Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Haidilao International Holding / Event-Driven

The Hang Seng Indexes Company Limited (HSIL) should announce the results of the 2020 Q3 review of the Hang Seng Family of Indexes on 6 November. The constituent changes will be effective after the close of trading on 4 December.With only 3 changes permitted in the September <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> review post the methodology change that included WVR securities and Secondary Listings in the eligible Universe, there could be as many as 9 changes in the December review.We see a high probability of <a href="https://www.smartkarma.com/entities/china-overseas-land-invest" target="_blank" data-smartkarma-citation="entities:419:1" rel="noopener">China Overseas Land &amp; Investment Ltd (688 HK)</a>, <a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com (HK) (9618 HK)</a>, <a href="https://www.smartkarma.com/entities/alibaba-health-information-technology-ltd" target="_blank" data-smartkarma-citation="entities:453:1" rel="noopener">Alibaba Health Information Technology (241 HK)</a>, <a href="https://www.smartkarma.com/entities/haidilao-international-holding-ltd" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao (6862 HK)</a>, <a href="https://www.smartkarma.com/entities/china-feihe-ltd" target="_blank" data-smartkarma-citation="entities:24413:1" rel="noopener">China Feihe (6186 HK)</a>, <a href="https://www.smartkarma.com/entities/semiconductor-manufacturing" target="_blank" data-smartkarma-citation="entities:14231:1" rel="noopener">Semiconductor Manufacturing (981 HK)</a> and <a href="https://www.smartkarma.com/entities/evergrande-real-estate-group-limited" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> being included in the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a>, and of <a href="https://www.smartkarma.com/entities/china-taiping-insurance-hldgs-co-ltd" target="_blank" data-smartkarma-citation="entities:489:1" rel="noopener">China Taiping Insurance Hldgs (966 HK)</a>, <a href="https://www.smartkarma.com/entities/china-telecom-corp-ltd-h" target="_blank" data-smartkarma-citation="entities:1015:1" rel="noopener">China Telecom Corp Ltd (H) (728 HK)</a>, <a href="https://www.smartkarma.com/entities/china-minsheng-banking-h" target="_blank" data-smartkarma-citation="entities:8983:1" rel="noopener">China Minsheng Banking H (1988 HK)</a>, <a href="https://www.smartkarma.com/entities/china-vanke-co-ltd-h" target="_blank" data-smartkarma-citation="entities:18368:1" rel="noopener">China Vanke Co Ltd (H) (2202 HK)</a>, <a href="https://www.smartkarma.com/entities/fosun-international-ltd" target="_blank" data-smartkarma-citation="entities:433:1" rel="noopener">Fosun International (656 HK)</a>, <a href="https://www.smartkarma.com/entities/china-citic-bank-corp-ltd-ea6c25fd-4b20-45cb-a4a6-df7a60136f03" target="_blank" data-smartkarma-citation="entities:653:1" rel="noopener">China Citic Bank Corp Ltd H (998 HK)</a> and <a href="https://www.smartkarma.com/entities/china-shenhua-energy-co-h" target="_blank" data-smartkarma-citation="entities:382:1" rel="noopener">China Shenhua Energy Co H (1088 HK)</a> being deleted from the index.Depending on price movements between now and 30 September, <a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a> and <a href="https://www.smartkarma.com/entities/hansoh-pharmaceutical-group" target="_blank" data-smartkarma-citation="entities:23675:1" rel="noopener">Hansoh Pharmaceutical (3692 HK)</a> could be included in the index, which would see <a href="https://www.smartkarma.com/entities/want-want-china-holdings-ltd" target="_blank" data-smartkarma-citation="entities:355:1" rel="noopener">Want Want (151 HK)</a> and <a href="https://www.smartkarma.com/entities/picc-property-casualty-h" target="_blank" data-smartkarma-citation="entities:350:1" rel="noopener">PICC Property &amp; Casualty H (2328 HK)</a> being deleted.Estimated one-way turnover for the rebalance is 9.63% which is lower than the turnover at the September rebalance, but significant nonetheless.The expected review changes will alter the sectoral composition of the index with an increase in the weight of the Consumer Discretionary, Information Technology and Health Care sectors at the expense of Financials and Energy. There will also be an impact on the HSCEI 2021 dividend futures, a large part of which has already been discounted by the market.

