Hong Kong Financial Services:Lowering the M&A rank to 2for DSBG/DSFH under our M&A framework

M&A less likely for DSBG/DSFH…We lower our M&A rank for Dah Sing from 1 to 2as we believe that the key shareholder (Wongfamily) could be less willing to entertain apotential sale of its stake than we previouslybelieved. We previously assigned DSBG/DSFH anM&A rank of 1 in our June 15, 2016 report, basedon our framework which incorporated our viewthat the Wong family (major shareholder) may beopen to a sale of either of the banking business orthe general insurance business over the next 12months (Dah Sing announced the sale of the lifeinsurance business on June 2). However, in thepublic disclosure of life insurance stake saledocuments (available since August 8) thecompany indicated that it will focus on closing theannounced transaction (sale of the insuranceoperations) by the end of 2017; management alsomade similar comments at its Aug 24 post resultsbriefing. Therefore, we now score our Keyshareholders’ willingness to sell metric as“maybe” vs. “yes” prior and believe there is alower probability of M&A occurring over the next12 months than we previously assumed.

    … lower M&A rank to 2 for DSBG/DSFH

    That said, we cannot rule out a potential takeoverof DSBG/DSFH entirely as management has notexplicitly ruled out a sale and we believe thebusinesses are both strategically appealing given:1) the attractive investment experience arisingfrom the divestment of the insurance business,and 2) the relatively small scale of the bankingbusiness. We continue to incorporate an M&Acomponent into our 12-m target prices, althoughat a 15% weighting (vs 30% prior), in line with ourdepartmental guidelines for an M&A rank of 2. Asa result, we cut our 12-m TPs by 13%/15% forDSBG/DSFH and retain Neutral ratings. Our targetmultiple of 1.52X for the M&A component (basedon the median bank M&A implied P/B over 2decades) is unchanged. Our fundamentalvaluations are unchanged and we continue to usean SOTP/RIM methodology for DSFH/DSBG,respectively.

    DSBG/DSFH risks

    Upside: M&A optionality, better NIM; Downside:weaker than expected credit quality, fundingpressure or, for DSFH specifically, insurancebusiness mark to market losses on bond portfolio.