Founder of Antler Capital

Stanley Tsai, CFA

Equity Bottom-Up

BOC Aviation | BOCAVI <a href="https://www.smartkarma.com/entities/boc-aviation" target="_blank" data-smartkarma-citation="entities:22689:1" rel="noopener">(2588 HK)</a> 
As a follow-up on <a href="https://www.smartkarma.com/profiles/david-blennerhassett" target="_blank" data-smartkarma-citation="accounts:840" rel="noopener">David Blennerhassett</a>'s Smartkarma Original <a href="https://www.smartkarma.com/insights/asia-pac-airports-ups-but-mostly-downs" target="_blank" data-smartkarma-citation="insights:51855" rel="noopener">Asia-Pac Airports: Ups, But Mostly Downs</a>, we take a look at BOCAVI, which, in our view, is a compelling alternative to APAC airport operators and airlines as a post-Covid trade.
BOCAVI is a highly geared play on the resumption of air travel. The stock has gone through periods of significant out/underperformance against the APAC airports and airlines and may continue to give investors high beta in either direction. The geographical exposure is broad, but there is a heavy skew towards short-haul flights, which will see the earliest acceleration in passenger traffic.
Management's countercyclical capex expansion increasingly looks like a shrewd bet. At its core, BOCAVI is in the capital management business. Strong liquidity and BOC's explicit backing have allowed the lessor to grow its purchase-and-leaseback portfolio through the depths of the pandemic. While airlines are still hemorrhaging cash, over 99% of BOCAVI's aircraft remain cash-generating.  
We expect the firm's undiscounted committed revenues to top USD20bn in 2021. By year-end, the value of the portfolio will have doubled since 2014. We estimate the present value of this cashflow stream to be HKD72.80/share. We are essentially getting free growth optionality. 
We are buyers at book value. The stock is trading at 8x P/E and 1.1x P/B on a 12M forward basis. BOCAVI is reasonably liquid, with a market cap of USD6bn and average daily turnover of USD3.5mn. Besides the obvious risk of protracted lockdowns globally, a well-functioning USD bond market and BOC's funding support are critical to our investment case.
Attachment: BOCAVI Financial Summary

BOC Aviation | BOCAVI (2588 HK) 
As a follow-up on David Blennerhassett's Smartkarma Original Asia-Pac Airports: Ups, But Mostly Downs, we take a look at BOCAVI, which, in our view, is a compelling alternative to APAC airport operators and airlines as a post-Covid trade.
BOCAVI is a highly geared play on the resumption of air travel. The stock has gone through periods of significant out/underperformance against the APAC airports and airlines and may continue to give investors high beta in either direction. The geographical exposure is broad, but there is a heavy skew towards short-haul flights, which will see the earliest acceleration in passenger traffic.
Management's countercyclical capex expansion increasingly looks like a shrewd bet. At its core, BOCAVI is in the capital management business. Strong liquidity and BOC's explicit backing have allowed the lessor to grow its purchase-and-leaseback portfolio through the depths of the pandemic. While airlines are still hemorrhaging cash, over 99% of BOCAVI's aircraft remain cash-generating.  
We expect the firm's undiscounted committed revenues to top USD20bn in 2021. By year-end, the value of the portfolio will have doubled since 2014. We estimate the present value of this cashflow stream to be HKD72.80/share. We are essentially getting free growth optionality. 
We are buyers at book value. The stock is trading at 8x P/E and 1.1x P/B on a 12M forward basis. BOCAVI is reasonably liquid, with a market cap of USD6bn and average daily turnover of USD3.5mn. Besides the obvious risk of protracted lockdowns globally, a well-functioning USD bond market and BOC's funding support are critical to our investment case.
Attachment: BOCAVI Financial Summary

BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

China Construction Bank  / Equity Bottom-Up

We all know that the four state-owned banks in China are more or less homogenous. While the current valuation PB differential of CCB for its China listing may appear high, we believe this may be justified compared with peers, when analysing ROA and loan loss reserves.

We all know that the four state-owned banks in China are more or less homogenous. While the current valuation PB differential of CCB for its China listing may appear high, we believe this may be justified compared with peers, when analysing ROA and loan loss reserves. 

CCB – China Premium To HK Listing, A Telling Indicator?