The Hang Seng Indexes Company Limited (HSIL) should announce the results of the 2020 Q3 review of the Hang Seng Family of Indexes on 6 November. The constituent changes will be effective after the close of trading on 4 December.With only 3 changes permitted in the September Hang Seng China Enterprises Index (HSCEI INDEX) review post the methodology change that included WVR securities and Secondary Listings in the eligible Universe, there could be as many as 9 changes in the December review.We see a high probability of China Overseas Land &amp; Investment Ltd (688 HK), JD.com (HK) (9618 HK), Alibaba Health Information Technology (241 HK), Haidilao (6862 HK), China Feihe (6186 HK), Semiconductor Manufacturing (981 HK) and Evergrande Real Estate Group (3333 HK) being included in the Hang Seng China Enterprises Index (HSCEI INDEX), and of China Taiping Insurance Hldgs (966 HK), China Telecom Corp Ltd (H) (728 HK), China Minsheng Banking H (1988 HK), China Vanke Co Ltd (H) (2202 HK), Fosun International (656 HK), China Citic Bank Corp Ltd H (998 HK) and China Shenhua Energy Co H (1088 HK) being deleted from the index.Depending on price movements between now and 30 September, NetEase (9999 HK) and Hansoh Pharmaceutical (3692 HK) could be included in the index, which would see Want Want (151 HK) and PICC Property &amp; Casualty H (2328 HK) being deleted.Estimated one-way turnover for the rebalance is 9.63% which is lower than the turnover at the September rebalance, but significant nonetheless.The expected review changes will alter the sectoral composition of the index with an increase in the weight of the Consumer Discretionary, Information Technology and Health Care sectors at the expense of Financials and Energy. There will also be an impact on the HSCEI 2021 dividend futures, a large part of which has already been discounted by the market.

HSCEI Index Rebalance Preview - December 2020: HUGE Number of Changes and Turnover Expected

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.

Thematic (Sector/Industry)

There is little evidence of any major economic shutdown in China during early this year. There is also little evidence of the period when China re-opened its economy only to find most all other economies were closed. It was arguably an especially difficult period for China and its banks. Where many banks have now reported their results, it becomes clearer that the numbers hardly reflect crisis - temporary or otherwise. This though is not what really matters; rather it is the implication for profit delta during 2H20.

There is little evidence of any major economic shutdown in China during early this year. There is also little evidence of the period when China re-opened its economy only to find most all other economies were closed. It was arguably an especially difficult period for China and its banks. Where many banks have now reported their results, it becomes clearer that the numbers hardly reflect crisis - temporary or otherwise. This though is not what really matters; rather it is the implication for profit delta during 2H20.

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

We recommend Buying <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's (BNKEA)</a> inefficient Additional Tier 1 (AT1) capital securities. The minimum trading size increment of a debt capital security must be at least $250,000 to qualify as Loss Absorbing Capacity (LAC) capital, effective from 1 January 2021 under Hong Kong Monetary Authority regulations. Three of BNKEA’s outstanding debt capital instruments do not meet this minimum size threshold and two of these are AT1 securities. We anticipate that BNKEA will retire and replace these securities with more efficient capital. The market does not price this into the AT1 securities.BNKEA is in the process of undertaking a strategic review of its franchise and operations. For our views on the potential business development outcomes from this review, please see: <a href="https://www.smartkarma.com/insights/bank-of-east-asia-strategic-review-to-set-at1-value-forewarned-is-forearmed" target="_blank" data-smartkarma-citation="insights:42705" rel="noopener">Bank of East Asia: Strategic Review to Set AT1 Value; Forewarned Is Forearmed</a>.We do not believe it to be in BNKEA’s interests to stiff credit investors by leaving inefficient capital outstanding while increasing shareholder returns, irrespective of the other strategic review outcomes. We also do not foresee par call risk as the bonds still quality as AT1 regulatory capital. As such, if the inefficient debt capital is not called and left outstanding as excess regulatory capital these bonds will be akin to expensive Senior Unsecured debt.The downside risk to this recommendation is that the firm simply dividends excess common equity capital to its shareholders while not calling and replacing the inefficient capital securities. We believe that if the bank does not call the Dec 20 callable AT1 bond, then it is also unlikely to call the 2022 AT1 security. However, in this situation, the bank risks becoming a pariah in the debt capital markets. It risks becoming the Deutsche Bank of Asia for credit investors. Better to play nice and reap greater rewards over time.

