Summary

China Everbright Limited's (“CEL” or “the Group”) businesses are still mainly divided into China Everbright Bank (“CEB”), China Everbright Securities (“CES”) and other sectors (Hong Kong operations), of which CES is the main contributor of the Group's profits. According to CEL's annual report, CES was listed in A-shares market in August 2009 and helped CEL to achieve the significant increase of profits, rose approximately 369% yoy, due to HK$3.18 billion one-off gain from CES's IPO.

Due to the strong recovery of A Shares market in 2009, net profit of CES increased significantly to RMB3.26 billion. CEL owned 33.33% of CES after CES listed in A Shares. Therefore, net profit of CEL earned from CES was HK$1.349 billion, increased by 181% yoy.

However, due to the large adjustment of A Shares in 2010, incomes of CES would decrease obviously, and also considering the high base of 2009, we believe net profit of CEL would decrease significantly, but in general, it will still maintain on quite stable increase in the long term.

Due to stable growth of CEL's profits in future and quite large volatility of A Shares in the short term, we still recommend CEL on Buy rating, but reduce its 12-month target price to HK$21.10, around 51% higher than current price.

Strong increase of profits of associates in 2009

CES issued 520 million new shares with initial price of RMB21.08 in Shanghai Stock Exchange on August 18, 2009. After the listing, CEL's interest in CES has been diluted from 39.31% to 33.33%

As at the end of 2009, operating profits of CES increased obviously by 50.87% yoy to RMB7.281 billion, and profits before tax rose 207.10% yoy significantly to RMB4.413 billion.

Moreover, net profits of CES achieved to RMB3.263 billion in 2009, according to equity method, CEL owned 33.33% shares of CES, which gained HK$1.349 billion from CES, increased by 181% yoy, in line with our expectation.

Although CES's profits increased significantly in 2009, due to the large adjustment of A Shares in 2010 and the high base of 2009, we estimate profits of CES would decrease sharply in 2010.

As at the end of 2010Q1, according to China GAAP, revenue of CES achieved to RMB839 million, decreased by 27% yoy and 41% qoq respectively. Its net profits amounted to RMB343 million, decreased largely by 43% yoy and 65% qoq respectively.

Therefore, we estimate profits of CES would drop significantly in 2010H1 compared with the same period of 2009, and may contribute HK$1.416 to CEL's net profits in the whole year, and increase to 75.76% of the Group's profit before tax.

Due to the large increase of associates` profits, especially, HK$3.18 billion one-off gain from CES's IPO in A Shares in 2009, which caused net profit of CEL increased significantly by 369% yoy to HK$4.758 billion.

However, if excludes such gain, the Group's profits before tax was around HK$1.667 billion, increased by 41% yoy. We believe the performance of A Shares in 2010 would be weaker than 2009, therefore, the growth rate of CEL's profits in 2010 would also decrease, its net profit would decrease by 63% yoy to HK$1.742 billion, as we estimate.

It is worthy of noting that CEL's profits before tax in 2010 would increase by 10% yoy if excludes one-off IPO gain in 2009, therefore the profits of CEL still maintain on quite stable increase in general.

Stable increase of assets

As at the end of 2009, total assets of CEL achieved to HK$24.309 billion, increased sharply by 61% compared with HK$15.056 billion in 2008.

The main reason for assets increased sharply was the significant growth in security investments.The investment in associates achieved to HK$8.738 billion, increased largely by 79% compared with HK$4.889 billion in 2008. Meanwhile, available-for-sale securities increased significantly by 119% from HK$4.082 billion in 2008 to HK$8.939 billion in 2009.

We forecast the growth rate of investments would decrease in 2010, and total assets of CEL would increase approximately by 14% to HK$27.772 billion.

Risk

The volatility of stock markets is larger then expectation, which affects the investment gains of CEL in the short term.

Valuation

Due to the strong rebound of domestic stock market, and sharp increase of the profits after CES listed in A Shares, which caused the profits of CEL to increase significantly in 2009. However, such one-off gain can not be last, therefore, the growth rate of profits of CEL would decrease obviously in 2010 compared with 2009, but in general, the profits and assets of CEL still maintain on stable increase.

Meanwhile, as only one listed company in H Shares who owns the license of domestic securities company, CEL's profits would maintain strong increase after the relative investment strategies are going to be released in domestic market. Therefore, we still hold an optimistic view on CEL's performance in future.

According to sub-part valuation method, we respectively give the P/B for CES, CEB and the Group's Hong Kong operations at 2.5x, 2x and 1x, estimate CEL's intrinsic value should be HK$30.11, we give 10% discount to its intrinsic value because of the large volatility of stock markets recently and get 12-month target price of CEL at HK$ 27.10, around 51% higher than its current price, equivalent to 24.8x P/E and 1.78x P/B in 2010 separately. We maintain CEL on Buy rating.

Financial data

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