Equity Market Equity Morning Notes

Cyrus Tai (SFC CE:BKJ685) (852) 3519 1292 August 27, 2021 Friday Market Wrap HSI▼1.08% HSCEI▼1.53% Turnover HK$138.6 bn▼21% (30-day average) SSE Composite▼1.09% SZSE Component ▼1.92% Sector tracking Stock tracking 1D ▲% 1Y ▲% Shanghai Connect 1D ▲% Connect 1D ▲%

Iron & Steel 7.9 Marine 303.9 ZMJ(564) 13.9 ZMJ(564) 13.9

Household Prod 2.6 Textiles 221.7 MAANSHAN(323) 12.6 CNLP(1589) 13.7

Logistics 2.5 Chemicals 205.1 BLUE MOON(6993) 9.3 MAANSHAN(323) 12.6

Coal 1.6 Machinery 178.2 KAISA(1638) 8.2 BLUE MOON(6993) 9.3

Non-ferrous 1.5 Auto 173.3 SMOORE(6969) 7.6 KAISA(1638) 8.2

Market Highlight Bank of (23 HK)：A Long history with broad network Incorporated in 1918, The , Limited (“BEA”) is leading Hong Kong-based financial services group with total consolidated assets of HK$884.4 billion (US$114.1 billion) as of 31st December, 2020. BEA offers a comprehensive range of corporate banking, personal banking, wealth management, and investment services to customers throughout Greater China and beyond. BEA maintains one of the largest retail networks in Hong Kong, while The Bank of East Asia (China) Limited (“BEA China”), a wholly-owned subsidiary of BEA, operates one of the most extensive networks of any foreign bank in mainland China, with outlets in 40 cities nationwide. BEA’s share price was under pressure BEA's share price trend in the past ten years In March 2021, BEA reached a 15-year BEA's share price (HKD) exclusive bancassurance partnership with AIA. 40 As part of the transaction, AIA acquired 100% of BEA Life. It was learned that BEA and Elliott had worked on a strategic review over the 35 direction of BEA for months, and this transaction was prodded by Elliott. 30

25 In August 2018, the HSI announced the 20 In February 2016, US hedge fund Elliott Management, the fourth largest shareholder, quarterly review results. BEA, which had called for BEA to put itself up for sale. been a blue chip stock since 1984, was removed from the list of constituent 15 Kwok-po, chairman of BEA, refused to sell, but increased his stakes instead. stocks of the HSI, taking effect in early September 2018. 10 2011/07 2014/07 2017/07 2020/07 Source: Bloomberg, Internet, Orient Securities (Hong Kong) BEA has a history of 100 years

Background: BEA was incorporated in Hong Kong in 1918 with a presence in Mainland operations: Milestones included: the introduction of foreign currency credit mainland China by opening the first branch in Shanghai in 1920. The shares of BEA card settlement services, the establishment of the first Sino-foreign joint-venture were traded in Hong20 世纪 Kong 下半叶since the early 1920s. BEA contributed to the war against company, the setup of the first Sino-foreign joint-venture company, the first to foreign invasion by promoting Chinese National Salvation bonds to Hong Kong provide property mortgages, and the incorporation of the first Sino-foreign joint-venture residents in 1939, raising millions of dollars in support of China’s war effort. finance company outside special economic zones, etc.

1910s – 1940s 1950s – 1970s 1980s – 1990s Since 2000s

Supporting Hong Kong's industry: In 1950s-1970s, BEA helped Global business expansion: In 2001, it expanded its banking business in the West Coast of the US finance Hong Kong’s industrial boom, spreading “Made in Hong through acquisitions. In 2007, BEA China, a wholly-owned banking subsidiary of BEA, became one of Kong” products around the world. In 1952, the Singapore branch the first locally incorporated foreign banks in mainland China. In 2008, RMB debit and credit cards was opened. In the 1970s, BEA was the first local financial were launched. In 2018, a branch was established in Qianhai, Shenzhen. Also, it became one of the institution in HK to link branches by computer, and jointly launched initiating banks of the first trade financing platform leveraging blockchain technology in Hong Kong. the first HKD credit card with Bank of America. Source: Company, Internet, Orient Securities (Hong Kong)

Orient Securities (Hong Kong) Limited 1 August 27, 2021

BEA outlets are located in Greater China, Southeast Asia, the UK and the US, etc. BEA’s Network at a Glance

