Description
We expect consolidation in the shadow bank industry. This is due to the potential: (i) regulatory liberalization of micro-finance business of small-loan finance companies; (ii) launch of regulations on online P2P lending business; and (iii) tightening of commercial banks’ investment in shadow bank assets. Leading shadow banks with strong industry expertise, cheap steady funding sources, proactive business diversification and disciplined risk management should be winners.
June 2, 2014
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SEE PAGE 62 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS
Diversified Financials
Shadow banks: Hidden treasures
? Initiate sector at OVERWEIGHT; CFSH & FEH as top picks.
? Regulatory changes will moderate shadow bank asset growth.
? Market consolidation will benefit well-disciplined leaders.
What’s New
Shadow banks – Survival for the fittest. We expect consolidation
in the shadow bank industry. This is due to the potential: (i)
regulatory liberalization of micro-finance business of small-loan
finance companies; (ii) launch of regulations on online P2P lending
business; and (iii) tightening of commercial banks’ investment in
shadow bank assets. Leading shadow banks with strong industry
expertise, cheap steady funding sources, proactive business
diversification and disciplined risk management should be winners.
Potential regulatory changes. The CBRC has recently issued new
guidelines to prohibit trust companies from making proprietary
investments in non-standardized assets. The PBOC and CBRC have
proposed to remove the financial leverage and loan size restriction
for micro-finance business of small-loan finance companies. The
PBOC will soon launch rules to regulate deposit-taking of online
third-party payment providers and online P2P lending. We believe
this should result in: (i) More conservative investments by trust
companies; (ii) micro-finance gradually replacing entrusted loans;
and (iii) the development of online P2P secured lending.
Further improvement in asset quality. Market has maintained the
perception that shadow bank assets are of poor quality. However,
well-disciplined and risk-cautious shadow banks reported better
asset quality than banks (close to 0% loss rate). We believe the
regulatory changes will help expel bad players from the industry
and further improve the quality of shadow bank assets.
Initiation of leading shadow banks. We expect the development
of internet finance by Credit China will help boost its fee income
and lower its credit risk. CFSH will benefit from cheap funding and
customer referrals from its strategic partners. The customer mix
diversification and development of side-businesses for customers
will provide an early risk alert for FEH to reduce exposures to
deteriorating customers and industries. We initiate Credit China at
HOLD (due to rich valuation) and both CFSH and FEH at BUY.
What’s Our View
We expect China’s shadow bank assets will grow slower, at 15-16%
p.a. during 2014-15 (CNY23.1t in 2013; +43% YoY). Still, we believe
Credit China, China Financial Services Holdings (CFSH) and Far East
Horizon (FEH) will remain among the leaders in their niche shadow
bank businesses. Initiate sector with OVERWEIGHT view.
Analyst
Financial summary
Company BB SP TP Upside Net profit (HKDm) EPS CAGR P/E (x) P/B (x) ROE (%) Yield (%)
name code Rating (HKD) (HKD) (%) 2013 2014F 2015F 2014-2016 2013 2014F 2015F 2013 2014F 2015F 2013 2014F 2015F 2013 2014F 2015F
Credit China 8207 HK HOLD 1.84 1.85 +0.5 181 145 185 41.6% 25.3 40.4 31.7 3.5 3.3 3.0 14.7 8.8 10.1 0.67 0.50 0.64
CFSH 605 HK BUY 0.68 0.95 +39.7 237 363 489 27.7% 8.8 6.4 4.9 1.0 0.9 0.7 12.3 14.8 16.0 1.47 1.47 1.47
FEH 3360 HK BUY 5.27 7.15 +35.7 2,450 2,851 3,539 26.4% 7.1 6.1 4.9 1.0 0.9 0.8 14.4 15.2 17.1 5.59 6.39 7.94
Source: Company data, Maybank Kim Eng
(New)
OVERWEIGHT
Steven ST Chan
(852) 2268-0645
[email protected]
June 2, 2014 2
Diversified Financials
Contents
Two most important charts/tables .................. 3
Investment summary .................................. 4
Outlook and risks of shadow banks in China ....... 8
Business model of Credit China – Shift towards
micro-finance and P2P online lending ............ 25
Business model of China Financial Services –
Regional expansion & new product development ... 32
Business model of Far East Horizon – Integrated
services help asset quality ......................... 39
Valuation and Recommendation ................... 44
Credit China Holdings (8207 HK) .................. 47
China Financial Services Holdings (605 HK) ...... 51
Far East Horizon (3360 HK) ......................... 56
June 2, 2014 3
Diversified Financials
Two most important charts/tables
Figure 1: The shadow bank system in China
Source: Maybank Kim Eng
Figure 2: Total amount of shadow bank assets in China
Source: Maybank Kim Eng
Banks, non-bank FIs and the public
have helped partially boost shadow
bank assets in China, with a total
estimated amount of CNY23.1t in 2013
With potential tightening of
regulations, we expect growth in
shadow bank assets to moderate to
15-16% p.a. during 2014-15
June 2, 2014 4
Diversified Financials
Investment summary
Shadow banks outperformed other financials
The valuation of key Hong Kong-listed China shadow banks has
outperformed the MSCI China Financial index since the beginning of 2014.
