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Wing Hang Bank (00302.HK) - Supported by M&A potential

Friday, December 11, 2009

5101

Wing Hang Bank(302)

Recommendation on 11 December 2009
Recommendation	Hold
Price on Recommendation Date	$79.300
Target Price	$82.500

Weekly Special - 3306 JNBY Design Limited

WHB reported a better-than-expected interim result with net profit HK$513mn. Similar to other local banks, the good result was attributable to the lower than expected provisions. We hence revised our EPS estimates upward.

Wing Hang Bank is a better managed bank and has achieved higher ROE than its medium-size peers in the past few years, this makes WHB an attractive M&A candidate. We believe this hope will support WHB a premium valuation.

With revised estimates, we raise our 12-month target price to $82.5. We upgrade WHB's rating to “Hold”, there is a 4% upside relative to the last close price.

Credit cost is better than expected

WHB's loan loss provision dropped from 2H08's HK$399mn to HK$84mn, while the annualized credit cost decreased from 99bps to 21bps. WHB's asset quality is better than expected and we hence lower FY09's and FY10's credit cost forecast to 20bps and 17bps respectively.

Estimates revised

Similar to other local banks, WHB proved its asset quality to be much more resilient than expected though we see HK loan growth is still weak in 2H09. After lowering the LLP forecast, we adjust our EPS and BVPS forecast, increasing FY09 and FY10EPS estimate by 29% and 36%; and increasing FY09 and FY10 BVPS forecast by 7% and 13% respectively.

High M&A potential

Among the medium- size local banks, WHB has good management and achieved higher ROE in the past, which makes WHB an attractive M&A candidate. Furthermore, the Fung family, WHB's key shareholders, have publicly stated that they have received informal approaches from various interested parties. We believe this M&A hope will support WHB a premium valuation.

Dividend

WHB cut its interim dividend to $0.20, the payout ratio thus drop to 11%. This move shows the bank's need of preserving capital. We expect the bank will still be conservative in 2H09 and full year payout ratio is estimated to be 35% while we believe WHB will raise the payout ratio back to 50% in 2010.

Valuation

Under our estimation, WHB's FY10 EPS will be $5.5, and ROE will rise to 12.4%. Though we do not expect WHB's ROE will rise to 2003-2007's 5 year average 17.1% next year, we believe M&A potential can support a premium valuation and we set target P/B ratio at 2.13x which is the 6 years mean. Our 12-month target price is HK$82.5. We upgrade WHB's rating to “Hold”, there is 4% upside potential relative to last close price.