1. Head Office – Hong Kong

Greater China (ex-Hong Kong) 2. Shanghai 16. Xi'an 30. Jiangmen 3. Beijing 17. Zhengzhou 31. Qingyuan 4. Urumqi 18. Wuhan 32. Guangzhou 5. Harbin 19. Hefei 33. Foshan 6. 20. Nanjing 34. Shaoguan 7. Dalian 21. Nanchang 35. Zhuhai 8. Tianjin 22. Chengdu 36. Jieyang 9. Shijiazhuang 23. Chongqing 37. Dongguan 10. Jinan 24. Changsha 38. Shenzhen 11. Qingdao 25. Fuzhou 39. Zhongshan 12. Kunshan 26. Xiamen 40. Huizhou 13. Suzhou 27. Kunming 41. Shantou 14. Hangzhou 28. Nanning 42. Macau 15. Ningbo 29. Zhaoqing 43. Taipei Overseas BEA maintains one of the largest retail networks in Hong Kong, with full- Singapore Malaysia service branches, SupremeGold and SupremeGold Private Centres for Singapore Labuan affluent and premium affluent customers respectively. In mainland China, Kuala Lumpur BEA’s wholly-owned subsidiary, BEA China operates outlets in 40 cities United Kingdom United States nationwide. Overseas, BEA maintains an active presence in Southeast Asia,

the UK, and the US, serving customers through around 170 outlets London New York worldwide. Birmingham Los Angeles Manchester Source: Company, Orient Securities (Hong Kong)

Hong Kong operations contributed the most to 2021H1 revenue and pre-tax profit 2021H1 segment results

2021H1 Hong Kong segment results

Group 2021H1 net attributable profit of HK$2.67bn was up 74.3% yoy, mainly driven by a significant decrease in impairment losses in Mainland China and Hong Kong. Credit costs improved because of fewer loan downgrades, as well as a positive impact from updates to economic variables in the Bank’s expected credit loss model. Hong Kong operations contributed 58% of BEA's overall operating income in 2020 and 63% of its pre-tax profit. Pre-tax profit increased by 40.6% yoy to HK$1,988m in 2021H1, mainly driven by higher fee income, reduced impairment losses and a positive swing in mark-to-market revaluations, as the business conditions and outlook improved. The Bank focused on growing non-interest income under the low-for-long interest rate environment. Efforts to uplift frontline productivity and drive fee-generating business were successful and net fee and commission income increased by 21.7% yoy. Net insurance profit also rose notably on improved results from underwriting and mark-to-market revaluations. The Bank maintained a cautious approach to lending at the beginning of the year, and started to take a more proactive stance in the second quarter as the macroeconomic outlook improved. Demand for corporate loans showed good momentum as companies began to plan for the post-pandemic recovery. Mainland operations contributed 29% of BEA's overall operating income in 2021H1 and record a pre-tax gain of approximately HK$415M. Mainland China was the first major economy to growth following the outbreak of the COVID-19 pandemic last year and its economy surged by 12.7% compared to one year ago. BEA China turned a loss of HK$ 468m into a profit of HK$279m compared to the same period last year. BEA China placed emphasis on sustainable income growth through deepening client relationships, improving product and service offerings, and laying a strong institutional foundation. In 2021H1, BEA China’s total loans grew by double digits to reach HK$140,313 million, fuelled by an expansion in the corporate loan portfolio, now comprising a more diversified and higher quality client base. BEA China will continue to expand the customer base, further diversify loan portfolio and revenue sources and drive fee income. Moreover, it will be placed more on cross-selling of treasury products, transaction banking service, cross- boundary financing solutions and on-and-offshore debt capital market service. Source: Company, Orient Securities (Hong Kong)

Orient Securities (Hong Kong) Limited 2 August 27, 2021

The decline in provisions boosted net profit

BEA’s 2021H1 operating income by business line BEA’s 2020H1 operating income by business line BEA’s operating income

NII Net fee and commission income Others NII Net fee and commission income Others Operating income (HK$B)

16% 11% 20

15 17% 18% 10 66% 5 72% - 2018 2019 2020 20H1 21H1 BEA’s 21H1 operating income slightly declined 0.7% yoy, of which NII, net fee and commission income and others accounted for 66%, 18% and 16% of operating income respectively, compared with 20H1’s 72%, 17% and 11%. NII decreased by 10% yoy, while net fee and commission income and others rose 7% and 46% yoy, respectively. The non-interest income rose by 22.5% to HK$2,892 million, supporting a steady of operating income.

BEA’s operating profit before provision BEA’s net profit BEA’s impairment loss Operating profit before provision (HK$B) Net profit (HK$B) Impairment loss (HK$B)

12 8 8 10 6 6 8 6 4 4 4 2 2 2 - - - 2018 2019 2020 20H1 21H1 2018 2019 2020 20H1 21H1 2018 2019 2020 20H1 21H1 BEA’s operating income in 20H1 decreased 0.7% yoy with operating profit before provision down 9%, while net profit surged 50%, mainly due to a sharp decrease of 18% in impairment losses. The Impairment losses on financial instruments fell sharply, from HK$2,675 million in 2020 to HK$581 million in 2021.