We believe investors have concerns about the asset quality of H-share
banks and margin pressure facing China property companies.
The competitive advantage shadow banks have over commercial banks is
their ability to provide quick short-term liquidity to customers. They can
serve customers who need urgent bridging loans for their businesses. But
this does not mean that the quality of their customers is inferior to banks.
Shadow banks – Not necessarily a monster
Due to the tight capital requirement to restrict investment in risky
projects, asset quality of trust products has remained healthy with only
five defaults over the past two decades. The CBRC has recently issued new
guidelines to prohibit trust companies from making proprietary
investments in non-standardized assets. Still, with the recent default of
two coal mining-related trust products and the decline in returns, we
expect growth in trust assets to moderate to 15-20% p.a. during 2014-15
(+46% YoY in 2013).
Competition for pawn loans has remained gentle in recent years given the
moderate granting of new pawnshop licenses. Also, the maximum leverage
ratio of pawnshops is also low at 1x. Most pawnshops in China made new
pawn loans and entrusted loans to customers based on a loan-to-value
(LTV) ratio of below 60% of the property collateral. Hence, the loss ratio of
pawn loans was close to 0%. With funding constraints, Euromonitor expects
pawn loans to have a 19% CAGR during 2013-16 (+22% YoY in 2013).
Figure 3: Summary of key regulations on China shadow banks
Trust Assets Pawn Loans Entrusted Loans Finance
Leasing
Internet
Lending
Micro Credit Private
Equity
Asset size in 2013
(CNYb)
10,907 338 8,298 2,100 90 835 193
Forecast CAGR
(2013-16)
15-20% p.a. 19% 5% p.a. 20-30% p.a. 57.2% 28.3% 5.3%
Pricing cap NA 6M benchmark
rate
4x PBOC
benchmark rate
4x PBOC
benchmark rate
NA 4x PBOC
benchmark rate
NA
Total gross return NA >30% >30% 10-15% 14-16% for
second-lien
mortgages
>30% NA
Financial leverage
limit (x)
NA 1 NA 10 NA 0.5 NA
NPL ratio 5 defaults
over the past
2 decades
We expect consolidation in the shadow bank industry. This is due to the potential: (i) regulatory liberalization of micro-finance business of small-loan finance companies; (ii) launch of regulations on online P2P lending business; and (iii) tightening of commercial banks’ investment in shadow bank assets. Leading shadow banks with strong industry expertise, cheap steady funding sources, proactive business diversification and disciplined risk management should be winners.
June 2, 2014
C
h
i
n
a
S
E
C
T
O
R
R
E
S
E
A
R
C
H
|
SEE PAGE 62 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS
Diversified Financials
Shadow banks: Hidden treasures
? Initiate sector at OVERWEIGHT; CFSH & FEH as top picks.
? Regulatory changes will moderate shadow bank asset growth.
? Market consolidation will benefit well-disciplined leaders.
What’s New
Shadow banks – Survival for the fittest. We expect consolidation
in the shadow bank industry. This is due to the potential: (i)
regulatory liberalization of micro-finance business of small-loan
finance companies; (ii) launch of regulations on online P2P lending
business; and (iii) tightening of commercial banks’ investment in
shadow bank assets. Leading shadow banks with strong industry
expertise, cheap steady funding sources, proactive business
diversification and disciplined risk management should be winners.
Potential regulatory changes. The CBRC has recently issued new
guidelines to prohibit trust companies from making proprietary
investments in non-standardized assets. The PBOC and CBRC have
proposed to remove the financial leverage and loan size restriction
for micro-finance business of small-loan finance companies. The
PBOC will soon launch rules to regulate deposit-taking of online
third-party payment providers and online P2P lending. We believe
this should result in: (i) More conservative investments by trust
companies; (ii) micro-finance gradually replacing entrusted loans;
and (iii) the development of online P2P secured lending.
Further improvement in asset quality. Market has maintained the
perception that shadow bank assets are of poor quality. However,
well-disciplined and risk-cautious shadow banks reported better
asset quality than banks (close to 0% loss rate). We believe the
regulatory changes will help expel bad players from the industry
and further improve the quality of shadow bank assets.
Initiation of leading shadow banks. We expect the development
of internet finance by Credit China will help boost its fee income
and lower its credit risk. CFSH will benefit from cheap funding and
customer referrals from its strategic partners. The customer mix
diversification and development of side-businesses for customers
will provide an early risk alert for FEH to reduce exposures to
deteriorating customers and industries. We initiate Credit China at
HOLD (due to rich valuation) and both CFSH and FEH at BUY.
