Founder of Antler Capital

Stanley Tsai, CFA

Thematic (Sector/Industry)

In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).
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<td style="width: 726.047px;">Exhibit 1: China Financials | Silver Linings Playbook</td>
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<td style="width: 726.047px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/213/768/original/image_768460236451623962508577.png?1623962508" class="editor-image img-responsive" data-smartkarma-image-id="213768"></figure>

Source: Our analysis
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</tbody>
</table>
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In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).



Exhibit 1: China Financials | Silver Linings Playbook





Source: Our analysis




Related Insights
China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 
Glut and Famine: We Might See Snow in China This Summer 
China Macro: PPI Peaks, while CPI Eases Tightening Fears 
China Macro: Exports Disappoint, but It's Still Early in the Game 
Glut and Famine: China's Monetary Conditions a Notch Tighter in May 
ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 
BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

China Financials: Silver Linings Playbook

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

Equity Bottom-Up

*Asian Business Doing Well:Total APE in 1Q21 for Asia and Africa amounted to USD 1.2 bn, increasing USD 177 mn (17.4%) YOY. New business value for Asia and Africa improved USD 102 mn (20.3%) YOY. VONB margins for Asia and Africa improve 3% YOY to 52% at 1Q21. Mainland China delivered solid growth during the quarter, driven by an improved sales campaign and low comparative results in 1Q20; and  *No Action On Jackson: The key disappointment comes from the delay of its Jackson National Life (JNL), US subsidiary, demerger which has now been pushed out until sometime in 2H21 (from 1H21) – even then we don’t have confidence this deal will get done. Management did mention that regulatory approval from Michigan and New York has been obtained, however, a review of the updated Form 10 is ongoing.

*Asian Business Doing Well:Total APE in 1Q21 for Asia and Africa amounted to USD 1.2 bn, increasing USD 177 mn (17.4%) YOY. New business value for Asia and Africa improved USD 102 mn (20.3%) YOY. VONB margins for Asia and Africa improve 3% YOY to 52% at 1Q21. Mainland China delivered solid growth during the quarter, driven by an improved sales campaign and low comparative results in 1Q20; and  *No Action On Jackson: The key disappointment comes from the delay of its Jackson National Life (JNL), US subsidiary, demerger which has now been pushed out until sometime in 2H21 (from 1H21) – even then we don’t have confidence this deal will get done. Management did mention that regulatory approval from Michigan and New York has been obtained, however, a review of the updated Form 10 is ongoing. 

*Better, But Off A Low Base: AIA Group (1299.HK) [AIA] will report 1Q21 operating metrics on May 14, 2021. We anticipate a low base YOY rebound in VONB to USD 950 mn (15%). Mainland China and Malaysia should be this quarter’s standouts, whilst Hong Kong likely exhibits yet another decline in 1Q21 due to the border closure with mainland China;  and * China And Hong Kong Risks Still Need To Be Addressed: Concerned about weakening organic growth, AIA has gone on a deal-making spree: Bank of East Asia’s (23.HK) [BEA] wholly-owned life insurance unit, BEA Life; an exclusive 15-year bancassurance relationship with BEA; acquisition of Blue Cross (Asia-Pacific) Insurance’s underwritten closed life insurance; a strategic digital partnership with ZhongAn Online P&amp;C Insurance’ (6060.HK) [ZhongAn]; and received CBIRC approval to restructure its Shanghai-based life insurance branch into a wholly-owned subsidiary. In addition to the massive managerial distractions with so many deals at one time, there are negative tax implications for mainland Chinese subsidiaries versus branches; challenges of bogusly rated AAA mainland Chinese bonds; no end in sight with its flailing Hong Kong flagship; and getting the BEA Life team on the same with AIA Hong Kong.

*Better, But Off A Low Base: AIA Group (1299.HK) [AIA] will report 1Q21 operating metrics on May 14, 2021. We anticipate a low base YOY rebound in VONB to USD 950 mn (15%). Mainland China and Malaysia should be this quarter’s standouts, whilst Hong Kong likely exhibits yet another decline in 1Q21 due to the border closure with mainland China;  and * China And Hong Kong Risks Still Need To Be Addressed: Concerned about weakening organic growth, AIA has gone on a deal-making spree: Bank of East Asia’s (23.HK) [BEA] wholly-owned life insurance unit, BEA Life; an exclusive 15-year bancassurance relationship with BEA; acquisition of Blue Cross (Asia-Pacific) Insurance’s underwritten closed life insurance; a strategic digital partnership with ZhongAn Online P&amp;C Insurance’ (6060.HK) [ZhongAn]; and received CBIRC approval to restructure its Shanghai-based life insurance branch into a wholly-owned subsidiary. In addition to the massive managerial distractions with so many deals at one time, there are negative tax implications for mainland Chinese subsidiaries versus branches; challenges of bogusly rated AAA mainland Chinese bonds; no end in sight with its flailing Hong Kong flagship; and getting the BEA Life team on the same with AIA Hong Kong. 

