Maybank IB Research noted that BOCD’s fundamentals remained strong.
PETALING JAYA: Hong Leong Bank Bhd
’s (HLB) investment in China’s Bank of Chengdu (BOCD) has proven profitable, and the bank may eventually sell down its current 19.8% stake in the latter.
Positively, this is supplemented by a push to drive higher earnings from its domestic operations, said Maybank Investment Bank (Maybank IB) Research.
“HLB’s investment in BOCD has undoubtedly been a good one – its 19.8% stake today is worth about RM6.2bil against an investment cost of about RM2.1bil.
“Nevertheless, the China bank’s contribution to group earnings has burgeoned to about 31% in the financial year 2024 (FY24) and management is actively looking to scale this back through faster growth in its domestic operations and potentially a reduced stake to about 15%.
“We have moderated our earnings growth estimate from BOCD to about 6% per annum in FY25-FY27 to factor in this possible move,” Maybank IB said in a report following an International Investor Day event hosted by BOCD.
It noted that BOCD’s fundamentals remained strong. Cost efficiencies are reflected in its cost-to-income ratio (CIR) of just 23.8% in the first half of 2024 (1H24), while its balance sheet remains liquid.
Asset quality is impeccable with more than adequate provision coverage, while return on equity (ROE) was 18% in 1H24.
“BOCD’s current core capital ratio of 8.2% is low, in our opinion.
“Nevertheless, this is expected to rise to about 8.7% once its remaining five billion yuan convertible bonds are converted and management believes that this level is sufficient to sustain growth over the next two-to-three years without having to do a capital call.”
BOCD has a dividend payout policy of 30% and its annual profits, net of dividends, are likely to be sufficient to support 100 billion yuan worth of new loans a year, added the research firm.
Meanwhile, Kenanga Research noted that BOCD’s associate contribution of RM1.59bil to HLB was a result of a five-year net profit compounded annual growth rate (CAGR) of 23%.
“While its past loan growth CAGR has been 27% and is driven by state projects, we derive more comfort that near-term visibility from revenue stems from an uplift in its net interest margins of 1.66%, which is below the industry’s trailing average of 1.8%.”However, it said recovery may be imminent with the expiry of fixed deposits (circa 65% of total deposits), which presently accrue higher interests.
Meanwhile, the group recently completed its in-house data centre and is in the middle of relocating its new headquarters by the fourth quarter of 2025.
The normalisation of establishment costs beyond this may lower its already modest CIR back to 21%, its recent low.
Despite the earnings catalysts, Kenanga Research is wary of the possible stake dilution to 17.8%, owing to the issuance and likely exercise of BOCD’s convertible bonds by other minority holders.
“Recall that in March 2022, HLB had similarly exercised its portion of the convertible bonds to raise its effective stake to 19.8% from 18%.
“Granted, we do not believe HLB may consider disposing of its stake completely in the near term as an ROE of 18% may be difficult to replicate with other investments.”
Kenanga Research maintained an “outperform” on HLB with a target price of RM27.40, based on price-to-book value of 1.35 times.
“We continue to view the stock as a solid pick for investors seeking stability, as the group’s gross impaired loans ratio remains to be one of the lowest among peers, while it is still able to generate better-than- industry loans growth.”
