Chailease Holding Co Ltd:Downgrade to Hold,Taking a breather

Potential capital raising. Last Friday (26 May 2017), 84.97% of shareholders votedin favour of a proposed capital increase via the issuance of a maximum of 150mcommon shares in Taiwan or Global Depositary Receipts (GDR) (0.45% against,14.57% abstention) in the Annual General Meeting (AGM). The resolution authorizesthe Board of Directors to determine, amend and implement the plan for the issuanceof GDRs through common shares. We note that Chailease had simiilar shareholders’resolutions in 2012, 2014 and 2015 but only completed the GDR issuance in 2012(refer to Exhibit 1 on page 3 for details). In 2012, Chailease issued 120m newcommon shares for 24m GDRs to raise TWD5.96bn, representing 13.3% of theenlarged share capital back then. If Chailease were to issue the maximum 150m newshares as per the shareholders’ resolution, this would represent 13.17% of thecurrent outstanding capital (or 11.63% of the potentially enlarged share capital).

    However, due to uncertainty with regard to timing, pricing and completion, we do notfactor in the potential capital increase in our estimates.

    Downgrade to Hold with 1% higher target price TWD85 on shorter discounting.

    We do not change estimates in this note. While we remain positive on the company’sfundamentals, the year-to-date share price rally has likely reflected much of theimprovement and we would wait for 2Q17 briefing for updates on delinquencies.

    Valuation and risks. We use a PB-based single stage Gordon growth model as ourvaluation methodology. We derive a target 2017e PB multiple of 2.3x, based on10.5% COE, 3% sustainable growth rate and 20.5% ROE based on the three-yearaverage ROE we forecast for 2017-19. Applying the PB multiple of 2.3x to our 2017eBVPS estimate of TWD38.5, we arrive at a 2017e fair value of TWD90.1, which whendiscounted to the fair value today (31 May 2017) and rounded to the nearest tencents, yields our revised target price of TWD85.0. With 4.7% upside to our targetprice, we downgrade Chailease to Hold. Upside risks include further positivesurprises from in delinquencies improvement, efficiency gains and faster businessgrowth. Downside risks include a renewed deterioration in delinquencies; pressureon loan yield; unfavourable funding conditions; unexpected, adverse changes in theregulatory environment, efficiency deterioration and equity raising risk.