Macroeconomics

Monthly Newsletter | May 2021
Monetary data in May suggest that the environment has turned a notch tighter in China. Loan and deposit growth surprised on the downside and signals the beginning of yet another challenging period for the Chinese banks in the months ahead.
Both the asset and liability sides of the banks' balance sheets hit a wall in April. Loan growth missed consensus by a notable margin, driven by a softer mortgage market and slower corporate credit expansion. The net decline in new deposits was more worrying and the risk of disintermediation is on the rise, particularly for the smaller banks.
Deleveraging real estate exposures remains a top priority for the regulators. New mortgage rates have edged up, continuing a trend since 1Q21. Margins have widened slightly for new corporate loans as well. This supports our view that net interest margins have bottomed out and is mildly positive for the H-share G-SIBs.  
We expect the central bank to maintain a neutral policy for the remainder of 2021. The policy rates and loan prime rate will likely hold steady. That said, smaller banks that rely extensively on the interbank market may find it increasingly difficult to source cheap funding. Interbank bank defaults among the unlisted banks are not a remote possibility.
We will remain underweight the H-share banks against MSCI China <a href="https://www.smartkarma.com/entities/msci-china-index" target="_blank" data-smartkarma-citation="entities:22895:1" rel="noopener">(MXCN INDEX)</a> until 2Q21 earnings. Meanwhile, we will watch closely whether a sales rebound story will materialize for the life insurers, as bank deposit outflows may find their way into savings polices in the coming quarters.

<div>
Related Insights
</div>
<div>
<ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/icbc-the-prefs-are-junk-and-should-trade-like-it" target="_blank" data-smartkarma-citation="insights:51598" rel="noopener">ICBC: The Prefs Are Junk and Should Trade Like It</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/icbc-the-bond-identity-a-zero-growth-dividend-discount-story" target="_blank" data-smartkarma-citation="insights:51463" rel="noopener">ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story</a> </li>
</ul>
</div>

Monthly Newsletter | May 2021
Monetary data in May suggest that the environment has turned a notch tighter in China. Loan and deposit growth surprised on the downside and signals the beginning of yet another challenging period for the Chinese banks in the months ahead.
Both the asset and liability sides of the banks' balance sheets hit a wall in April. Loan growth missed consensus by a notable margin, driven by a softer mortgage market and slower corporate credit expansion. The net decline in new deposits was more worrying and the risk of disintermediation is on the rise, particularly for the smaller banks.
Deleveraging real estate exposures remains a top priority for the regulators. New mortgage rates have edged up, continuing a trend since 1Q21. Margins have widened slightly for new corporate loans as well. This supports our view that net interest margins have bottomed out and is mildly positive for the H-share G-SIBs.  
We expect the central bank to maintain a neutral policy for the remainder of 2021. The policy rates and loan prime rate will likely hold steady. That said, smaller banks that rely extensively on the interbank market may find it increasingly difficult to source cheap funding. Interbank bank defaults among the unlisted banks are not a remote possibility.
We will remain underweight the H-share banks against MSCI China (MXCN INDEX) until 2Q21 earnings. Meanwhile, we will watch closely whether a sales rebound story will materialize for the life insurers, as bank deposit outflows may find their way into savings polices in the coming quarters.


Related Insights




ICBC: The Prefs Are Junk and Should Trade Like It 

ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 



Glut and Famine: China's Monetary Conditions a Notch Tighter in May

Credit

ICBC <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">(1398 HK</a> | <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-a" target="_blank" data-smartkarma-citation="entities:494:1" rel="noopener">601398 CH)</a> 
The market has been much more generous to ICBC's USD preferred shareholders than to its H-shareholders. ICBCAS 3.58 PERP has had a strong run since it was printed in September 2020, interrupted only momentarily by the Huarong <a href="https://www.smartkarma.com/entities/china-huarong-asset-management" target="_blank" data-smartkarma-citation="entities:968:1" rel="noopener">(2799 HK)</a> scare. The prefs are trading at 103 for a dismal yield of 2.9%. In our view, the AT-1 instrument is overvalued and due for a correction.
ICBCAS 3.58 PERP is rated 'Ba1', but trades like an investment-grade bond. On a yield-to-call basis, the prefs are trading at a 200bp spread to 5-year US treasuries. The pickup over the bank's USD senior unsecured issues is 150bp, which is a very modest premium for a six-notch rating difference from 'A1' to 'Ba1'.  
The yield differential between ICBC-H <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">(1398 HK)</a> and ICBCAS 3.58 PERP has widened to a recent high. The H-share / pref yield gap shows strong mean-reversion tendencies. At 425bp, we believe the spread has the potential to tighten over the coming weeks.
Supply-demand imbalance is the key driver of current price dislocations. We believe the prefs' scarcity value will gradually decline as the next round of AT-1 / senior bail-in instruments issued by the Big Four banks flood the primary market. That said, there is little we can do to change investors' perception of the Chinese G-SIBs as safe havens regardless of subordination.
We are short ICBCAS 3.58 PERP on the expectation that pending new AT-1 issues will dilute its price premium. For the long H-share / short pref trade to be worthwhile, we will probably have to wait till ICBC-H crosses below HKD4.50. Liquidity for the prefs should be plenty to facilitate these trades. The key risk is for the market to turn decidedly bearish on Chinese non-financial credits and default to bank papers for shelter.
Related Insight
<ul>
<li>
<a href="https://www.smartkarma.com/insights/icbc-the-bond-identity-a-zero-growth-dividend-discount-story" target="_blank" data-smartkarma-citation="insights:51463" rel="noopener">ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story</a> </li>
</ul>
(Attachment: Financial Summary)