AIA Group – 1Q21 Preview; Better But Off Low Base

Equity Analyst, LightStream Research

Shifara Samsudeen, ACMA, CGMA

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Capital Markets

The leading Chinese insurance and healthcare platform <a href="https://www.smartkarma.com/entities/waterdrop-inc" target="_blank" data-smartkarma-citation="entities:33018:1" rel="noopener">Waterdrop Inc (WDH US)</a>  has set the terms for its US IPO. According to iResearch, Waterdrop was ranked the largest independent third-party insurance platform in China in terms of life and health insurance first year premiums (FYP) distributed in 2020.The company plans to issue 30m ADS’ at an indicative price range of US$10-12 per ADS. Each ADS represents 10 ordinary shares of the company and the offer represents about 7.6% of the company’s total outstanding shares post IPO. At the midpoint of the IPO price of US$11 per ADS, Waterdrop will raise net proceeds of US$301.6m (assuming over-allotment option is not exercised) at a market capitalisation of US$4.3bn and a post-money EV of US$3.7bn.A number of cornerstone investors have agreed to subscribe for at least US$210m worth of ADS’ offered at the IPO and these investors include Boyu Capital, HOPU Investments and Kevin Sunny Holdings. Waterdrop plans to use approx. 50% of the net IPO proceeds on enhancing and expanding its healthcare service and insurance business, 30% of the net IPO proceeds on R&amp;D and the remainder will be used for general corporate purposes.

The leading Chinese insurance and healthcare platform Waterdrop Inc (WDH US)  has set the terms for its US IPO. According to iResearch, Waterdrop was ranked the largest independent third-party insurance platform in China in terms of life and health insurance first year premiums (FYP) distributed in 2020.The company plans to issue 30m ADS’ at an indicative price range of US$10-12 per ADS. Each ADS represents 10 ordinary shares of the company and the offer represents about 7.6% of the company’s total outstanding shares post IPO. At the midpoint of the IPO price of US$11 per ADS, Waterdrop will raise net proceeds of US$301.6m (assuming over-allotment option is not exercised) at a market capitalisation of US$4.3bn and a post-money EV of US$3.7bn.A number of cornerstone investors have agreed to subscribe for at least US$210m worth of ADS’ offered at the IPO and these investors include Boyu Capital, HOPU Investments and Kevin Sunny Holdings. Waterdrop plans to use approx. 50% of the net IPO proceeds on enhancing and expanding its healthcare service and insurance business, 30% of the net IPO proceeds on R&amp;D and the remainder will be used for general corporate purposes.

Waterdrop IPO: Attractive at the Lower End of the IPO Pricing

*Pointless Shenzhen Deal: Ping An Insurance (2318.HK) [Ping An] has announced that it has agreed to invest CNY 37-51 bn in a restructured Founder Group, an unlisted mainland Chinese-controlled conglomerate. Under the proposal, Ping An will have own between 51.1%-70% of a newly formed entity called New Founder Group; and*Enough On Its Plate: In our view, Ping An has far too much on its plate to worry about than purchasing another company’s mess. There are weak fundamentals at Ping An Life, poor profit metrics at Ping An Property &amp; Casualty; and weak fundamentals at Ping An Bank. There are just so many IPOs and secondaries that Ping An can do with its FinTech investments to offset the insurer’s poor performance.

*Pointless Shenzhen Deal: Ping An Insurance (2318.HK) [Ping An] has announced that it has agreed to invest CNY 37-51 bn in a restructured Founder Group, an unlisted mainland Chinese-controlled conglomerate. Under the proposal, Ping An will have own between 51.1%-70% of a newly formed entity called New Founder Group; and*Enough On Its Plate: In our view, Ping An has far too much on its plate to worry about than purchasing another company’s mess. There are weak fundamentals at Ping An Life, poor profit metrics at Ping An Property &amp; Casualty; and weak fundamentals at Ping An Bank. There are just so many IPOs and secondaries that Ping An can do with its FinTech investments to offset the insurer’s poor performance.

China

China Pacific Insurance (Group) Company, Ltd. is an integrated insurance services provider. The Company offers life and property insurance products through its subsidiaries.

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China Pacific Insurance (2601 HK)

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