BCHB - Takes a 19.99% stake in Bank of Yingkou

BCHB’s unit, CIMB Group, has entered into a share subscription agreement with Bank of Yingkou Co., Ltd. of China, to buy 141.2m new shares for RMB348.8m (RM156.2m) cash. The new shares represent a 19.99% equity interest, and on completion, CIMB Group will be the bank’s single largest shareholder.
About Bank of Yingkou:
 Largest commercial bank in Yingkou city, which has a population of 2.24m, and is located in Liaoning Province in north-east China.
 Was a city commercial bank until recently, when it received approval to operate as a regional bank, giving it a potential customer base of 42m people.
 Incorporated in Apr 1997, from the amalgamation of 13 credit cooperatives.
 Recognised by the China Banking Regulatory Commission as one of the best national financial institutions in providing loans to SMEs.
 Has a total asset of RMB13.9b (RM6.2b) as at 31 Dec 2007 and reported a net profit of RMB198.1m (RM88.7m) in FY07.
(Source: Bursa Malaysia Announcement)

Comments:
A baby-step for BCHB in venturing into the humongous Chinese market. BCHB’s acquisition is valued at approximately 1.58x the adjusted book value of Bank of Yingkou – a fair price in our view.
Overall, we view this new investment as short-term neutral but long-term positive for BCHB. Bank of Yingkou is said to be looking to expand to Shenyang, the city in Liaoning province earmarked to be an Islamic finance hub of China, where BCHB’s Islamic financing niche could be put to good use.
We are not sure whether BCHB will be able to equity account for its investment in the Bank of Yingkou, but assuming it can, at a similar net profit of RM89m from Bank of Yingkou in FY08, and a financing cost of 7% p.a. by BCHB, we estimate the new investment in Bank of Yingkou could net a small bottomline enhancement of RM7m for BCHB in FY08, assuming a full year impact.
We maintain our earnings forecasts and Hold call on BCHB. Our target price, which is based on 14x PER on FY09 earnings is under review