Re-rating in sight; initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Banking / Finance Other Financial Services Company Far East Horizon Date 5 December 2016 Initiation of Coverage Re-rating in sight; initiating with Buy Reuters Bloomberg Exchange Ticker 3360.HK 3360 HK HSI 3360 ADR Ticker ISIN FEHZY US30732W1018 Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E EPS (CNY) 0.70 0.70 0.75 0.89 1.06 EPS growth 20.2 0.6 6.8 18.4 19.4 Price/book (x) 1.2 1.0 1.0 0.9 0.8 Yield (net) (%) 4.0 3.9 3.7 4.4 5.3 ROE (%) 15.2 13.3 13.2 14.2 15.2 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Time to factor in hospital and school operations; top Buy with TP of HK$8.9 ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 1 Dec 2016 (HKD) 6.83 Price target - 12mth (HKD) 8.90 52-week range (HKD) 7.44 - 5.20 HANG SENG INDEX 22,790 Jacky Zuo Research Associate (+852 ) 2203 6255 jacky.zuo@db.com Hans Fan, CFA Research Analyst (+852 ) 2203 6353 hans.fan@db.com Price/price relative 5.06.07.08.09.012/146/1512/156/16Far East HorizonHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -5.1 -4.2 4.3 HANG SENG INDEX -1.5 -1.6 1.8 Source: Deutsche Bank We expect the market to re-rate FEH after seeing its solid progress in its hospital and school operations, which already account for 11% of our SoTP valuation and 8% of our 2018E gross profit forecast. We think FEH’s de-risking efforts in switching to safer clients and non-cyclical sectors (healthcare + education) will pay off with a stable asset quality trend down the road. We expect its net profit to post a 19% CAGR in 2016E-18E with a ROE recovery from 13% to 15%, helped by higher leverage and higher asset turnover by ABS issuance. We initiate coverage with Buy and a target price of HK$8.9. A faster expansion into industrial operations will be a key catalyst to watch for. ”Leasing + industrial operation” model to bear fruit We are positive on FEH’s expansion into industrial operations, particularly in private hospital and high-end school management, driven by supportive national policy and strong demand from the rising middle class. FEH had invested in 15 private hospitals (5,000 beds) and 17 schools as of 3Q16, and targets 10,000 hospital beds by 2017 and at least 50 more high-end kindergartens and 10 more international high schools in the next 3-5 years. We expect gross profit of industrial operations to post a 58% CAGR in 2016E-18E and make up 12% of the total in 2018E, up from 3% in 1H16. Balance sheet de-risking leads to benign asset quality Despite its focus on SME leasing, FEH maintained a stable asset quality trend with a NPA ratio of 1.0% as of 1H16 (vs. 1.8% for the average Chinese bank) and much lower NPL formation (0.9% vs. 2% for banks). FEH had moved to higher quality customers with a revenue size of RMB1.3bn on average in 1H16 (2x that in 2014). The lessor has also improved sector mix, with Healthcare and Education making up 42% of leased assets with a close to zero NPA ratio. Valuation and risks We use a sum-of-the-parts valuation to derive our HK$8.9 target price, which implies a target 2017E P/B of 1.20x and 2017E P/E of 8.9x. We use a 3-stage GGM to reach 1.12x 2017E P/B for the leasing business and apply 20x 2017E P/E for the hospital and school management (vs. 35x and 41x for hospital and education peers). Key risks: slow industrial operation expansion and asset quality deterioration. Distributed on: 04/12/2016 20:05:00 GMT 5 December 2016 Other Financial Services Far East Horizon Page 2 Deutsche Bank AG/Hong Kong Model updated:01 December 2016 Running the numbers Asia Hong Kong Other Financial Services Far East Horizon Reuters: 3360.HK Bloomberg: 3360 HK Buy Price (1 Dec 16) HKD 6.83 Target Price HKD 8.90 52 Week range HKD 5.20 - 7.44 Market Cap (m) HKDm 26,981 USDm 3,478 Company Profile Far East Horizon (FEH) is a leading equipment-based financial leasing company in China. It primarily focuses on 9 sectors including Healthcare, Education and Construction etc., and it starts