Expanding Southeast Asian Operations Will Diversify Future Revenue Streams

Key Takeaways

• BOC Hong Kong's expansion in cross-border business and Southeast Asia signals strong revenue growth and diversification opportunities.
  
• Investments in digital finance and green initiatives are expected to improve margins and attract sustainability-focused investors.
  
• Uncertain monetary policy, high interest rates, and competition may affect BOC Hong Kong's market share and earnings, particularly in volatile real estate and Southeast Asian markets.

Catalysts

An investment holding company, provides banking and related financial services to corporate and individual customers in Hong Kong, China, and internationally.

• BOC Hong Kong is expanding its cross-border business and customer base, with a significant increase of over 20% year-on-year in individual cross-border customers and 50% growth in cross-boundary Wealth Management Connect accounts, which is likely to boost future revenue streams.
  
• The company is actively investing in its digital financial services and scenario-based ecosystems, enhancing customer engagement and services, expected to improve net margins through cost efficiency and increased transaction volumes.
  
• There is significant growth in Southeast Asian operations, with a 30.8% increase in net operating income and a focus on leveraging the offshore RMB business, indicative of strong future earnings potential from diversified regions.
  
• BOC Hong Kong is heavily investing in green finance and ESG initiatives, such as increasing green and sustainable loan balances by 18%, which could improve net margins by attracting environmentally-conscious investors and reducing operational costs.
  
• The company is maintaining a strong capital position with a CET1 capital ratio of over 20% and exploring strategic uses of capital such as increased dividends or potential M&A, which could enhance earnings per share and shareholder return.

BOC Hong Kong (Holdings) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BOC Hong Kong (Holdings)'s revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 57.0% today to 51.9% in 3 years time.
• Analysts expect earnings to reach HK$37.5 billion (and earnings per share of HK$3.55) by about February 2028, up from HK$35.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, up from 7.6x today. This future PE is greater than the current PE for the HK Banks industry at 5.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.58%, as per the Simply Wall St company report.

BOC Hong Kong (Holdings) Future Earnings Per Share Growth

Risks

• Uncertain future monetary policies in major economies could lead to market volatility, affecting BOC Hong Kong's revenue and net margins.
  
• High interest rate environment pressures the real estate market, particularly in Hong Kong, which could increase non-performing loans and impact earnings.
  
• Competition in both the local and regional markets might constrain growth or erode BOC Hong Kong's market share, impacting future revenues.
  
• A significant part of revenue growth is tied to Southeast Asian markets, which, while promising, present geopolitical and operational risks that could affect earnings.
  
• Exposure to the Mainland China property market poses risks, particularly with the potential for increased NPL ratios, which could negatively impact net margins and asset quality.

Valuation

• The analysts have a consensus price target of HK$28.68 for BOC Hong Kong (Holdings) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$33.0, and the most bearish reporting a price target of just HK$24.12.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be HK$72.3 billion, earnings will come to HK$37.5 billion, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of HK$25.65, the analyst price target of HK$28.68 is 10.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.