Dah Sing Bank/Financials:What are the likely scenarios,Upgrade DSB to Buy

　　Good deals, further unlocking value

　　Dah Sing Financials (DSF) recently announced the disposal of Dah Sing Life(DSL) for HKD8bn, and concurrently, Dah Sing Bank (DSB) entered into anagreement to distribute DSL products for HKD2.6bn, a committed fee for a 15-year partnership. The deals look positive, but we also believe the extra capitalcould be used for a series of corporate actions to unlock further value.

　　Expecting benefits from (1) a +7% annual earnings contribution from banca, (2)adoption of SOTP, with DSL disposal highlighting the need to reflect a fairtrading multiple of DSB’s core assets and (3) potentially positive corporateactions, we upgrade DSB to Buy (from Hold), and maintain a Buy call on DSF.

　　What are the potential outcomes?

　　After the disposal of its life insurance business, DSF’s core holding would be a75% stake in its banking operations DSB (2356.HK), a small general insurancebusiness, and most importantly, cash proceeds of HKD8bn, which represents48% of DSF’s current market capitalization. We believe a sensible and rationaluse of the disposal proceeds would be positive for both DSB and DSF’s shareprices. We highlight below several likely scenarios:n Special dividend: We believe a portion of the gain will be given out as aspecial dividend. Of the estimated gain of ~HKD4.1bn (assume misc.

　　expenses of 2%), we assume 25% (its average payout in the past 3 years)or HKD1bn (HKD3.1/share) will be distributed. Together with DSB’searnings, this would amount to a ~9% yield in 2016, higher than HSB’sspecial dividend yield of ~6% in its 2015 results.

　　Privatization of DSB and sale of DSF in the long run: This scenario involvesthe privatization of DSB by buying out the remaining 25% minorities. Wesee few incentives to keep two listed entities, with DSB accounting for89% of earnings and 80% of book value in DSF post-acquisition. The keyobstacle here would be how much it can offer to pay. We estimate thatwithout going to the market, DSF can offer 1.2x P/B, a decent share pricepremium of 48%. Post-privatization, the end game at a later stage could beto sell a simplified 100%-owned bank at a higher multiple.

　　Distribution of DSB shares to DSF shareholders: If DSF does not want togo through the privatization process, another way to realize the bank’svalue or increase the free float is to distribute DSB’s shares to existing DSFshareholders. And to alleviate the impact of share dilution (the Wongfamily’s stake would shrink to 31% from 41%), we expect more clarityfrom senior management in terms of a special dividend payout frominsurance disposal and the realization of remaining value in DSF.