Nomura said Hang Seng Bank’s (HSB)(Hong Kong stock code 00011) 1H results is 11% ahead of consensus. But the research house is less certain over NIM’s outlook, as it sees pressure from lesser loan pricing power as loan demand slows and rising deposit cost. While it thinks it is unlikely that HSB will see a significant re-rating on the back of this set of results, the house thinks investors will continue to value a dividend yield of 4.8% with a ROE of 18% in FY2012 so that a de-rating is also unlikely in the near term. With the macro easing in China, Nomura remains cautious on the impact this would have on growth of loans for use outside of HK. It maintained its “reduce” call and HK$80 target on HSB.
UBS lifted its target price for Hang Seng Bank to HK$110 from HK$105, and maintained its “neutral” rating. It said HSB’s 1H results were ahead of the house’s expectations driven largely by a very strong life insurance performance (this can be a volatile revenue stream). Should the Industrial Bank (IB) stake be treated as a “Financial Investment” rather than an “associate” the impact on reported profit is significant, UBS noted. Net profit could drop by 20-25% & reported equity increase 3-4%.
Morgan Stanley raises Hang Seng Bank target to HK$87.00 from HK$80.00 after revising up its EPS forecasts for 2012 by 7%, partly on the back of the sale proceeds from the general insurance business. The house keeps an Underweight rating as it expects the bank’s underlying profitability to stay under pressure as funding cost increases in the second half, and also because of rich valuation. The bank’s “loan mix has shifted over the years into higher-risk areas, implying higher credit costs if macro conditions remain weak,” it adds. The stock is up 0.7% at HK$108.40 vs HSI’s 1.0% gain in the early morning session.
Credit Suisse lifteed its target price for Hang Seng Bank to HK$99 from HK$97, and maintained its “neutral” rating. It believes HSB’s decent results should be overshadowed by continued concerns about the accounting treatment of IB stake. The house said the risk of classifying IB as a financial investment from associate is high, with RoE potentially dropping to 16% from 20% in FY2013.
Barclays Research said a potential change in the accounting treatment of Hang Seng Bank’s 10.7% stake in Industrial Bank (IB) could result in a 4ppt lower reported ROE. In preparation for Basel III, its dividend payout ratio will fall to 50% by FY2014 (from 60% in FY2012) as its IB stake remains a drag on capital, the house added. Barclays sees rising headwinds as the negative impact from China’s interest rate cuts feed through to IB’s and HSB China’s net interest margins for the rest of the year. It reiterateedits “underweight” rating on HSB and price target of HK$92.10.
Daiwa Research lowered its target price for Hang Seng Bank to HK$105 from HK$125, and downgraded the stock to “hold” from “buy”. HSB will reassess its current accounting treatment of its interests in Industrial Bank (IB) upon completion of IB’s private placement. Daiwa assumed IB will cease to be an associate, which will result in a material loss of associate income for HSB in 2013-14 as HSB can only book dividend income from IB in its P&L. This change in accounting treatment to dilute HSB’s ROE to 17-18% from 21-22%.
HSBC (ADR: HBC, Hong Kong stock code 0005) is up 0.9% at HK$65.85, as investors continue to digest its 1H results released Monday. The share performance is in line with the boarder market, but Goldman Sachs believes the US compliance issue remains the near-term share price overhang although the bank has put aside $700 million provision. The house says HSBC’s underlying first-half profit before tax of $12.7 billion was in-line with market consensus, but 3% below the house’s forecast due to higher operating expenses. It continues to see value in the stock despite the near-term overhang. “If we apply 10.7X P/E multiple (average of Asia banks under GS coverage universe) to its Asia operation, its current share price suggests the market only gives 0.2X P/B to its ex-Asia operation,” it says. It keeps a Buy rating on the stock with a HK$78 target price.
Barclays Capital lifts AIA Group Ltd.’s (Hong Kong stock code 1299) target to HK$33 vs HK$32.60 after the company Friday reported a strong set of first-half results, which showed a “solid” 10% year-on-year increase in net profit as well as a “standout” 28% rise in new business value. The brokerage notes that AIA’s NBV margin expanded to 43.1% in the first half from 38.7% in the second half of last year. It continues to see further upside in the company’s margin expansion trend, which supports its forecast of 28% NBV growth this year and 24% NBV growth in 2013. “The product mix-driven and across-the-board improvement reinforces our positive view on the sustainability of the current margin expansion trend, and we continue to see further room for growth.” Barclays keeps an Overweight call for the stock, which is up 1.7% at HK$27.20.
China Cosco (Hong Kong stock code 1919) is down 1.8% at HK$3.17, underperforming the broader market’s 1.4% gain, after the Chinese shipping giant said Friday it expects to post a first-half net loss for 2012 due to the weak global economy and slowing growth in China. High fuel costs as well as oversupply of shipping capacity also weighed on freight rates, the state-owned shipping company said. China Cosco didn’t give the exact figures for its expected net loss in 2012 but it said earlier its 2011 first-half net loss was CNY2.76 billion.
Barclays maintains its Underweight rating based on its “above-average leverage and valuation combined by worse-than-average operating performance. It keeps the target price at HK$3.54
AIA Group’s (Hong Kong stock code 1299) intraday reversal may be due to investors’ concerns about a potential share disposal by AIG, which has been acting as an overhang on AIA shares; AIG still holds an 18.6% stake in the Pan-Asian insurer. AIA is now down 0.4% at HK$26.70 after rising as high as HK$27.75 in the morning session on its above-view 1H12 results. The AIG overhang aside, Barclays analyst Mark Kellock says the latest set of figures reinforces his positive view on the sustainability of AIA’s margin enhancement; he keeps an Overweight recommendation on AIA, with a price target of HK$32.60. AIA is the fourth most heavily traded Hong Kong stock Friday, with HK$513.0 million worth of shares.
Macau casino operators generally fall 2% to 6% after Sands China (Hong Kong stock code 1928) reports its 2Q net income fell 40% on year to $160.5 million. While the company attributes the lower profit to a $100 million non-cash impairment loss on two land parcels in Macau and increased pre-opening expenses for Cotai Central, the uninspiring results still serve to rekindle investors’ concerns over a sharp slowdown in Macau’s gambling market. UOB KayHian says for Macau names under its coverage, Galaxy Entertainment (0027) is its top pick as it foresees its earnings in the next few quarters continuing to be driven by Galaxy Macau’s increasing business volume and margin improvement. Sands China tumbles 6% to HK$19 while Galaxy is down 4.2% at HK$17.28.