Dah Sing Financials: Unlocking scarce local insurance and banking value

Recommendation: Buy
Price:

51.4

Market
Cap:

17.21B Valuation
Metric

Capitalization
Shr.Price (HKD)
Issued.Shrs
Floating
Mkt.Cap HKD

Price Target:

63.9
SOTP

Forest
Return:
Current
Multiple:

Earnings (HKDm)
51.6
335m
197m
17,256m

Ownership
40.97% Wong Shou Yeh, David
15.18 % The Bank of TokyoMitsubishi UFJ, Ltd

Revenue
Profit
EPS (HKD)

12/14A
7,398
1,716
5.05

12/15A
6,850
1,948
0.015

12/16F*
5,326
1,649
5.37

12/14A
0.90%
9.66%

12/15A
0.94%
9.86%

12/16F*
0.88%
8.00%

Returns
ROA
ROE

+24%
PB
0.85x

Target
Multiple:

PB
1.05x

Balance Sheet (HKDm)

12/14A
12/15A
Risk Weighted Assets 1,660
1,784
Book Value per share 56.84
61.02
Tier 1 Capital Ratio
11.4% 12.2%
Valuations
PE
PBV
Div

12/14A
12/15A
12/16F*
8.55x
6.67x
9.61
0.80x
0.64x
0.79x
2.56%
2.57%
2.65%

* Bloomberg estimates

Key summary
-

12/16F*
1,797
65.32
11.73%

Dah Sing Financials (DSF) holds 74.59% interest in Dah Sing Bank, one of the only two
local banks available for takeover.
Various Chinese enterprises are actively looking for strategic USD assets
DSF AGM would be held at 16:30pm on May 31, 2016 following Dah Sing Bankings
AGM in Island Place Tower, North Point. Expect more disclosures on AGM meeting.

Investment thesis
1. DSF is a redundant listing layer after sale of insurance business.
DSF (440.hk) has been listed on the Hong Kong Stock Exchange since 1987. It simply holds Dah
Sing Banking and insurance business.
DSF announced intention to explore alternatives for Dah Sing Life Assurance Company in Jan
2016. Dah Sing's insurance business has an embedded value of about US$500 million and it
accounted for 0.5% HK insurance market share. Insurance products are mainly 74% sold via
banks, mainly Dah Sing Banks and 26% via agents. Dah Sing's insurance earned HK$325m in FY15.
After that there were subsequent news updates on this potential sale. Based on the latest news,
DSF attracted a highest bid of US$1.3b or HKD 10b from J.D. Capital.
Reference: http://www.reuters.com/article/dah-sing-insurance-sale-idUSL3N1893BI
After disposing the insurance unit, DSF would simply hold a large sum of cash and Dah Sing
Banking interest.

DSF may decide to declare special dividends with the proceeds. Yet it would be best to dissolve
the entities by distributing cash and Dah Sing Banking shares. Dissolving Dah Sing Finanicals
would realize the value unlocked in this holding co:
i.

eliminate existing holding company discount;

ii.

Increasing the public floating % of Dah Sing Banking. Currently Dah Sing Bank public
floating% is 25.4% (i.e. HKD 4.8b as of May 26) with an 20 day average daily
turnover HK$11.3m. This low floating may prohibits funds with floating
requirements in their investment mandates.
DSBs public float could have increased to 58.1% and this would attract a bigger
profile of institutional investors. It would help to eliminate the valuation gap,
especially price to book, between DSB with other local banks with higher floating%
like Hang Seng Bank and BEA. For details please refer to appendix 5. peers
comparison
Shareholders
Wong Shou Yeh, David
Mitsubishi UFJ Financial
DSF Public
DSF
DSB Public
New Public

share% respective DSB share%

40.97%
30.56%
15.18%
11.32%
43.85%
32.71% @
74.59%
25.41% #
58.12% @+#

2. Attractive takeover target for mainland banks.

BOCHK is currently in talks with potential buyers, including Bank of Xiamen, to divest its 70%
interest in Chiyu Bank at valuation of ~PB2.2x. Currently two listed local banks could be the
takeover targets- Dah Sing Banking and Bank of East Asia.
Ref: http://asia.nikkei.com/Markets/Equities/BOC-Hong-Kong-rises-for-third-day-ondivestment-speculation
Compare to Bank of East Asia, Dah Sing Banking, in my view is the only choice for takeover:
i.

market cap wise consideration- BEA HK$74.9b vs. HK$18.9b.

