How to position for a continued Ashare
market rally
Market confidence is returning; prefer insurers to brokers/banks
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Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Tracy Yu
Research Analyst
(+852) 2203 6191
tracy.yu@db.com
Esther Chwei
Research Analyst
(+852) 2203 6200
esther.chwei@db.com
Pandora Lee
Research Analyst
(+852) 2203 5928
pandora.lee@db.com
Judy Zhang
Research Analyst
(+852) 2203 6193
judy.zhang@db.com
Sukrit Khatri
Research Associate
(+852) 2203 5927
sukrit.khatri@db.com
Top picks
Ping An (2318.HK),HKD67.25 Buy
NCI (1336.HK),HKD29.40 Buy
Yuanta Financial Holding
(2885.TW),TWD16.30
Buy
Cathay Financial Holding
(2882.TW),TWD33.80
Buy
Bank of China (3988.HK),HKD3.79 Buy
Companies Featured
Ping An (2318.HK),HKD67.25 Buy
ICBC (1398.HK),HKD5.72 Buy
China Construction Bank
(0939.HK),HKD6.50
Buy
Agri. Bank of China (1288.HK),HKD4.21 Buy
Bank of China (3988.HK),HKD3.79 Buy
Bank of Communications
(3328.HK),HKD6.37
Hold
China Merchants Bank-H
(3968.HK),HKD18.20
Hold
China CITIC Bank (0998.HK),HKD5.27 Buy
China Minsheng Bank
(1988.HK),HKD11.38
Hold
Chongqing Rural Bank (3618.HK),HKD4.70 Buy
China Life (2628.HK),HKD24.85 Buy
CPIC (2601.HK),HKD29.40 Buy
NCI (1336.HK),HKD29.40 Buy
CTIH (0966.HK),HKD16.12 Hold
PICC Group (1339.HK),HKD4.55 Hold
CITIC Securities (6030.HK),HKD19.96 Hold
Haitong Securities (6837.HK),HKD13.36 Hold
Yuanta Financial Holding
(2885.TW),TWD16.30
Buy
Cathay Financial Holding
(2882.TW),TWD33.80
Buy
With SHCOMP up 7% YTD and the A-share market ADT up 2.7 times since Nov
2012 (Jan 2013: Rmb214bn vs DB FY13e: Rmb150bn), we maintain a positive
view on Chinese financials in 1H13 and prefer insurers to brokers/ banks. With
hopes of continued economic recovery, we believe cyclical plays such as Ping
An, NCI and HTS should outperform peers if the A-share market continues to
rally. In addition, we see potential upside for Taiwanese non-bank financials,
especially Yuanta and Cathay FHC, given the rising cross-border business and
low valuation. BOC and ABC, as laggards in the H-share banking space, should
also benefit more from this economic upturn.
Closing preference for banks over brokers on higher-than-expected ADT
With the big four banks having outperformed the brokers by 2-8% YTD in the
H-share market and the A-share market ADT up 2.7 times vs. Nov 2012 (Jan
2013 ADT: Rmb214bn vs. DB FY13E: Rmb150bn), we remove our relative
preference for banks over brokers. Only once in history has there been such a
sharp jump, when ADT rose by 2.4 times over a 3-month period since March
2006, leading to a tripling of the SHCOMP Index in the following 18 months.
That period of turnover recovery was accompanied by a surge in the stock
prices of A-share brokers, which rose 734% vs. 35% for the H-share listed
large banks. While the market might identify brokers as a proxy to SHCOMP,
we believe a subsequent change in business mix, a much bigger book, the
absence of asset leverage and persistent pressure on brokerage commission
rate could hinder a repeat of the exaggerated rally for brokers. We are Neutral
on China brokers, but see upside risks if the A-share market continues to rally.
Chinese insurers and Taiwan non-bank financials as better A-share proxy
Our sensitivity analysis suggests that at current levels of ADT and with a 30%
rise in SHCOMP, the H-share listed Chinese brokers’ recurrent earnings could
rise by 60% in FY13. Nonetheless, the absence of significant asset leverage
would limit the ROE to 8-9%, thereby adding only 3-4% to our book value
forecast. Such returns make the current valuation at 1.7-2x 2013E P/B look
relatively full. Given the similarities of their book, revenue contribution from
brokerage income and CIR of 53% and 51% respectively, we see little
difference between CITICS and HTS. In contrast, H-share listed life insurers
should fare better due to their higher leverage; we see a 9-12% increase in our
embedded value forecast, making them a better play on the A-share market
recovery. Our top picks in the China financials space are Ping An and NCI. We
also see upside for Taiwan non-bank financials, especially Yuanta and Cathay
FHC, given rising cross-border business and cheaper valuations.
Confidence is an integral part of the improvement in fundamental; risks
Given the ongoing economic rebound, we maintain our positive view on
China’s financial sector and prefer insurers to brokers/banks. This view is
consistent with our bullish house view on the China’s market. We identify Ping
An, NCI, BOC, ABC, Yuanta and HTS as the leveraged plays to continued
economic recovery. On our estimates, the Chinese listed banks, life insurers
and brokers in the H-share market are trading at 1.2x 2013E P/B, 1.3x 2013E
P/EV and 1.85x 2013E P/B, respectively. Major downside risks to our positive
view include an unexpected economic slowdown, higher-than-expected
inflation, and rising global and company event risks.