Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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<div>And the rest, as they say, is history.</div>
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<div>At the 11th hour, leading to what would the world's largest IPO, with an implied valuation of US$316bn - nearly 20% larger than the world's largest bank, <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">ICBC (H) (1398 HK)</a> - the Shanghai Stock Exchange <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1103/2020110302285.pdf" target="_blank" rel="noopener">cancelled</a> the A-Share listing saying that the interviews that authorities had conducted with Jack Ma and regulation changes were not adequately explained in the documents, and the listing could not go ahead. Shortly after, Ant Group pulled its H-Share offering too.</div>
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<div class="content-caption">Source: FT</div>
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<div>It's easy to point the finger at Jack Ma's bellicose speech in Shanghai on the 24 October, in which he suggested traditional Chinese banks should change their “pawnshop” operating model. Arguably, this didn't help.</div>
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<div>But the scuppering of the IPO is not some juicy vendetta - simply the reality of China's state-controlled banking system.</div>
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<div>The runaway success of <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> / <a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> - and other massive tech companies such as <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a> - pivots off a less regulated entity pitched against more heavily regulated rivals.</div>
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<div>The reining in of "disruptors" reach of these tech companies came in for even greater oversight yesterday with proposed new government measures to stomp on monopolistic practices, as a means to curtail their influence.</div>
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<div>What does all this mean for big Chinese tech companies? Yesterday's downward move in BABA and Tencent could be just a sign of things to come.</div>
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<div>More below the fold.</div>
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And the rest, as they say, is history.






At the 11th hour, leading to what would the world's largest IPO, with an implied valuation of US$316bn - nearly 20% larger than the world's largest bank, ICBC (H) (1398 HK) - the Shanghai Stock Exchange cancelled the A-Share listing saying that the interviews that authorities had conducted with Jack Ma and regulation changes were not adequately explained in the documents, and the listing could not go ahead. Shortly after, Ant Group pulled its H-Share offering too.





Source: FT




It's easy to point the finger at Jack Ma's bellicose speech in Shanghai on the 24 October, in which he suggested traditional Chinese banks should change their “pawnshop” operating model. Arguably, this didn't help.

But the scuppering of the IPO is not some juicy vendetta - simply the reality of China's state-controlled banking system.

The runaway success of Alibaba Group (9988 HK) / Ant Group (6688 HK) - and other massive tech companies such as Tencent Holdings (700 HK) - pivots off a less regulated entity pitched against more heavily regulated rivals.


The reining in of "disruptors" reach of these tech companies came in for even greater oversight yesterday with proposed new government measures to stomp on monopolistic practices, as a means to curtail their influence.

What does all this mean for big Chinese tech companies? Yesterday's downward move in BABA and Tencent could be just a sign of things to come.

More below the fold.

















































Party Poopers: Reining In China's Internet

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)

<p>The news of a C19 vaccine is a discrete variable that can affect how banks assess credit risk. With a vaccine there is less risk of economic shutdown, less risk of worsening consumption, and less risk of more unemployment. All of this must mean better statistics for probability of default (PD) and loss given default (LGD). At the same time, the US President-elect is talking about a ‘dark winter’ and urging mass mask-wearing. This comes as many European countries re-shutdown their economies at least to some degree. Banks will be hard-pressed to not view the Biden comments and actions from European countries as negative for credit metrics. This can mean a messy and moving set of credit risk assumptions for banks, making the path forward that much more difficult to ascertain.</p>

The news of a C19 vaccine is a discrete variable that can affect how banks assess credit risk. With a vaccine there is less risk of economic shutdown, less risk of worsening consumption, and less risk of more unemployment. All of this must mean better statistics for probability of default (PD) and loss given default (LGD). At the same time, the US President-elect is talking about a ‘dark winter’ and urging mass mask-wearing. This comes as many European countries re-shutdown their economies at least to some degree. Banks will be hard-pressed to not view the Biden comments and actions from European countries as negative for credit metrics. This can mean a messy and moving set of credit risk assumptions for banks, making the path forward that much more difficult to ascertain.

China Banks – Biden, Vaccine, Provisions

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

<p><a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> almost raised US$35bn in the largest IPO in history. While the IPO may eventually proceed, we are unsure of the valuations the company could demand the next time around.</p><p>Following the suspension of listing on the STAR Market by the Shanghai Stock Exchange due to a 'major event', <a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> announced the suspension of the H-share listing too. The company also said that the refund of the application monies will be made as soon as possible to Hong Kong retail investors.</p><p>This 'major event' will have knock-on implications for a host of other trades/strategies as well. In this Insight, we take a look at some of them.</p>

Ant Group (6688 HK) almost raised US$35bn in the largest IPO in history. While the IPO may eventually proceed, we are unsure of the valuations the company could demand the next time around.Following the suspension of listing on the STAR Market by the Shanghai Stock Exchange due to a 'major event', Ant Group (6688 HK) announced the suspension of the H-share listing too. The company also said that the refund of the application monies will be made as soon as possible to Hong Kong retail investors.This 'major event' will have knock-on implications for a host of other trades/strategies as well. In this Insight, we take a look at some of them.