The Group’s impaired loan ratio fell from 1.26% at the end of December 2020 to 1.21% at the end of June 2021. The impaired loan ratio for Hong Kong operations rose from 0.75% to 0.79%, while that for Mainland China operations fell from 3.10% to 2.63%. Operating profit after impairment losses amounted to HK$3,187 million, an increase of HK$1,965 million, or 160.8%. Source: Bloomberg, Company, Orient Securities (Hong Kong)

Spread business was expected to recover in 2022 BEA’s net interest income BEA’s net Interest margin

NII (HK$B) NIM (%) 16 2.2

14 2 12 1.8 10 8 1.6 6 1.4 4 1.2 2 0 1 2016 2017 2018 2019 2020 2021E 2022E 2023E 2016 2017 2018 2019 2020 2021E 2022E 2023E

BEA’s earnings per share BEA’s dividend per share

EPS (HK$) DPS (HK$) 2.00 1.00

1.00 0.50

0.00 0.00 2019 2020 2021E 2022E 2023E 2019 2020 2021E 2022E 2023E

BEA’s 2020 revenue was mainly dragged down by the spread business. During the period, NIM narrowed and NII slid yoy. According to Bloomberg’s consensus, BEA’s NIM may further shrink yoy in 2021, whilst NII will also dwindle, but the decline will be largely narrowed. In 2022-23, NIM may rebound, while NII will also log yoy growth. As for EPS and DPS, the market expects a positive growth in 2021-2023. Source: Bloomberg, Company, Orient Securities (Hong Kong)

Orient Securities (Hong Kong) Limited 3 August 27, 2021

Revenue Operating Income by segment Financial Summary Hong Kong operations (HK$m) 2018 2019 2020 Operating income (HK$M) Mainland operations NII 12,959 14,566 11,550 20,000 Overseas operations Corporate management Net fee and commission 2,653 2,875 2,922 2% 15,000 Other operating income 1,460 2,314 2,838

10% Operating income 17,072 19,755 17,310 10,000 Profit before provision 8,509 9,864 8,347 Net profit 6,509 3,260 3,614 5,000 29% 58% EPS (HKD) 2.07 0.89 0.97 - DPS (HKD) 1.18 0.46 0.40 2016 2017 2018 2019 2020 Dividend payout (%) 57 52 41 BEA’s operating income rose during 2017- Hong Kong operations contributed the most NII, operating income and profit before provision 2019, and then slid yoy during the COVID-19. (58%) to overall operating income in 2020, increased in 2019 and declined in 2020, while net followed by mainland operations (29%). profit saw a reverse trend in 2019-2020.

Strength Weakness

 BEA is a leading Hong Kong financial  Spread business will be under services group and one of the banks with Valuation pressure from lower interest rates, the largest retail network in Hong Kong. attractiveness while decreased NII dragged down  Established in 1918, BEA enjoys brand 5 operating income. advantages. 4  Asset quality may face 3 uncertainties due to economic Dividend 2 Growth fluctuations or project generosity 1 momentum performance. 0 Opportunity Threat

 Headquartered in Hong Kong, BEA has been Cash flow Balance sheet  Fluctuations in macroeconomic rooted in the Greater China Region for adequacy stability conditions may adversely affect years. With 1.9 million customers in the BEA’s results. Greater Bay Area alone, BEA is expected to  The tightening of supervision may seize the opportunity in the development put pressure on BEA's cost control. of the region.  With several licenses, BEA can engage in diversified businesses related to banking and wealth management, riding on a huge multi-channel distribution network.

Key Risk Valuation Our Opinion

 Fluctuations in macroeconomic  BEA has a long history and a brand advantage conditions may put pressure on asset P/E 12.9x quality and results.  With a huge network in Hong Kong and the Mainland, it is expected to benefit the  Spread business may be impacted by development of the Greater Bay Area lowering interest rates.  Spread business may be impacted by a Tighter regulation may make cost control P/B  0.37x downturn in interest rates more difficult.  Economic fluctuations may bring uncertainty to the asset quality and performance Dividend Yield 3.20%

Relative Performance P/E Band P/B Band

BEA’s share price bounced up after a six- BEA’s P/E is 12.9X, below the average. BEA’s P/B is 0.37X, lower than its 5-year average. month sliding.

Orient Securities (Hong Kong) Limited 4 August 27, 2021

Analyst Certification I, Cyrus Tai (Tai Wai Ho), being the person primarily responsible for the content of this research report, in whole or in part, hereby certify that: (1) all of the views expressed in this report accurately reflect my personal view about the subject company(ies) and its (or their) securities; (2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report, or our Department; (3) I am not, directly or indirectly, supervised by or reporting to our Investment Banking Department; (4) the subject company(ies) do(es) not fall into the restriction of the quiet period as defined in paragraph 16.5(g) of SFC Code of Conduct; (5) I and my associates do not deal in or trade in the stock(s) covered in this report within 30 calendar days prior to the date of issue of the report; (6) I and my associates do not serve as an officer(s) of the listed company(ies) covered in this report; and (7) I and my associates have no financial interests in relation to the listed company (ies) covered in this report.

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Orient Securities (Hong Kong) Limited 5 August 27, 2021