Dah Sing Banking enjoys a lower market cap. Large cap is not desirable. Offeror
has to arrange a huge credit line as a funding proof in the a general offer.

ii.

complex shareholding structure- BEA has no dominant controlling shareholders

and BEA currently has some troublesome shareholders (Guoco and Elliot).
Comparatively, Dah Sing Banking has a simpler shareholder structure. Dah Sing

Banking is simply 74.6% owned by Dah Sing Finanical and is ultimately owned
41% by Wong Family (for detail please refer to part 1).
The more parties involved in the takeover process, the more difficult to reach a
Sell conclusion.
BEA shareholding structure:
BEA Shareholders
Sumitomo Mitsui Financial Group, Inc.
Criteria Caixa, S.A.
Kwek Leng Kee
Sumitomo Mitsui Financial Group, Inc.
Elliott Capital Advisors, L.P.
Public

Iii.

share%
19.01
17.24
14.15
9.50
7.00
33.10

Under current situation, potential buyers are very likely Chinese institutional
group with or without banking license in the market. Foreign banks, even APAC
banks, are doing tough.
BEA loans are dominated with loans in PRC, accounting for 48.1% of the loan
profile. It is very hard to convince a Chinese buy to offer a high PB valuation 2.0
to acquire these assets with the knowledge that big SOE banks are trading at PB
0.7x.

3. Hong Kong financial assets are attractive to Chinese buyers

According to Reuters, highest bid of Dah Sing Insurance is HKD 1b which is 30% higher than
expected. To be honest Dah Sing Insurance accounted for 0.5% HK insurance market share and
earned FY15 HK$325m. The pricing is aggressive and we need to keep in mind that most Dah
Sing Insurance products rely heavily on Dah Sing Bank sales channels. This proves that potentials
buyers are willing to offer a high premium to acquire HKD assets. Past buyers were willing to
offer a PB 2.0x+ valuation to acquired local HK banks.
Given that Dah Sing Bank is a rare gem, the valuation should be at least PB 2.0x.
Insider transactions
Directors: not noted in 2016
Controlling shareholders: not noted in 2016
Institutional investors: Aberdeen Asset sold down to 4.9% interest in Jan 2016 and ceased to
report the shareholding thereafter.
HKEX link: http://goo.gl/1IqmsN

Board of Directors
Chairman, Board of Directors- Mr. David Shou-Yeh Wong, aged 75.
Chief Executive, Managing Director- Mr. Derek Hon-Hing Wong, aged 63.
Total 9 directors; 4 executive director and 5 independent directors.
Risk to investment
1. Dah Sing Financials may not declare large, if not entire, sum of the capital. Management may
wish to retain majority of the money for future acquisitions. Acquisitions may be made too high
or too aggressive; this is common in fin-tech area.
2. Wongs family may wish to retain controlling in Dah Sing Banking and not lure to sell the
banking business even with high valuation offered. David Wong and Harold Wong are still
actively managing the Group. After all, sale of insurance group may not relate to sell of Dah Sing
Banking.
However, given the scarcity of the business, Dah Sing Banking would not be impossible to find
buyers. A nice premium should be reasonably expected. As passive investors, timing uncertainty
in the deal is the biggest risk.
Given that Wongs family retain a high portion stake in Dah Sing Financials and with the
investment stake by The Bank of Tokyo-Mitsubishi, it is unlikely that Wongs family will follow
what Lis family done in Bank of East Asia- having unreasonably high compensation, granting
themselves options, etc.
3. If Wongs decide not to dissolve DSF, DSF will remain as a holding company and continue to
be suffered from holding company discounts.

Valuation/conclusion
For a sum of the part approach, value DSF by assuming that DSF will dissolve itself as a holding
company and distribute the Dah Sing Bank shares. With reference of local HK banks past
takeover deals, PB 2.0x would be a takeover valuation.

Time
Company
2013 Chong Hing Bank
2014 Wing Hang Bank
2015 Nanyang
2015 Chiyu

Buyer
Yuexiu
OCBC
China Cinda
To be identified
Lowest valuation

Price to
book valuation
Status
2.3 Completed
2.0 Completed
2.0 Completed
2.2 In discussion
2.0

Scenario A- keep DSF listing and act as a going concern, distribute partial sale proceeds as special dividend.
Going concern
Dah Sing Banking
market cap
interest %
Holding co discount
Dah Sing Banking valuation
proposed insurance group sale
highest bid (usd)
exchange rate
in HKD
Expected market cap

HKD' B
18.92
74.6%
20%
11.29
A
1.3
7.78
10.11
21.40

B
A+B
Price= 63.9

current market cap (May 26)

17.21
24.4%

upside

Scenario B- dissolves DSF and returns the sale proceeds and DSB shares to investors.
Dissolve basis
HKD' B
Dah Sing Bank level
21.467
4.009
0.74
18.20
2
36.40
D

Dah Sing Banking book value

less Bank of Chongqing book value
add options adjustment
Dah Sing Bank adjusted book
Takeover valuation- PBx
Dah Sing Banking valuation
Bank of Chongqing market value

5.86

May 26 closing price

Shareholding in B
Bank of Chongqing market value HKD' B
Holding co discount
Bank of Chongqing value

0.46
2.6872
20%
2.15

Dah Sing Banking combined value

DSF 74.59% interest
DSF insurance sale
highest bid (usd)
exchange rate
in HKD

38.55
28.76

D+E
X

10.11

Combined DSF value

38.87

X+Z
Price= 116

1.3
7.78

current market cap (May 26)

upside

17.21
125.9%

Weekly Chart stronger than Hang Seng Index.

