<p>Asia Taiwan<br/>Banking/Finance Banks<br/>20 February 2009<br/>Taiwan Financials<br/>Trading opportunities in<br/>downturns<br/>Nora Hou<br/>Research Analyst<br/>(886) 2 2192 2830<br/><a href="mailto:nora.hou@db.com">nora.hou@db.com</a><br/>Michelle Chou, CFA<br/>Research Associate<br/>(886) 2 2912 2839<br/><a href="mailto:michelle.chou@db.com">michelle.chou@db.com</a><br/>Underweight Taiwan Financials; Long alpha, Short beta<br/>Given DB's further cut in Taiwan's 09E GDP (-4.2% vs. -1.6% previously), we<br/>expect zero credit expansion, with potential corporate defaults holding back<br/>fundamental recovery. As a result, we cut our earnings forecasts/TPs for financial<br/>stocks under our coverage. We have a negative 12-18 month sector outlook, but<br/>see catalyst-driven rebounds in 1Q-2Q09. By then, we see alpha stocks<br/>outperforming beta plays given the deteriorating macro and suggest a basket pair<br/>trade (Long Fubon/First/Chinatrust; Short Cathay/Mega/Taishin/SinoPac).<br/>Deutsche Bank AG/Hong Kong<br/>All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local<br/>exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche<br/>Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm<br/>may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single<br/>factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research<br/>is available to customers of DBSI in the United States at no cost. Customers can access IR at<br/><a href="http://gm.db.com/IndependentResearch">http://gm.db.com/IndependentResearch</a> or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE<br/>LOCATED IN APPENDIX 1.<br/>Forecast change<br/>Top picks<br/>First FHC (2892.TW),TWD12.85 Buy<br/>Fubon FHC (2881.TW),TWD19.65 Buy<br/>Companies featured<br/>First FHC (2892.TW),TWD12.85 Buy<br/>2007A 2008E 2009E<br/>P/E (x) 11.3 10.6 8.3<br/>Div yield (%) 7.3 7.5 9.6<br/>Price/book (x) 1.4 0.8 0.7<br/>Fubon FHC (2881.TW),TWD19.65 Buy<br/>2007A 2008E 2009E<br/>P/E (x) 16.3 14.0 15.3<br/>Div yield (%) 5.1 6.1 5.6<br/>Price/book (x) 1.3 0.9 0.9<br/>Cathay FHC (2882.TW),TWD30.10 Hold<br/>2007A 2008E 2009E<br/>P/E (x) 22.3 103.2 17.1<br/>Div yield (%) 3.4 0.6 3.8<br/>Price/book (x) 2.8 1.6 1.4<br/>Yuanta FHC (2885.TW),TWD12.00 Sell<br/>2007A 2008E 2009E<br/>P/E (x) 25.5 59.6 14.8<br/>Div yield (%) 3.5 1.3 5.1<br/>Price/book (x) 1.6 0.9 0.8<br/>Mega FHC (2886.TW),TWD9.50 Hold<br/>2007A 2008E 2009E<br/>P/E (x) 13.7 146.2 13.8<br/>Div yield (%) 5.9 0.5 5.1<br/>Price/book (x) 1.1 0.6 0.6<br/>Taishin Financial Hldgs (2887.TW),TWD4.90 Sell<br/>2007A 2008E 2009E<br/>P/E (x) 39.7 – 60.7<br/>Div yield (%) 1.1 0.0 0.7<br/>Price/book (x) 1.2 0.5 0.5<br/>Shin Kong FHC (2888.TW),TWD7.60 Sell<br/>2007A 2008E 2009E<br/>P/E (x) 31.3 – –<br/>Price/book (x) 1.1 0.8 0.8<br/>Div yield (%) 1.6 0.0 0.0<br/>SinoPac Holdings (2890.TW),TWD5.49 Sell<br/>2007A 2008E 2009E<br/>P/E (x) 42.1 – 19.9<br/>Div yield (%) 0.8 0.0 2.0<br/>Price/book (x) 1.0 0.5 0.4<br/>Chinatrust Financial (2891.TW),TWD9.94 Hold<br/>2007A 2008E 2009E<br/>P/E (x) 16.7 6.4 8.9<br/>Div yield (%) 2.0 4.5 3.4<br/>Price/book (x) 1.7 0.8 0.8<br/>Global Markets Research Company<br/>Stagnancy in general<br/>DB macro economists recently lowered Taiwan’s 09E GDP growth further to<br/>-4.2% (previous: -1.6%) given the slow recovery, suggesting limited momentum<br/>for banks to grow their books. We project that total system loans will remain flat<br/>this year, driven by 1% growth from state banks (mainly in the corporate segment)<br/>and dragged by 1.5% contraction from private players (given sluggish retail<br/>demand).<br/>Rising credit cost across the board<br/>We see state banks facing rising default risks given the government’s intended<br/>corporation bailouts. Uncertainties also loom on private players given their<br/>financially opaque SME books. We project that system NPLs will pick up from<br/>early 2Q09 and that provisioning will peak in late 2Q09-early 3Q09. We see sector<br/>NPL ratio reaching at least 2.5% by YE09, boosting banks' credit cost by 75-<br/>150bps in 09-10E, with the increment coming mostly in 2009.