We recommend Buying Bank of East Asia's (BNKEA) inefficient Additional Tier 1 (AT1) capital securities. The minimum trading size increment of a debt capital security must be at least $250,000 to qualify as Loss Absorbing Capacity (LAC) capital, effective from 1 January 2021 under Hong Kong Monetary Authority regulations. Three of BNKEA’s outstanding debt capital instruments do not meet this minimum size threshold and two of these are AT1 securities. We anticipate that BNKEA will retire and replace these securities with more efficient capital. The market does not price this into the AT1 securities.BNKEA is in the process of undertaking a strategic review of its franchise and operations. For our views on the potential business development outcomes from this review, please see: Bank of East Asia: Strategic Review to Set AT1 Value; Forewarned Is Forearmed.We do not believe it to be in BNKEA’s interests to stiff credit investors by leaving inefficient capital outstanding while increasing shareholder returns, irrespective of the other strategic review outcomes. We also do not foresee par call risk as the bonds still quality as AT1 regulatory capital. As such, if the inefficient debt capital is not called and left outstanding as excess regulatory capital these bonds will be akin to expensive Senior Unsecured debt.The downside risk to this recommendation is that the firm simply dividends excess common equity capital to its shareholders while not calling and replacing the inefficient capital securities. We believe that if the bank does not call the Dec 20 callable AT1 bond, then it is also unlikely to call the 2022 AT1 security. However, in this situation, the bank risks becoming a pariah in the debt capital markets. It risks becoming the Deutsche Bank of Asia for credit investors. Better to play nice and reap greater rewards over time.

Bank of East Asia: Buy the Inefficient Capital Securities

It is often a murky affair, analyzing banks in China. The most recent earnings brings this to the fore. Where most banks globally have seen devastating profit in the first half of the year, that is hardly the case for China. Few large, listed banks have yet reported, but <a href="https://www.smartkarma.com/entities/china-citic-bank-corp-ltd-ea6c25fd-4b20-45cb-a4a6-df7a60136f03" target="_blank" data-smartkarma-citation="entities:653:1" rel="noopener">China Citic Bank Corp Ltd H (998 HK)</a> has and its 1H20 profit is well higher than its FY19 profit on an annualized basis. The key to China’s banks in the shutdown crisis - the great interruption - is how banks have been pushed to limit NPL recognition, provide loan support for ailing companies and  to ultimately limit credit costs. One implication is that as others are seeing a highly positive delta in coming quarters this will not be the case for China banks. Another implication is that reported financials in China are perhaps more opaque than previously thought?

It is often a murky affair, analyzing banks in China. The most recent earnings brings this to the fore. Where most banks globally have seen devastating profit in the first half of the year, that is hardly the case for China. Few large, listed banks have yet reported, but China Citic Bank Corp Ltd H (998 HK) has and its 1H20 profit is well higher than its FY19 profit on an annualized basis. The key to China’s banks in the shutdown crisis - the great interruption - is how banks have been pushed to limit NPL recognition, provide loan support for ailing companies and  to ultimately limit credit costs. One implication is that as others are seeing a highly positive delta in coming quarters this will not be the case for China banks. Another implication is that reported financials in China are perhaps more opaque than previously thought?

