Equity Market Hong Kong Equity Morning Notes

Cyrus Tai (SFC CE:BKJ685) (852) 3519 1292 August 20, 2021 Friday Market Wrap HSI▼2.13% HSCEI▼2.56% Turnover HK$164.9 bn▼5% (30-day average) SSE Composite▼0.57% SZSE Component ▲0.23% Sector tracking Stock tracking 1D ▲% 1Y ▲% Shanghai Connect 1D ▲% Shenzhen Connect 1D ▲%

Printing 3.6 Marine 285.8 HUANENG POWER (902) 8.8 C TRANSMISSI (658) 15.0

Auto 0.9 Textiles 186.4 KINGDEE (268) 8.4 HUANENG POWER (902) 8.8

Textiles 0.9 Auto 179.8 KERRY PPT(683) 6.0 KINGDEE (268) 8.4

Apparel 0.5 Machinery 178.2 DONGFANG (1072) 5.4 DONGYUE (189) 7.1

Apparel 136.8 HUADIAN (1071) 4.6 KERRY PPT(683) 6.0

Market Highlight StanChart (2888 HK): Rising Focus on Four Strategic Priorities is a leading international banking group, with a presence in 59 of the world’s most dynamic markets, and serving clients in a further 85. The history of Standard Chartered in Hong Kong dates back to 1859. It is currently one of the Hong Kong SAR’s three note-issuing . As of 2020, with US$789.1bn of assets on the balance sheet, the group booked US$14.8bn of operating income. According to the 2020 annual report, they would ramp up their focus on four strategic pillars: wholesale network business, affluent client business, mass retail business and sustainability.

One of G-SIBs G-SIB list and additional capital buffer requirements As announced in 11/2010, the Financial Stability Board (“FSB”) (as of 11/2020) maintained list of 30 global systemically important banks (“G-SIB”). Bucket G-SIBs in alphabetical order within each bucket Bucket 5 and 4 with the highest additional capital buffer requirements 5 (Empty) of 3.5% and 2.5% respectively were empty. Therefore, the three banks (3.5%) 4 allocated to bucket 3 (buffer: 2.0%) were the world’s most systematically (Empty) (2.5%) important banks. In addition, 8 and 19 banks were assigned to bucket 2 3 , HSBC, JP Morgan Chase (buffer: 1.5%) and bucket 1 (buffer: 1.0%), respectively. Standard (2.0%)

Charted was classified as a “bucket 1” G-SIB. of America, Bank of China, Barclays, BNP Paribas, China 2 Construction Bank, , Industrial and Commercial Bank of (1.5%) As of 1H21, StanChart’s common equity tier 1 ratio and total capital ratio China, Mitsubishi UFJ FG

were 14.4% and 21.1%, respectively. With economic recovery, StanChart Agricultural Bank of China, Bank of New York Mellon, , , Groupe BPCE, Groupe Crédit Agricole, ING Bank, announced a US$250M share buyback to maintain the tier 1 ratio within 1 Mizuho FG, , Royal Bank of Canada, Santander, Société (1.0%) 13-14%. In addition, StanChart also disclosed resumption of 2021 Générale, Standard Chartered, State Street, Sumitomo Mitsui FG, interim dividend payments worth US$0.03 per share, or US$94 million Toronto Dominion, UBS, UniCredit, in total. Source: The FSB, Orient Securities (Hong Kong) History can be traced back to mid-19th century

Background: The Chartered Bank was incorporated in London under a Royal Merger: In 1965, the Standard Bank of South Africa merged with the Bank Charter from Queen Victoria in 1853. Chartered opened its first branches in of West Africa acquiring businesses including a banking operation in Bombay, 20Calcutta世纪 and下半叶 Shanghai in 1858, followed by Hong Kong and Singapore Nigeria. Standard Chartered Bank was incorporated in 1969 after the in 1859. In South Africa, Standard started business in Port Elizabeth in 1863, merger of Standard Bank and Chartered Bank. The Bank continuously having established a considerable number of branches. extended the network in 1990s by a series of mergers.

1853 to late 19th century Early to mid-20th century Second half of 20th century Late 20th century to early 21st century

M&A: StanChart entered an agreement with Australia and New Zealand Banking Network expansion: In early 1900s, Chartered was the first foreign bank (ANZ) to require Mid-east and South Asia business of Grindlays. In 2005, StanChart allowed to operate in New York. Standard had about 600 branches or acquired Korea First Bank, which was the largest M&A projects since the offices in Africa in 1950s. By acquiring Eastern Bank in 1957, Chartered establishment of StanChart. In 2006, Temasek, Singapore's state-owned investment had presence in Aden, Bahrain, Beirut and Cyprus. company bought 12% stake in Standard Chartered from the Khoo family, becoming the largest shareholder. It further grew with a series of acquisitions, including American Express. Source: Internet, Orient Securities (Hong Kong)

Orient Securities (Hong Kong) Limited 1 August 20, 2021

By client segment, CCIB business contributed the largest operating income and pre-tax profit Underlying operating income and pre-tax profit by client segment

