Digital Transformation May Boost Efficiency, But Foreign Exchange Risks Remain

Key Takeaways

• Expansion in wealth management and credit card services with high-net-worth clients may drive revenue growth and increase fee income.
  
• Digital transformation, including AI and cloud growth, aims to boost operational efficiency and customer satisfaction, enhancing net margins and earnings.
  
• Dependence on foreign investments and exposure to market volatility could impact earnings, with additional risks from exchange rates and regional instability.

Catalysts

Through its subsidiaries, provides various financial products and services in Taiwan, rest of Asia, and internationally.

• Cathay United Bank is expected to continue expanding its wealth management and credit card business by deepening relationships with high-net-worth clients, potentially increasing fee income and driving revenue growth.
  
• Cathay Life's focus on protection-type products and foreign currency-denominated policies could significantly accumulate contractual service margins (CSM), contributing to stronger future earnings.
  
• The company's overseas expansion, particularly in Vietnam and China, with a focus on digital infrastructure and online business, may open new revenue streams and boost overall revenue growth.
  
• The adoption of IFRS 17 and the company's strategy to reduce the high guaranteed cost of liabilities from legacy books is expected to result in a more predictable and stable earnings profile, potentially enhancing net margins.
  
• Cathay Financial's advancements in digital transformation, including the growth of their AI and cloud architecture, could enhance operational efficiencies and customer satisfaction, positively impacting net margins and earnings.

Cathay Financial Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cathay Financial Holding's revenue will decrease by 16.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.7% today to 21.9% in 3 years time.
• Analysts expect earnings to reach NT$97.9 billion (and earnings per share of NT$6.47) by about March 2028, down from NT$105.9 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 12.9x on those 2028 earnings, up from 9.0x today. This future PE is greater than the current PE for the GB Insurance industry at 9.6x.
• 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 5.2%, as per the Simply Wall St company report.

Cathay Financial Holding Future Earnings Per Share Growth

Risks

• The dependence on robust investment returns, especially in foreign markets, could expose Cathay Financial to volatility in capital markets, affecting overall earnings potential.
  
• A significant portion of Cathay Life's investment portfolio is held overseas, which might be vulnerable to foreign exchange fluctuations, impacting net margins.
  
• Potential short-term volatility from property hedging could lead to unpredictable hedging costs, affecting net income stability.
  
• Any further political or economic instability in regions where Cathay Financial has expanded (such as Greater China) could impact asset quality and revenue.
  
• Changes in accounting standards (like IFRS 17) could introduce one-off impacts on book value, affecting perceived financial health and potentially influencing shareholder dividends.

Valuation

• The analysts have a consensus price target of NT$73.918 for Cathay Financial Holding 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 NT$79.7, and the most bearish reporting a price target of just NT$64.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$446.0 billion, earnings will come to NT$97.9 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 5.2%.
  
• Given the current share price of NT$65.3, the analyst price target of NT$73.92 is 11.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.