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The Hidden Value of Dah Sing Financial May Shine One Day

Dah Sing Financial (SEHK: 440) is one profitable stock to keep an eye on. Parent of the Dah Sing Banking Group (SEHK: 2356), it holds one of the only two licensed banks independently controlled by a local Hong Kong family. With the upside factors more than compensating for the downside factor, Dah Sing Financial currently trades at an attractive valuation.

Weak recent price performance 

The stock price of Dah Sing Financial once rallied to $65.55 in 2017, following the announcement of the sale of its life insurance unit in Hong Kong and Macau for HK$8 billion. But soon after the completion of the transaction and the distribution of a disappointing special dividend ($6.6 per share, totaling HK$2.2 billion or just 27.5% of the sale proceed), the stock price turned south and once hit a low at $37.35 in January 2019. Though the stock price has rebounded a little bit recently to the current level of $42.8 (as of 20 March 2019), in tandem with the strong market movement since January 2019, it is still below the $50 level at which the stock was roughly trading before the announcement of the sale of insurance unit in June 2016.

Deep discount to fundamental value 

The fundamental values of many stocks are disputable, but in the case of Dah Sing Financial, it should be relatively simple since the major assets of the company are shares of another listed company. As of 20 March 2019, Dah Sing Financial’s market cap is $14.34 billion but its 74.42% stake in Dah Sing Banking Group alone is worth $15.69 billion, let alone a general insurance business not included in the listed subsidiary. So buying Dah Sing Financial now is not just like buying Dah Sing Banking Group at 10% off, it also means getting the general insurance business for free.

What is plaguing its market valuation then?

In a modern competitive market, almost any undervalued stock is undervalued for a reason. For Dah Sing Financial, the bad loan risk from Mainland China operation has been dragging down its market price. Its major subsidiary Dah Sing Banking Group holds 15% stake, or approximately $1.26 billion, in Bank of Chongqing (SEHK: 1963), a leading commercial bank in the largest city in Western China. For years, market has been worrying about the bad loan provisions for Mainland Chinese banks. The latest interim report shows that the impairment provision against Bank of Chongqing amounts to HK$403 million–––almost 30% of Dah Sing Banking Group’s interim profit for the half year ended June 2018. The market’s gloomy valuation of Dah Sing Financial reflects this drag down in profit brought about by its stake in the Mainland Chinese bank.

Several upsides still 

3 potential upside factors nonetheless overpass the downside factor:

1) Restructuring potential

A holding company discount exists for Dah Sing Financial right now. In recent years, the market has witnessed several restructurings of the corporate structures of a few prominent businesses owned by local Hong Kong tycoons, including the high-profile Cheung Kong-Hutchison restructuring in 2015 and Wharf restructuring in 2017. Except releasing values for stockholders, another reason for these restructurings was the passing on of family businesses; tycoons in these companies had come to retirement age and were keen to pass on their businesses to their next generation in simpler corporate structures.

The chairman and founder of Dah Sing Financial, Mr. David Shou-Yeh Wong, ages 78 now. In years to come, the market might witness a big corporate restructuring for the Wong family’s business to pass on to the next generation, which, like other restructurings, tend to drive up the fundamental valuation of the stock.

2) Special dividend

As mentioned, the company distributed just 27.5% of the proceeds from the sale of the life insurance business as a special dividend, sitting idle on the remaining $5.8 billion cash proceed. If the company cannot find other usages for the cash pile, it might as well just distribute another round of special dividend, which could be very lucrative given the significant proportion of the remainder.

3) Takeover target

Most importantly, Dah Sing Financial could be a potential target for a takeover by Mainland enterprises. Mainland Chinese enterprises have been keen on expanding influence in and control over Hong Kong business environment. The banking industry, being “the mother industry of all businesses”, is undoubtedly one industry that the Mainland enterprises cannot miss.

Dao Heng Bank was merged into DBS Group in 2001-2003. Wing Lung Bank was acquired by China Merchants Bank in 2008; Chong Hing Bank was acquired by the Chinese state-owned Yue Xiu Group in 2014; and Hang Seng Bank (SEHK: 11) was long a subsidiary of HSBC Holdings (SEHK: 5). Today, Dah Sing Financial holds one of the only two remaining licensed banks in Hong Kong independently controlled by a local family (the other being Bank of East Asia). This special status along with a high proportion of healthy local loan assets can easily warrant a 1.5-2 times price-to-book (PB) ratio should Dah Sing Financial go for sale, whereas the stock is currently trading at a low 0.57 time PB.

Investors should decide themselves whether the above upsides surpass the downside in holding the stocks. In the author’s opinion, the upsides especially the merger potential with mainland enterprises are more prominent, while the downside is just about right to push the stock to the current attractive valuation.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Alex Ng doesn't own any shares mentioned.