(US$m) Underlying operating income Underlying profit before taxation

20H1 21H1 YoY(%) 20H1 21H1 YoY(%) CCIB 4,655 4,292 (8) 1,279 1,821 42 CPBB 2,909 2,969 2 417 778 87 Central & other items (segment) 483 357 (26) 259 83 (68) Total 8,047 7,618 (5) 4,172 2,508 37 1H21 underlying operating income 1H21 underlying profit before taxation

1H21 operating income 1H21 profit before taxation

Central & other items (segment) Central & other items (segment)

CPBB CPBB

CCIB CCIB

0% 20% 40% 60% 0% 50% 100% Source: Company, Orient Securities (Hong Kong) US$51m release in overlay, statutory profit before tax up 57% to US$2.6bn in 1H21, beyond expectation Corporate, Commercial & Institutional Banking income, accounting for more than a half of the group’s revenue, declined 7% in 1H21, with a 31% reduction in cash management due to the impact of lower interest rates and lower trading gains in financial markets resulting from a non-repeat of the exceptional market volatility experienced in 1H’20. CCIB profit rose 42% as the decrease in credit impairment more than offset lower income, increased expenses and a non-repeat of a US$165M other impairment recovery in 1Q20. Consumer, Private & Business Banking income increased 2%, and was flat on a constant currency basis, as best-ever wealth management performance and strong growth in mortgage & auto income more than offset the impact of lower interest rates on retail deposits. CPBB profit increased 87% driven mainly by higher income and significantly lower credit impairment. Expenses climbed 3% but were flat on a constant currency basis.

Central & other items (segment) profit tumbled 68% to US$83M with income down 26%, reflecting lower realisation gains within treasury.

Expenses were up 43%, reflecting the normalisation of performance-related pay accruals.

By region, Greater China and North Asia contributed the largest operating income and pre-tax profit Underlying operating income and pre-tax profit by region (US$m) Underlying operating income Underlying profit before taxation 20H1 21H1 YoY(%) 20H1 21H1 YoY(%) Asia 5,520 5,463 (1) 1,590 2,239 41 Africa & Middle East 1,255 1,250 (0) 90 475 -

Europe & Americas 1,095 993 (9) 356 337 (5)

Central & other items (region) 177 (88) (150) (81) (369) - Total 8,047 7,618 (5) 4,172 2,508 37 Asia profits rose 41% as the decrease in credit impairment more than offset lower income, increased 1H21 underlying operating income expenses and a non-repeat of a US$165M other impairment recovery in 1Q20. Income slipped 1% Asia or 3% on a constant currency basis with a strong wealth management performance offset by lower trading income and the impact of the lower interest rate environment. Africa & Middle East Africa & Middle East profits hiked over five-fold to US$475M, the highest interim profit performance Europe & Americas in the last five years, due to a US$410M slide in impairments. Income was flat and up 1% on a constant currency basis, with growth in wealth management income and strong pipeline conversion Central & other items (region) offsetting the impact of interest rate cuts. Expenses edged up 3% on a constant currency basis. Europe & Americas had a net release in credit impairment which was more than offset by lower 13% income and increased costs leading to a 5% cut in profits. Income tumbled 9%, or 4% excluding negative movements in DVA, reflecting lower trading gains resulting from a non-repeat of the 16% exceptional market volatility experienced in 1H20. Central & other items (region) recorded a loss of US$369M with income down US$265 million due to lower returns paid to treasury on the equity provided to the regions in a lower interest rate 72% environment and increased expenses reflecting a normalisation of performance-related pay accruals. Source: Company, Orient Securities (Hong Kong)

Orient Securities (Hong Kong) Limited 2 August 20, 2021

Business model: Transformation on track Streamlined four separate businesses into two In January 2021, they streamlined the organisation by integrating existing business units into two new segments: Corporate, Commercial & Institutional Banking (CCIB); and •Supporting companies across the world, from small and medium-sized Consumer, Private and Business Banking (CPBB). The creation of enterprises to large corporates and the CCIB segment, bringing together Corporate & Institutional CCIB institutions, both digitally and in Banking and Commercial Banking, simplifies the way they work person globally, keeping their distinct local client focus. Their Retail and Private Banking units are now CPBB. The change will help the retail businesses deliver services more effectively to clients, having a more global approach while serving clients locally. They •Working with small businesses and individuals , from mass-market have also streamlined the four international regions. Their new clients to high-net-worth Asia region (made up of former Greater China & North Asia and individuals, both digitally and in ASEAN & South Asia regions) will allow them to make the most CPBB person, including country-level of regional opportunities and deliver their services more support effectively across the different Asian markets.