What’s Our View
We expect China’s shadow bank assets will grow slower, at 15-16%
p.a. during 2014-15 (CNY23.1t in 2013; +43% YoY). Still, we believe
Credit China, China Financial Services Holdings (CFSH) and Far East
Horizon (FEH) will remain among the leaders in their niche shadow
bank businesses. Initiate sector with OVERWEIGHT view.
Analyst
Financial summary
Company BB SP TP Upside Net profit (HKDm) EPS CAGR P/E (x) P/B (x) ROE (%) Yield (%)
name code Rating (HKD) (HKD) (%) 2013 2014F 2015F 2014-2016 2013 2014F 2015F 2013 2014F 2015F 2013 2014F 2015F 2013 2014F 2015F
Credit China 8207 HK HOLD 1.84 1.85 +0.5 181 145 185 41.6% 25.3 40.4 31.7 3.5 3.3 3.0 14.7 8.8 10.1 0.67 0.50 0.64
CFSH 605 HK BUY 0.68 0.95 +39.7 237 363 489 27.7% 8.8 6.4 4.9 1.0 0.9 0.7 12.3 14.8 16.0 1.47 1.47 1.47
FEH 3360 HK BUY 5.27 7.15 +35.7 2,450 2,851 3,539 26.4% 7.1 6.1 4.9 1.0 0.9 0.8 14.4 15.2 17.1 5.59 6.39 7.94
Source: Company data, Maybank Kim Eng
(New)
OVERWEIGHT
Steven ST Chan
(852) 2268-0645
[email protected]
June 2, 2014 2
Diversified Financials
Contents
Two most important charts/tables .................. 3
Investment summary .................................. 4
Outlook and risks of shadow banks in China ....... 8
Business model of Credit China – Shift towards
micro-finance and P2P online lending ............ 25
Business model of China Financial Services –
Regional expansion & new product development ... 32
Business model of Far East Horizon – Integrated
services help asset quality ......................... 39
Valuation and Recommendation ................... 44
Credit China Holdings (8207 HK) .................. 47
China Financial Services Holdings (605 HK) ...... 51
Far East Horizon (3360 HK) ......................... 56
June 2, 2014 3
Diversified Financials
Two most important charts/tables
Figure 1: The shadow bank system in China
Source: Maybank Kim Eng
Figure 2: Total amount of shadow bank assets in China
Source: Maybank Kim Eng
Banks, non-bank FIs and the public
have helped partially boost shadow
bank assets in China, with a total
estimated amount of CNY23.1t in 2013
With potential tightening of
regulations, we expect growth in
shadow bank assets to moderate to
15-16% p.a. during 2014-15
June 2, 2014 4
Diversified Financials
Investment summary
Shadow banks outperformed other financials
The valuation of key Hong Kong-listed China shadow banks has
outperformed the MSCI China Financial index since the beginning of 2014.
We believe investors have concerns about the asset quality of H-share
banks and margin pressure facing China property companies.
The competitive advantage shadow banks have over commercial banks is
their ability to provide quick short-term liquidity to customers. They can
serve customers who need urgent bridging loans for their businesses. But
this does not mean that the quality of their customers is inferior to banks.
Shadow banks – Not necessarily a monster
Due to the tight capital requirement to restrict investment in risky
projects, asset quality of trust products has remained healthy with only
five defaults over the past two decades. The CBRC has recently issued new
guidelines to prohibit trust companies from making proprietary
investments in non-standardized assets. Still, with the recent default of
two coal mining-related trust products and the decline in returns, we
expect growth in trust assets to moderate to 15-20% p.a. during 2014-15
(+46% YoY in 2013).
Competition for pawn loans has remained gentle in recent years given the
moderate granting of new pawnshop licenses. Also, the maximum leverage
ratio of pawnshops is also low at 1x. Most pawnshops in China made new
pawn loans and entrusted loans to customers based on a loan-to-value
(LTV) ratio of below 60% of the property collateral. Hence, the loss ratio of
pawn loans was close to 0%. With funding constraints, Euromonitor expects
pawn loans to have a 19% CAGR during 2013-16 (+22% YoY in 2013).
Figure 3: Summary of key regulations on China shadow banks
Trust Assets Pawn Loans Entrusted Loans Finance
Leasing
Internet
Lending
Micro Credit Private
Equity
Asset size in 2013
(CNYb)
10,907 338 8,298 2,100 90 835 193
Forecast CAGR
(2013-16)
15-20% p.a. 19% 5% p.a. 20-30% p.a. 57.2% 28.3% 5.3%
Pricing cap NA 6M benchmark
rate
4x PBOC
benchmark rate
4x PBOC
benchmark rate
NA 4x PBOC
benchmark rate
NA
Total gross return NA >30% >30% 10-15% 14-16% for
second-lien
mortgages
>30% NA
Financial leverage
limit (x)
NA 1 NA 10 NA 0.5 NA
NPL ratio 5 defaults
over the past
2 decades