indian market. Haitong Int’l (HTI) announced plans to acquire theIndia subsidiary of Haitong Bank, the other overseas platform of its parent company, forcHKD107m, which implies 2.4x PB based on its equity base as of March 2016. Webelieve there may still be more connected transactions in future, as HTI and HaitongBank align their regional business operations, which may affirm HTI’s strategic positionas a leading boutique investment banking company in the Asia-Pacific region.
Although Haitong India was loss-making in the past two fiscal years (year endedMarch), we see limited financial impact from this acquisition as:
The transaction is small in scale, with the total consideration being only c0.5% ofour 2016e net asset value for HTI. Besides, Haitong India’s net loss for the fiscalyear ended 31 March 2016 was also less than 1% of our 2016e earnings.
Specifically, we note HTI acquired JapanInvest, an overseas equity research firmwith weak profitability, for a consideration of cHKD189m in March 2015, whichdid not affect its financial performance or share price much at that time.
Haitong India is primarily active in the stock brokerage and investment bankingbusinesses, which are not capital-intensive and do not bear much balance sheetrisk. HTI plans to focus on these two businesses at the current stage and will usethis India foothold to enhance its product offerings to institutional clients and toseek cross-selling opportunities.
Maintain Buy with HKD6.2 target price. Our financial forecasts for HTI areunchanged. We maintain our HKD6.2 target price, which is derived from a PB-basedvaluation approach (with 14% medium-term ROE, 11.5% COE and 5% medium-termgrowth rate assumptions) yielding a 1.4x target 2017e PB. Our target price implies26% upside; we reiterate our Buy rating as we expect that HTI will benefit from theincreasing participation of mainland Chinese investors in Hong Kong across allbusiness lines. Key downside risks include a sharp deterioration in macro andmarket conditions, volatility in financial investments and inappropriate overseasexpansion strategies.