Source: Company, Orient Securities (Hong Kong)

Ramping up the focus on four strategic pillars As they look to move from transforming the bank to becoming a leader in global finance in the next five years, they have refreshed the strategy onto four strategic priorities and three enablers. This extension of the existing strategy allows them to focus on the key areas that will help them in the next phase of development. Four strategic pillars include wholesale network business, affluent client business, mass retail business and sustainability, while three critical enablers involve people and culture, new ways of working and innovation. The 2021 strategy aims to invest in the strategy and navigate the continued uncertainties through 2021; rejuvenate growth with early results from the sharpened strategy by 2023; and emerge as a leader with future-proof competitive advantages by 2025. They strive to be the number one wholesale digital banking platform; be among the top three affluent brands; double the mass presence; and become a market leader in sustainability.

StanChart proposes four strategic priorities

Wholesale Network Wealthy customer Mass retail banking Sustainability Business business •Enhancing our value •To become the leading private- •To become the leading •Focusing on growing our propositions and client sector catalyser of finance for international wholesale bank in affluent client business (Retail solutions, and deepening talent the SDGs where it matters most emerging markets Banking Priority and Premium, and capabilities across digital – in Asia, Africa and the Middle sales and marketing as well as East •Taking leading positions in high- and Private Banking clients) return and high-growth sectors across our top markets with data and analytics •Having a net zero financed •Driving "capital-lite" products, outstanding wealth •Building strategic enablers to carbon emissions target by 2050 while building a leading management and international become the partner of choice to sustainable finance franchise propositions leading global and regional and expanding the credit •Delivering personalised companies origination and distribution solutions and deepening client ecosystem engagement by leveraging data and analytics

Source: Company, Orient Securities (Hong Kong)

Dividends to resume gradually as the market awaits a gain in results

StanChart’s EPS StanChart’s DPS According to the consensus, StanChart’s

EPS (USD) DPS (USD) EPS is expected to further rise yoy in 1.00 0.35 2021-2023. DPS will also steadily pick up 0.30 in 2021-2023 with the lifting of British 0.80 0.25 regulatory requirements. In addition, 0.60 0.20 the group also forecasts revenue will return to 5%-7% growth from 2022, 0.15 0.40 whilst the credit impairment pressure in 0.10 2021 will be eased compared with last 0.20 0.05 year. 0.00 0.00 2019 2020 2021E 2022E 2023E 2019 2020 2021E 2022E 2023E Source: Bloomberg, Company, Orient Securities (Hong Kong)

Orient Securities (Hong Kong) Limited 3 August 20, 2021

Revenue Income by segments Financial Summary Corporate and insitutional banking (US$) 2018 2019 2020 Revenue (USD) Retail banking 16,000 Commercial banking Net interest income 7,795 7,667 6,852 Private banking Net fee income 3,492 3,522 3,160 15,500 Central & other items (segment) Other operating 4% 3,502 4,228 4,742 15,000 4% income Operating income 14,789 15,417 14,754 14,500 10% Pretax income 2,548 3,713 1,613 14,000 49% Net income 1,054 2,303 724 13,500 34% EPS (¢) 18.7 57.0 10.4

13,000 DPS (¢) 21.0 7.0 9.0 2016 2017 2018 2019 2020 Dividend payout ratio 112 12 87 Revenue increased in 2017-2019, and then Corporate and institutional banking Both overall revenue and profit tumbled as net declined yoy during the 2020 pandemic. accounted for the largest share of the group's interest income and fee income declined last year, basic revenue by client segment in 2020, while dividend payment was temporarily suspended reaching 49%. amid the 2020 pandemic in response to regulatory requirements.

Strength Weakness

 The group is a large financial group with Valuation  Operating business globally may be leading edges in the world, with a attractiveness exposed to regulatory risks 5 diversified business network and solid  Spread business will be under strength 4 pressure from the low rate  StanChart’s history can be traced back to 3 environment 1853, with long brand reputation Dividend 2 Growth generosity 1 momentum 0 Opportunity Threat

 The group delivered differentiated network Cash flow Balance sheet  Recurrence of COVID-19 may affect and affluent businesses, optimized returns adequacy stability the global economy, client activity in India, Korea, the UAE and Indonesia and credit quality  The group invested heavily in what they  Facing the risks brought by expect to be transformational digital geopolitical matters and initiatives, to increase operational macroeconomic concerns efficiency and improve clients’ experience (especially the increasing risk of sovereign default)

Key Risk Valuation Our Opinion

 Macroeconomic concerns may put  The group is a leading global financial group pressure on results and asset quality P/E 59.5x with long brand history and distinct strengths  Spread business is under pressure from  Their four strategic pillars may help highlight low or negative interest rates advantages and boost future growth  Spread business is under pressure from low  Global business faces geopolitical and P/B 0.43x rate environment regulatory risks  Geopolitics, regulatory risks and macroeconomic concerns, etc. Dividend Yield 1.46%

Relative Performance P/E Band P/B Band

The share price outperformed the HSI The P/E ratio is 59.5x, way above the The P/B ratio is 0.43X, which is lower than its in recent year. average. 5-year average.

Orient Securities (Hong Kong) Limited 4 August 20, 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 20, 2021