咪咪笑

Buy: Better Earnings into 3Q08 is a Catalyst for the Stock
 Catalysts emerging — Maintaining our Buy/Low Risk (1L) based on emerging
catalysts as earnings should improve into 3Q08. The stock still trades at the
bottom of its historic band at 1x 1-year forward P/EV, pricing in bad news on
FX volatility, MTM losses on investments, and risks on overseas exposure.
 Turning a corner in 2Q08 — Cathay Life’s investment yield improved to 1.95%
in 1H08 from 0.6% in 1Q08. Although MTM losses prevented a more
significant recovery as investment gains fell 81% QoQ, we note a sharp decline
in FX & hedging costs in 2Q08. FYP remained firm, up 1% QoQ in 2Q08, due to
better sales of traditional products, particularly short-term endowment
products launched in 2Q08. Banking profits recovered to NT$2.1bn in 2Q08
vs. NT$0.9bn in 1Q08, as losses on US sub-prime and credit cost declined.
 Looking forward to a better 3Q08 — With recent US$ rebound and a slowdown
in NT$ appreciation, we expect FX & hedging expenses to decline further in
3Q08. We also see recognition of NT$5bn in cash dividend income providing a
seasonal push into 3Q08. Management anticipates another NT$950m in ABSCDO
write-downs in 3Q08, but total exposure down to NT$5.8bn at end-2Q08.
 Risks to our call — We expect uncertainties on FYP growth will be an overhang
on valuations. Also, the FYP mix's focus on lower-margin products will likely
cap expansion in new business. RBC ratio dropped to 200-300% in 1H08 from
300-350% at end-07, on MTM losses on AFS investments and will remain
under pressure as markets remain volatile; but management states that
NT$17-18bn in excess cash at the FHC level should offer a buffer.