CSM Accumulation And Wealth Management Growth Will Propel Future Profitability Under IFRS 17

Key Takeaways

• Shin Kong Financial's focus on foreign currency strategies and high-system products aims to stabilize interest spreads and improve net margins for future revenue growth.
  
• Expansion in net interest margin and wealth management income indicates positive financial performance, supporting future profitability and financial stability.
  
• Concentration in U.S. dollar bonds and reliance on capital gains increase exposure to market, currency, and regulatory risks, impacting margin stability and earnings.

Catalysts

Provides a range of financial products and services in Taipei and internationally.

• Shin Kong Financial Holding's emphasis on foreign currency policies and high-system products aims to create stable interest spreads and better asset liability matching, which is expected to enhance future revenue and improve net margins.
  
• The company is focused on accumulating the Contractual Service Margin (CSM) with a target of NT$30 billion annually and achieved an 8% growth in CSM for the first 9 months of 2024. This strategy should boost future profitability and earnings under IFRS 17.
  
• Shin Kong Bank's expanding net interest margin and decent loan growth, with a 5.1% increase in the loan balance year-to-date, indicate a positive outlook for sustaining growth in net interest income, thus driving overall revenue growth.
  
• Wealth management income surged by 31.9% year-on-year, driven by strong sales of mutual funds and bancassurance products, which positions the company to exceed yearly guidance and contributes to expected future revenue growth.
  
• The company's strong asset management strategy, demonstrated by a robust investment portfolio and improved annualized investment return of 3.92%, indicates an ongoing and future enhancement in earnings and overall financial stability.

Shin Kong Financial Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shin Kong Financial Holding's revenue will decrease by -53.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.8% today to 50.2% in 3 years time.
• Analysts expect earnings to reach NT$17.2 billion (and earnings per share of NT$0.96) by about December 2027, up from NT$13.0 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 2027 earnings, down from 15.5x today. This future PE is lower than the current PE for the GB Insurance industry at 13.5x.
• Analysts expect the number of shares outstanding to grow by 1.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.05%, as per the Simply Wall St company report.

Shin Kong Financial Holding Future Earnings Per Share Growth

Risks

• The hedging costs increased due to Taiwan dollar appreciation, impacting the company's net margins and earnings.
  
• Shen Kong Life's investment portfolio is heavily concentrated in U.S. dollar-denominated bonds, which exposes it to foreign exchange risks that could affect its revenue and net earnings.
  
• The implementation of IFRS 17 could potentially lead to a decrease in pro forma equity values for Shin Kong Life, impacting book value and net margins.
  
• The continued high CSM contributions from protection type, health insurance, and riders also imply a limited diversification in revenue streams, potentially affecting stable revenue growth if market demands shift.
  
• Dependence on realized capital gains from equity to drive investment return increases exposure to market volatility, which could lead to fluctuating investment income and affect overall earnings.

Valuation

• The analysts have a consensus price target of NT$10.65 for Shin Kong 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$12.0, and the most bearish reporting a price target of just NT$9.3.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be NT$34.3 billion, earnings will come to NT$17.2 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 5.0%.
  
• Given the current share price of NT$11.75, the analyst's price target of NT$10.65 is 10.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.