Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Quantitative Analysis

This insight provides the output, and an overview of our, machine learning-driven, proprietary GEM screening model, which takes a three-pronged approach to find the best medium-term long ideas within the top100 largest stocks in the MSCI GEM Index. The model is based on 1) a typical quantitative multifactor screening model, enhanced by two Artificial Intelligence Technology-based approaches using 2) a Deep Neural Network model, and 3) a Recurrent Neural Network model. This model, which has been developed and tweaked over the past 24 months (and implemented in its current state for &gt;12 months), has a solid real-world performance track record, which I set out in the detail below. Notable new entrants to the top decile this month include South Korean auto names, <a href="https://www.smartkarma.com/entities/kia-motors-corp" target="_blank" data-smartkarma-citation="entities:156:1" rel="noopener">Kia Motors Corp (000270 KS)</a> and <a href="https://www.smartkarma.com/entities/hyundai-motor-co" target="_blank" data-smartkarma-citation="entities:155:1" rel="noopener">Hyundai Motor Co (005380 KS)</a> as well as Brazilian state-owned energy giant, <a href="https://www.smartkarma.com/entities/petroleo-brasileiro-sa" target="_blank" data-smartkarma-citation="entities:24459:1" rel="noopener">Petroleo Brasileiro Sa (PETR3 BZ)</a>.<table class="table table-striped">
<colgroup>
<col>
<col>
<col>
<col>
<col>
</colgroup>
<tbody>
<tr>
<td style="text-align: center; width: 48pt;">rank</td>
<td style="width: 169pt;">Name</td>
<td style="width: 119pt;">Sector</td>
<td style="width: 95pt;">Location</td>
<td style="text-align: center; width: 48pt;">prev.</td>
</tr>
<tr>
<td style="text-align: center;">1</td>
<td><a href="https://www.smartkarma.com/entities/cnooc-ltd" target="_blank" data-smartkarma-citation="entities:175:1" rel="noopener">CNOOC Ltd (883 HK)</a></td>
<td>Energy</td>
<td>China</td>
<td style="text-align: center;">1</td>
</tr>
<tr>
<td style="text-align: center;">2</td>
<td><a href="https://www.smartkarma.com/entities/mediatek-inc" target="_blank" data-smartkarma-citation="entities:772:1" rel="noopener">Mediatek Inc (2454 TT)</a></td>
<td>Information Technology</td>
<td>Taiwan</td>
<td style="text-align: center;">5</td>
</tr>
<tr>
<td style="text-align: center;">3</td>
<td><a href="https://www.smartkarma.com/entities/sk-hynix-inc" target="_blank" data-smartkarma-citation="entities:16955:1" rel="noopener">SK Hynix (000660 KS)</a></td>
<td>Information Technology</td>
<td>Korea (South)</td>
<td style="text-align: center;">23</td>
</tr>
<tr>
<td style="text-align: center;">4</td>
<td><a href="https://www.smartkarma.com/entities/kia-motors-corp" target="_blank" data-smartkarma-citation="entities:156:1" rel="noopener">Kia Motors Corp (000270 KS)</a></td>
<td>Consumer Discretionary</td>
<td>Korea (South)</td>
<td style="text-align: center;">60</td>
</tr>
<tr>
<td style="text-align: center;">5</td>
<td><a href="https://www.smartkarma.com/entities/bank-of-china-ltd-h" target="_blank" data-smartkarma-citation="entities:656:1" rel="noopener">Bank Of China Ltd (H) (3988 HK)</a></td>
<td>Financials</td>
<td>China</td>
<td style="text-align: center;">25</td>
</tr>
<tr>
<td style="text-align: center;">6</td>
<td><a href="https://www.smartkarma.com/entities/ptt-pcl" target="_blank" data-smartkarma-citation="entities:197:1" rel="noopener">PTT PCL (PTT TB)</a></td>
<td>Energy</td>
<td>Thailand</td>
<td style="text-align: center;">4</td>
</tr>
<tr>
<td style="text-align: center;">7</td>
<td><a href="https://www.smartkarma.com/entities/samsung-electronics-co-ltd" target="_blank" data-smartkarma-citation="entities:191:1" rel="noopener">Samsung Electronics (005930 KS)</a></td>
<td>Information Technology</td>
<td>Korea (South)</td>
<td style="text-align: center;">9</td>
</tr>
<tr>
<td style="text-align: center;">8</td>
<td><a href="https://www.smartkarma.com/entities/hyundai-motor-co" target="_blank" data-smartkarma-citation="entities:155:1" rel="noopener">Hyundai Motor Co (005380 KS)</a></td>
<td>Consumer Discretionary</td>
<td>Korea (South)</td>
<td style="text-align: center;">80</td>
</tr>
<tr>
<td style="text-align: center;">9</td>
<td><a href="https://www.smartkarma.com/entities/china-mobile-ltd" target="_blank" data-smartkarma-citation="entities:27:1" rel="noopener">China Mobile (941 HK)</a></td>
<td>Communication</td>
<td>China</td>
<td style="text-align: center;">29</td>
</tr>
<tr>
<td style="text-align: center;">10</td>
<td><a href="https://www.smartkarma.com/entities/petroleo-brasileiro-sa" target="_blank" data-smartkarma-citation="entities:24459:1" rel="noopener">Petroleo Brasileiro Sa (PETR3 BZ)</a></td>
<td>Energy</td>
<td>Brazil</td>
<td style="text-align: center;">59</td>
</tr>
<tr><td colspan="5" style="text-align: left;">Source: FactSet financial data and analytics, my estimates and calculations, Tensorflow, Keras, Google Colaboratory, pandas</td></tr>
</tbody>
</table>As usual, please feel free to reach out for the full output table, any questions, clarifications needed or suggestions.