ICBC (1398 HK | 601398 CH) 
The market has been much more generous to ICBC's USD preferred shareholders than to its H-shareholders. ICBCAS 3.58 PERP has had a strong run since it was printed in September 2020, interrupted only momentarily by the Huarong (2799 HK) scare. The prefs are trading at 103 for a dismal yield of 2.9%. In our view, the AT-1 instrument is overvalued and due for a correction.
ICBCAS 3.58 PERP is rated 'Ba1', but trades like an investment-grade bond. On a yield-to-call basis, the prefs are trading at a 200bp spread to 5-year US treasuries. The pickup over the bank's USD senior unsecured issues is 150bp, which is a very modest premium for a six-notch rating difference from 'A1' to 'Ba1'.  
The yield differential between ICBC-H (1398 HK) and ICBCAS 3.58 PERP has widened to a recent high. The H-share / pref yield gap shows strong mean-reversion tendencies. At 425bp, we believe the spread has the potential to tighten over the coming weeks.
Supply-demand imbalance is the key driver of current price dislocations. We believe the prefs' scarcity value will gradually decline as the next round of AT-1 / senior bail-in instruments issued by the Big Four banks flood the primary market. That said, there is little we can do to change investors' perception of the Chinese G-SIBs as safe havens regardless of subordination.
We are short ICBCAS 3.58 PERP on the expectation that pending new AT-1 issues will dilute its price premium. For the long H-share / short pref trade to be worthwhile, we will probably have to wait till ICBC-H crosses below HKD4.50. Liquidity for the prefs should be plenty to facilitate these trades. The key risk is for the market to turn decidedly bearish on Chinese non-financial credits and default to bank papers for shelter.
Related Insight


ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 

(Attachment: Financial Summary)

ICBC: The Prefs Are Junk and Should Trade Like It

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*Positive Operating Jaws: China Everbright Bank (6818.HK) [CEB] reported 1Q21 results of CNY 11.5 bn, increasing CNY 3.3 bn (40.1%) linked quarter. When we exclude securities gains, results were less robust coming in at CNY 8.5 bn, but still improving CNY 1.8 bn (27.4%). Results were driven by CEB’s positive operating jaws, as revenues improved CNY 2.6 bn (7.7%) while costs declined CNY 660 mn (6.1%); and*Credit Wall Continues To Grow: Net new problem loans continue to accelerate at Indian bank pace of CNY 11.5 bn or 110.8% on an annualized basis. By our calculation, reserve are short in the neighborhood of CNY 103 mn which represents about three years of 1Q20 core operating results. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 77%.

*Positive Operating Jaws: China Everbright Bank (6818.HK) [CEB] reported 1Q21 results of CNY 11.5 bn, increasing CNY 3.3 bn (40.1%) linked quarter. When we exclude securities gains, results were less robust coming in at CNY 8.5 bn, but still improving CNY 1.8 bn (27.4%). Results were driven by CEB’s positive operating jaws, as revenues improved CNY 2.6 bn (7.7%) while costs declined CNY 660 mn (6.1%); and*Credit Wall Continues To Grow: Net new problem loans continue to accelerate at Indian bank pace of CNY 11.5 bn or 110.8% on an annualized basis. By our calculation, reserve are short in the neighborhood of CNY 103 mn which represents about three years of 1Q20 core operating results. Provided (and its not a stretch) that the net new NPL ratio trajectory holds, reserve cover of NPLs will drop to 77%. 

China Everbright Bank – Credit Remains Troublesome

China

Bank of China Ltd provides a complete range of banking and other financial services to individual and corporation customers worldwide.  The bank's services include retail banking, Great Wall credit card and debit card services, consumer credit, foreign currency transaction, corporate banking, settlement and clearing,investment banking, and fund management businesses.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Bank Of China Ltd (H) (3988 HK)

BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

As downstream players continue to hemorrhage cash, over 99% of BOCAVI’s aircraft are still cash-generating. Valuation is undemanding for a high...

Stanley Tsai, CFA

CCB – China Premium To HK Listing, A Telling Indicator?

While the current valuation PB differential of CCB for its China listing may appear high, we believe this may be justified compared with peers,...

Daniel Tabbush

Glut and Famine: China's Monetary Conditions a Notch Tighter in May

Monetary data in May point to a tighter environment for both lending and funding. Mortgage rates have edged up, but the deposit drain is worrying....

Stanley Tsai, CFA

ICBC: The Prefs Are Junk and Should Trade Like It

The prefs have had a strong run and are trading at 103 for a yield-to-call of only 2.9%. The AT-1 is significantly overvalued relative to 5-year US...

Stanley Tsai, CFA

China Everbright Bank – Credit Remains Troublesome

CHINA EVERBRIGHT BANK: Operating results grew 27.4% QOQ, driven by positive operating jaws. Credit continues to weaken and the loss reserve...

Thomas J. Monaco

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)