Dah Sing Financial:The deal is on track

The deal is in process: The acquirer, Fujian Thai Hot, is getting regulatoryapprovals in Bermuda, HK and Macau. It might take a couple months as theGroup expected. We expect the deal to be completed in 2016.

There would be special dividends at the Group (440 HK): The Life dealwould bring HK$3.6bn of net proceeds to the Group and HK$2.6bn to theBank (2356 HK, not rated). The Group expects to use the proceeds for specialdividends, working capital and business reinvestment. We are expecting aHK$3.62 of DPS (or a total HK$1.2bn) for each year from FY16-18E. Thisshould bring dividend yield to 7%, and ROE should be sustained at c. 6%.

Operationally, asset quality remains the major concern, althoughmargins improved and loan growth was higher than expected. Keytakeaways include: 1) Reported NIM was enhanced to 1.94% in 1H16 (+4%HoH/+18bp YoY) behind lower funding costs; 2) Loan growth (at 2.1% HoH)was driven by individual loans, and slightly lagged behind the industry pace(at 2.2% HoH); 3) Asset quality deteriorated, as impaired loan ratio rose to1.03% (+28bp HoH). The company explained that it was mainly due to thedeterioration in the HK SME loan book with increased SMEs facingchallenges from their mainland operations. SME accounted for ~30% of totalloan book at the DSB as we calculated; 4) CET 1 was 12.6% in 1H16 (vs12.2% in FY15). But still DPS was cut to 29 cents in 1H16 vs 32 cents in1H15.

We cut net profit by 1% for FY16E (if without divestment gains) and 3% forFY17E. We are forecasting HK$3.6bn of divestment gains for FY16E. We aremore conservative on our dividend forecasts, as we found the Group cut itsinterim DPS despite of the CET 1 enhancement. We are now forecasting aDPS of HK$3.62 for FY16-18E (vs HK$5.82 previously).

The stock is trading at a forward PBV of 0.7x. Our TP of HK$71.16 is basedon a SoTP valuation. This implies a 1.13x of FY16E PBV and ~37% upside tocurrent share price. Although the share price has been driven by the sale ofLife, we believe more upside will be seen given the higher than expected lifepremium and the potential special dividends.