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On track to reach a positive interest spread
​Reiterate BUY and lift TP to NT$54: Cathay’s share price is highly correlated to the interest rate trend, which we attribute to its lowest overseas fixed income duration of ~9 years. This implies it has more space to shift its investment portfolio to higher bond assets yields when the bond yield curve steepens upwards. We also expect Cathay Life to return to a positive interest rate spread quicker vs mgmt’s expectation, within 5 years. We raise 2016/17F earnings by 8%/2% and lift our TP t...
A long-term entry point
​Cathay FHC’s stock price has corrected by 25% since last August; we believe the worst has passed and there is more upside risk than downside. We expect 1) YoY earnings declines to stabilize; 2) the rate cut impact to diminish in 2H16F; and 3) Cathay FHC to be the largest beneficiary of the US Fed’s rate hike. Therefore, we upgrade Cathay FHC to BUY with a TP of NT$44, based on a raised P/EV of 0.7x for Cathay Life.
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