S.Korea Financials:SLI to Buy SSC Stake from Samsung Electronics;Prefer SSC over SLI

　　Quick comment – SLI to own 72% stake in SSC: Samsung Life (SLI) madean official disclosure that it would acquire Samsung Electronics' 37.45% stakein Samsung Card (SSC). The after-market transaction is expected to becomplete by January 28. Following media reports of the deal (e.g.Moneytoday) in the morning, the share prices of both SLI and SSC rose.

　　Why is SLI buying the stake? The official disclosure stated the reasons asboosting synergies and securing stable investment returns. Aside from this, webelieve the transaction should enhance the capital structure of SLI on aconsolidated basis. It also gives SLI more flexibility in capital management andshould help it prepare for IFRS4 implementation. The other angle should bewhether SLI should convert into a financial holding company – but this wouldrequire rule changes, which have not happened. Hence, for now conversionseems unlikely, in our view.

　　We prefer SSC (rated OW) over SLI (rated UW): Earnings visibility is betterfor SSC despite the merchant cut factor, and its dividend payout is also higher.We are seeing more collaboration between Samsung financial companies,such as the launching of integrated branches, jointly set up by SamsungFire & Marine (SFM), SLI and SSC. Each of the companies hasstrengthsthat could be better utilized through collaboration, but we need to waitand see what strategy is put forth.

　　The bill related to intermediary financial holding companies is stillpending in the National Assembly. With elections coming up in April, wefind it unlikely that the bill will be passed any time soon.

　　We prefer SSC (rated OW) over SLI (rated UW): Earnings visibility is betterfor SSC despite the merchant cut factor, and its dividend payout is also higher.

　　SSC disclosed 2015 results with NP of W333bn beating our estimate(W320bn) but slightly lower than consensus (W338n). We expect resilientearnings for 2016 – NP of W310bn – with more upside risk thandownside risk to earnings. DPS for 2015 was set at W1,500, above ourforecast (W1,200) and consensus (W1,122). It implyies 52% payout ratioand 4.6% dividend yield.

　　We expect SLI's core business to remain weak, owing to negative spreadin a low interest rate environment; 4Q15 results came in weak. We believethe stock is not cheap at 0.8x P/BV vs. a 6% ROE, and dividend yield of1.6% is less attractive (27% payout).).