Appendix
1. Hong Kong banking sector outlook
Hong Kong banking sector is under more pressure in 2016-loan growth in Hong Kong is slowing,
lending into mainland China will also slow as demand drops in line with slightly slowing
economic growth, and as Hong Kong banks increase their focus on what mainland China
exposures they want to take on. Meanwhile, net interest margins sees not likely increasing
significantly in 2016. There would be higher credit costs in 2016 as non-performing loans in
mainland China increase and impact Hong Kong banks and their mainland China subsidiaries.
There are more regulatory pressure from Hong Kong Monetary Authority. Approximately 70 of
the largest 100 banks in the world have an operation in Hong Kong.

The industry is highly competitive. Yet local banks are still attractive towards Chinese buyers as
HK banks are HKD assets are equivalent to USD assets. During 2013-2015, there were 3
completed takeover deals in local banks- 2 were Chinese buyers.

2. DSF listing subsidiary/associates

2356 Dah Sing Bank (74.59% direct interest)
Market cap: HK$ 19.01b; Business: Banking
1963 Bank of Chongqing Co., Ltd. - H Shares (21.66% direct interest)

3. Dah Sing Banking profile

Listed in 2004, Dah Sing Banking has three banking subsidiaries (Dah Sing Bank, BCM and
Dah Sing Bank (China) Limited), providing banking and financial services through a network
of about 70 branches in Hong Kong, Macau and the Mainland, and a securities trading company.
Dah Sing Bank holds about 14.7% strategic interest in Bank of Chongqing, which is the leading
city commercial bank in Chongqing.

Detailed history of Dah Sing Bank:

http://www.hkexnews.hk/listedco/listconews/SEHK/2004/0618/02356/CWP112_c.pdf
Loan book (as of Dec 31 2015)
Items
Loans in China
Loans in Hong Kong, in which
- Industrial, commercial and financial
# Property investment
- Individuals
# Residential properties
# Credit card advances

Capital Adequacy Ratio as of Dec 31 2015

Common Equity Tier 1
Tier 1
Total

% of total gross advances

6.7%
66.2%
33.6%
14.7%
32.7%
19.4%
4.1%

%
12.2%
12.2%
16.7%

4. Group structure

Daivd Wong is the Chairman of both Dah Sing Financials and Dah Sing Banking an.
Daivd Wongs eldest son Harold Wong is the Group General Manager Dah Sing
Financials and Chief Executive of Dah Sing Banking.

David Wong has two sons and only Harold is working in the group as management (per
disclosures)
Wongs family is taking key management role in both listing companies.
Unlike other local families, Wongs family has been very low profile in the Hong Kong
community.

5. Peers Comparison
DSF has largely outperformed against the local banking peers since Jan 2016 when the Group
decided to explore alternatives on its insurance business. Valuation wise DSF is the 2nd worst
among the peers.

Valuation Ratio: Price to Book

DAH SING FINANCIAL HOLDINGS
BOC HONG KONG HOLDINGS LTD
HANG SENG BANK LTD
BANK OF EAST ASIA LTD
CHONG HING BANK LTD

2012
1.032
1.635
2.843
1.087
1.038

2013
0.951
1.554
2.436
1.003
0.990

6. CCASS summary
CCASS holdings on 2016-05-24
Summary
Type of holder
Custodians
Brokers
Other intermediaries
Intermediaries
Named investors

Holding
205,052,719
75,722,005
138,521
280,913,245
24,000

Stake
61.20%
22.60%
0.04%
83.84%
0.01%

2014
0.903
1.397
1.886
0.951
0.710

2015
0.842
1.282
1.849
0.894
0.723

2016
0.786
1.102
1.823
0.890

Unnamed investors
Total in CCASS
Securities not in CCASS
Issued securities

1,360,414 0.41%
282,297,659 84.25%
52,777,441 15.75%
335,075,100 100.00%

CCASS movement from Jan 1 to May 25 2016

Top 5 buyers
1
2
3
4
5

CCASS ID
B01274
C00010
B01224
B01777
B01284

Name
MORGAN STANLEY
CITIBANK N.A.
MERRILL LYNCH
DAIWA CAPITAL MARKETS
HANG SENG SECURITIES LTD

Holding
Change
Stake % Stake % Last holding
3,240,405 1,848,592
0.97
0.55 2016-05-24
17,521,472 1,427,644
5.23
0.43 2016-05-24
1,020,398
954,308
0.3
0.28 2016-05-24
722,145
713,345
0.22
0.21 2016-05-23
1,455,874
632,936
0.43
0.19 2016-05-24

Top 5 sellers
1
2
3
4
5

CCASS ID
C00093
C00074
C00019
B01610
B01323

Name
Holding
BNP PARIBAS
15,499,918
DEUTSCHE BANK AG
5,189,201
THE HONGKONG AND SHANGHAI BANKING
113,524,823
KGI SECURITIES
98,297
DEUTSCHE SECURITIES
824,211

Change
Stake % Stake % Last holding
-4,026,477
4.63
-1.2 2016-05-24
-1,595,583
1.55
-0.48 2016-05-24
-1,133,646
33.88
-0.34 2016-05-24
-722,626
0.03
-0.22 2016-05-24
-554,221
0.25
-0.17 2016-05-24