<br/>Earnings estimate and TP revisions<br/>We cut our earnings forecasts for financial companies under our coverage by an<br/>average of 13.6% in 09 and 6.3% in 10, assuming low loan growth (on average<br/>-0.6% in 09 and 1.8% in 10) and higher credit costs (on average 83bps in 09 and<br/>73bps in 10), given DB’s more bearish macroeconomic view. These adjustments<br/>reduced our target prices for stocks by as much as 18%.<br/>Catalysts to drive sentiment rallies<br/>We expect banking stocks to rebound in late 1Q09/early 2Q09, driven by the<br/>imminent signing of the cross-strait MoU (see “Taiwan Strategy: three trades for<br/>09” by Julian Wang, 2 February 2009). In our opinion, however, the sentiment<br/>rallies will not last long without a solid fundamental recovery. In two months, we<br/>see alpha stocks likely outperforming beta plays given the continued<br/>macroeconomic deterioration.<br/>Valuation and risks<br/>We value Taiwanese banks based on SOTP (details on p. 9). Key upside risks: 1)<br/>faster-than-expected cross-strait financial liberalization and a general domestic<br/>investment pick-up; and 2) confirmed bottoming of major economies. This report<br/>recommends one or more pair trades involving the simultaneous purchase of one<br/>or more securities and sale of one or more other securities. As the name implies,<br/>this is a trade idea (not fundamental research) that is only recommended to be<br/>executed in its entirety. As such, the buy and sell components of the trade might<br/>not align with the analyst's current fundamental research rating on the stocks<br/>involved on a stand-alone basis.</p><p>Table of Contents<br/>Long alpha, Short beta...................................................................... 3<br/>Gloomy fundamentals, but we see trading opportunities .........................................................3<br/>Long – Fubon, First, Chinatrust .................................................................................................3<br/>Short – Cathay, Mega, Taishin/SinoPac.....................................................................................4<br/>More fundamental headwinds ......................................................... 6<br/>Stagnancy in general.................................................................................................................6<br/>Rising credit costs, across the aboard ......................................................................................6<br/>Earnings/TP revisions................................................................................................................7<br/>Again…MOU signing to drive sentiment rallies ........................................................................9<br/>Valuation ..................................................................................................................................9<br/>Risks ........................................................................................................................................9<br/>Investment thesis ............................................................................ 10<br/>Fubon FHC (2881 TT, NT$19.65, Buy).....................................................................................10<br/>Cathay FHC (2882 TT, NT$30.10, Hold) ..................................................................................12<br/>Yuanta FHC (2885 TT, NT$12.00, Sell) ....................................................................................14<br/>Mega Holdings (2886 TT, NT$9.50, Hold) ...............................................................................16<br/>Taishin FHC (2887 TT, NT$4.90, Sell) ......................................................................................18<br/>Shin Kong FHC (2888 TT, NT$7.60, Sell) .................................................................................20<br/>SinoPac Holdings (2890 TT, NT$5.49, Sell) .............................................................................22<br/>Chinatrust FHC (2891 TT, NT$9.94, Hold) ...............................................................................24<br/>First FHC (2892 TT, NT$12.85, Buy)........................................................................................26</p><p></p><p>
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