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

<p><strong><em>*Don’t Be Misled By Better Numbers: </em></strong>Industrial and Commercial Bank of China (1398.HK) [ICBC] reported stronger 3Q20 results than 2Q20, coming in at CNY 80.3 bn - increasing CNY 15.6 bn (24.1%) linked quarter. The linked quarter Improvement is largely attributed to three factors: a) net interest income improvement of CNY 4.0 bn (2.6%) on both a 1 bp NIM improvement to 1.92%, and 2.6% loan growth; b) a CNY 11.7 bn (17.7%) decline in loss provisioning despite marked credit weakness; and c) a 700 bp decline in ICBC’s tax rate to 15.2%; and </p><p><strong><em>*Credit Risk Rising: </em></strong>As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 419 bn which amounts to over a year of pre-tax results at ICBC.      </p>

*Don’t Be Misled By Better Numbers: Industrial and Commercial Bank of China (1398.HK) [ICBC] reported stronger 3Q20 results than 2Q20, coming in at CNY 80.3 bn - increasing CNY 15.6 bn (24.1%) linked quarter. The linked quarter Improvement is largely attributed to three factors: a) net interest income improvement of CNY 4.0 bn (2.6%) on both a 1 bp NIM improvement to 1.92%, and 2.6% loan growth; b) a CNY 11.7 bn (17.7%) decline in loss provisioning despite marked credit weakness; and c) a 700 bp decline in ICBC’s tax rate to 15.2%; and *Credit Risk Rising: As ICBC is the benchmark name to which all mainland Chinese banks are measured, an increase of such magnitude is more than alarming – and intimates mainland Chinese bank credit risk is moving in oppositive directions to their counterparts in India. When one considers the current break in credit quality reserves would appear to be incredibly light – in the neighborhood of CNY 419 bn which amounts to over a year of pre-tax results at ICBC.      

ICBC – Be Very Wary Of Worsening Credit

<p> <strong><em>*Way Too Early Provision Reduction: </em></strong>Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, reported 3Q20 net income of CNY 8.7 bn – increasing CNY 3.6 bn or 70% linked quarter. One factor, and one factor alone, was responsible for the increase  - provisions were pre-emptively reduced CNY 6.7 bn (29.5%) over the period despite a true decrease in credit risk; </p><p> <strong><em>*Credit Is WEAKER: </em></strong>Net new NPLs have increased CNY 23.0 bn linked quarter or a massive 223.1% on an annualized basis. Assuming the credit break in the PAB portfolio holds – which it likely will given the economic weakness attributed to COVID-19 – reserves would appear light by CNY 178 bn if we assume a 2x NPL ratio. This shortfall represents 62% of stated equity; and</p><p> <em><strong>*Fundamentally Challenged Still:</strong></em> Despite the Investor Day cheerleading session, Ping An P&amp;C operating profits declined CNY 2.6 bn (29.2%) HOH in 1H20, as the overall combined ratio eroded 1.5% to 98.1% due primarily to continued weakness within the credit insurance unit where the combined ratio came in at 125.6% (up 32.4%). The credit insurance segment reported a CNY 3.5 bn underwriting loss, due to defaults on underlying loans. </p>

 *Way Too Early Provision Reduction: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, reported 3Q20 net income of CNY 8.7 bn – increasing CNY 3.6 bn or 70% linked quarter. One factor, and one factor alone, was responsible for the increase  - provisions were pre-emptively reduced CNY 6.7 bn (29.5%) over the period despite a true decrease in credit risk;  *Credit Is WEAKER: Net new NPLs have increased CNY 23.0 bn linked quarter or a massive 223.1% on an annualized basis. Assuming the credit break in the PAB portfolio holds – which it likely will given the economic weakness attributed to COVID-19 – reserves would appear light by CNY 178 bn if we assume a 2x NPL ratio. This shortfall represents 62% of stated equity; and *Fundamentally Challenged Still: Despite the Investor Day cheerleading session, Ping An P&amp;C operating profits declined CNY 2.6 bn (29.2%) HOH in 1H20, as the overall combined ratio eroded 1.5% to 98.1% due primarily to continued weakness within the credit insurance unit where the combined ratio came in at 125.6% (up 32.4%). The credit insurance segment reported a CNY 3.5 bn underwriting loss, due to defaults on underlying loans. 

Ping An Insurance – Bank Fundamentals Worsening

China

Industrial and Commercial Bank of China Ltd provides a broad range of personal and corporate commercial banking services all over China.  The Bank's businesses include deposit, loan, credit card, fund underwriting and trust, and foreign currency settlement and trading.

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Ind & Comm Bk Of China (A) (601398 CH)

Party Poopers: Reining In China's Internet

It is a delicate dance to promote home-grown tech companies while keeping existing market forces in check. But it is no secret the PRC government's...

David Blennerhassett

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There are conflicting factors at play in assessing banks, including Chinese banks, which will making the path forward that much more difficult to...

Daniel Tabbush

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With Ant Group suspending the H-share listing following SSE's suspension of the A-share listing, there will be multiple implications for trades and...

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INDUSTRIAL AND COMMERCIAL BANK OF CHINA: Don't Believe The Hype. Numbers Manufactured, and Credit Risk Suggests Long Winter For ICBC and Mainland...

Thomas J. Monaco

Ping An Insurance – Bank Fundamentals Worsening

PING AN INSURANCE: PING AN BANK Reported A Completely Manufactured 3Q20 Earnings Result, Cutting Provisions Despite Substantially Weaker Credit

Thomas J. Monaco

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