Asian bank high yield (HY) Tier 2 bonds are perceived to have lower extension risk than their global Emerging Market peers. Combined with relatively lower spread levels, Asian bank Tier 2 bonds may not look good value; however, this overlooks the value of call certainty. The call versus non-call decision makes a difference to investor returns.We find that the gain from not calling <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's (23 HK)</a> 4% coupon 2021 callable Tier 2 bond is lowest amongst Asian-headquartered banks. This is reflected in the bond’s relatively low spreads. At the same time, the potential gain from not calling Dah Sing Bank’s 2024 callable Tier 2 bond is highest amongst Asian-headquartered banks. This is not reflected in the bond’s relative low spread, not should it be at this point in time.Meanwhile, perceived extension risk is relatively high for the 2022 callable Tier 2 bonds of some Turkish banks. This may suggest market concerns regarding both the willingness to call and, given their low bond ratings, the ability to source sufficient US$ liquidity to retire these bonds.In this, the second of a series of notes on Tier 2 debt instruments, we undertake an assessment of the perceived non-call risk in Asia-headquartered bank bonds as compared to higher yielding bonds in other Emerging Markets. Future reports will consider fundamental perspectives as we identify our top picks and pans in this segment of the bank credit continuum.

Asian bank high yield (HY) Tier 2 bonds are perceived to have lower extension risk than their global Emerging Market peers. Combined with relatively lower spread levels, Asian bank Tier 2 bonds may not look good value; however, this overlooks the value of call certainty. The call versus non-call decision makes a difference to investor returns.We find that the gain from not calling Bank of East Asia's (23 HK) 4% coupon 2021 callable Tier 2 bond is lowest amongst Asian-headquartered banks. This is reflected in the bond’s relatively low spreads. At the same time, the potential gain from not calling Dah Sing Bank’s 2024 callable Tier 2 bond is highest amongst Asian-headquartered banks. This is not reflected in the bond’s relative low spread, not should it be at this point in time.Meanwhile, perceived extension risk is relatively high for the 2022 callable Tier 2 bonds of some Turkish banks. This may suggest market concerns regarding both the willingness to call and, given their low bond ratings, the ability to source sufficient US$ liquidity to retire these bonds.In this, the second of a series of notes on Tier 2 debt instruments, we undertake an assessment of the perceived non-call risk in Asia-headquartered bank bonds as compared to higher yielding bonds in other Emerging Markets. Future reports will consider fundamental perspectives as we identify our top picks and pans in this segment of the bank credit continuum.

Asian Bank HY Tier 2: Extension Risk Perceptions Vs Global Emerging Market Peers

China

China CITIC Bank Corporation Limited provides banking services. The Company offers deposits, loans, domestic settlement,  currency trading, bank guarantee, and other services. China CITIC Bank provides its services to individuals, enterprises, and other clients.

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China Citic Bank Corp Ltd H (998 HK)

HSCEI Index Rebalance Preview - December 2020: HUGE Number of Changes and Turnover Expected

The Hang Seng Indexes Company Limited (HSIL) will announce the results of the 2020 Q2 review of the Hang Seng Family of Indexes in mid August. The...

Brian Freitas

China Banks – Muted Profit Delta

The profile for provision expenses and profits at China's banks during 1H20 is wholly different to many others globally.

Daniel Tabbush

Bank of East Asia: Buy the Inefficient Capital Securities

We recommend Buying Bank of East Asia's (BNKEA) inefficient Additional Tier 1 (AT1) capital securities. The minimum trading size increment of a...

Hank Calenti, CFA

China Banks – No Crisis

It is often a murky affair, analyzing banks in China. The most recent earnings brings this to the fore. Where most banks globally have seen...

Daniel Tabbush

Asian Bank HY Tier 2: Extension Risk Perceptions Vs Global Emerging Market Peers

Asian bank high yield (HY) Tier 2 bonds are perceived to have lower extension risk than their global Emerging Market peers. Combined with...

Hank Calenti, CFA

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