This insight provides the output, and an overview of our, machine learning-driven, proprietary GEM screening model, which takes a three-pronged approach to find the best medium-term long ideas within the top100 largest stocks in the MSCI GEM Index. The model is based on 1) a typical quantitative multifactor screening model, enhanced by two Artificial Intelligence Technology-based approaches using 2) a Deep Neural Network model, and 3) a Recurrent Neural Network model. This model, which has been developed and tweaked over the past 24 months (and implemented in its current state for &gt;12 months), has a solid real-world performance track record, which I set out in the detail below. Notable new entrants to the top decile this month include South Korean auto names, Kia Motors Corp (000270 KS) and Hyundai Motor Co (005380 KS) as well as Brazilian state-owned energy giant, Petroleo Brasileiro Sa (PETR3 BZ).









rank
Name
Sector
Location
prev.


1
CNOOC Ltd (883 HK)
Energy
China
1


2
Mediatek Inc (2454 TT)
Information Technology
Taiwan
5


3
SK Hynix (000660 KS)
Information Technology
Korea (South)
23


4
Kia Motors Corp (000270 KS)
Consumer Discretionary
Korea (South)
60


5
Bank Of China Ltd (H) (3988 HK)
Financials
China
25


6
PTT PCL (PTT TB)
Energy
Thailand
4


7
Samsung Electronics (005930 KS)
Information Technology
Korea (South)
9


8
Hyundai Motor Co (005380 KS)
Consumer Discretionary
Korea (South)
80


9
China Mobile (941 HK)
Communication
China
29


10
Petroleo Brasileiro Sa (PETR3 BZ)
Energy
Brazil
59

Source: FactSet financial data and analytics, my estimates and calculations, Tensorflow, Keras, Google Colaboratory, pandas

As usual, please feel free to reach out for the full output table, any questions, clarifications needed or suggestions.

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

China

Bank of China Limited provides banking services. The Company offers deposits, loans, foreign currency transaction, fund settlement, and other services. Bank of China provides its services to individuals, enterprises, and other clients.

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 (601988 CH)

Screening for GEMs: June 2021

This insight provides an overview of our, machine learning-driven, proprietary GEM screening model, based on a Multifactor model, a Deep Neural...

Wium Malan, CFA

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

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)