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

*New IPO Disappoints Right Out Of Gate: Waterdrop (WDH.US) [Waterdrop] provides an online insurance marketplace and related medical crowdfunding platform in mainland China. Waterdrop  reported its first set of earnings results since its IPO, coming in at a negative CNY 370.2 bn for 1Q21, declining CNY 249.4 (206.6%) YOY largely given its higher costs from a channel (third party traffic) and product mix shift to long-term insurance. Both factors have caused operating costs to increase CNY 579.1 bn (75.7%) YOY  - far outpacing revenue growth of CNY 229.6 bn (35.1%) over the period; and  *All Is Not Lost…Yet: First year premium (FYP) did increase 42.7% YOY – led by costly third party FYP which increased 51.6%. Long-term critical illness insurance grew 132% off of a low base, but still well exceeding industry average. Anecdotally, management believes that competitive pressures appear to be abating and that increases in customer acquisition costs is now decelerating. In addition, Waterdrop continues to make progress with: Waterdrop Health; Waterdrop Medicine; and with outpatient services.

*New IPO Disappoints Right Out Of Gate: Waterdrop (WDH.US) [Waterdrop] provides an online insurance marketplace and related medical crowdfunding platform in mainland China. Waterdrop  reported its first set of earnings results since its IPO, coming in at a negative CNY 370.2 bn for 1Q21, declining CNY 249.4 (206.6%) YOY largely given its higher costs from a channel (third party traffic) and product mix shift to long-term insurance. Both factors have caused operating costs to increase CNY 579.1 bn (75.7%) YOY  - far outpacing revenue growth of CNY 229.6 bn (35.1%) over the period; and  *All Is Not Lost…Yet: First year premium (FYP) did increase 42.7% YOY – led by costly third party FYP which increased 51.6%. Long-term critical illness insurance grew 132% off of a low base, but still well exceeding industry average. Anecdotally, management believes that competitive pressures appear to be abating and that increases in customer acquisition costs is now decelerating. In addition, Waterdrop continues to make progress with: Waterdrop Health; Waterdrop Medicine; and with outpatient services.

*Better, But Weak Metrics: Link REIT (823.HK) [Link REIT] reported a positive FY 2H21 bottom-line result of HKD 5.3 bn, increasing HKD 9.4 bn over the HKD 4.1 bn in losses posted in FY 1H21. However, when we exclude Link’s non-cash FV marks of HKD 2.0 bn, operating performance cam in at just HKD 3.3 bn – improving just HKD 143 mn (4.5%) HOH. The positive HOH operating performance was driven by an increase in revenues from mainland China and overseas related property;  *Worries Remain In Hong Kong: Hong Kong retail portfolio's rental reversion rate continued to be challenged YOY in FY 2H21, albeit slightly improving from a negative 2.6% in FY 1H21 to a negative 1.8%. Although not a enormous surprise, this trend would appear to be with us for an extended period in Hong Kong - especially given the continued border closures amid the COVID-19 disruption; and*Poor Capital Management Becoming A Big Problem: Link management also appears hellbent on destroying shareholder value with deals that make little financial sense. Link recently announced the acquisition of Happy Valley Shopping Mall in Guangzhou where the current annualized NPI yield barely covering the project’s cost of funding. In order to improve occupancy, it would appear that Link would likely need to offering significant tenant enticements, and investment massively in asset enhancement. Bizarrely instead of weighing buybacks return versus new investment ROI, management views share buybacks as a mechanism to defend shares against short-selling.

*Better, But Weak Metrics: Link REIT (823.HK) [Link REIT] reported a positive FY 2H21 bottom-line result of HKD 5.3 bn, increasing HKD 9.4 bn over the HKD 4.1 bn in losses posted in FY 1H21. However, when we exclude Link’s non-cash FV marks of HKD 2.0 bn, operating performance cam in at just HKD 3.3 bn – improving just HKD 143 mn (4.5%) HOH. The positive HOH operating performance was driven by an increase in revenues from mainland China and overseas related property;  *Worries Remain In Hong Kong: Hong Kong retail portfolio's rental reversion rate continued to be challenged YOY in FY 2H21, albeit slightly improving from a negative 2.6% in FY 1H21 to a negative 1.8%. Although not a enormous surprise, this trend would appear to be with us for an extended period in Hong Kong - especially given the continued border closures amid the COVID-19 disruption; and*Poor Capital Management Becoming A Big Problem: Link management also appears hellbent on destroying shareholder value with deals that make little financial sense. Link recently announced the acquisition of Happy Valley Shopping Mall in Guangzhou where the current annualized NPI yield barely covering the project’s cost of funding. In order to improve occupancy, it would appear that Link would likely need to offering significant tenant enticements, and investment massively in asset enhancement. Bizarrely instead of weighing buybacks return versus new investment ROI, management views share buybacks as a mechanism to defend shares against short-selling.

Link REIT – Hong Kong “Stabilizing”

*Competitor Call Confirms Business Is Dead: A competitor hosted a conference call with the management of HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]. Much of the discussion centered on Hong Kong/Asia, where net interest income remains under pressure due to low spreads, credit remains benign, and now Wealth Management is again in focus; and    *Elephant In Room Not Discussed: CET 1 was 15.9% at 1Q21, and the Group continues to aim for between 14.0% -14.5%. Unfortunately there was no mention nor even a question on its US franchise, HSBC North America (HSBCNA), which if sold or even managed properly could would easily allow HSBC to realize its CET1 goal  - given the losses management still needs to take on that mess.

*Competitor Call Confirms Business Is Dead: A competitor hosted a conference call with the management of HSBC Holdings plc (5.HK/HSBA.LN) [HSBC]. Much of the discussion centered on Hong Kong/Asia, where net interest income remains under pressure due to low spreads, credit remains benign, and now Wealth Management is again in focus; and    *Elephant In Room Not Discussed: CET 1 was 15.9% at 1Q21, and the Group continues to aim for between 14.0% -14.5%. Unfortunately there was no mention nor even a question on its US franchise, HSBC North America (HSBCNA), which if sold or even managed properly could would easily allow HSBC to realize its CET1 goal  - given the losses management still needs to take on that mess.

HSBC Holdings Plc – Head Still Buried In The Sand

Thematic (Sector/Industry)

*Inflation Figures Are Wrong: The daily information be reported on inflation is simply wrong. There is actually an awful lot of inflation, and because central banks are controlling the narrative, we find the that the numbers are not being reported correctly. If energy, food, and housing costs are excluded from inflation reports, then inflation measurements are just wrong to begin with. Certainly, as consumers, we’d like to not be responsible for paying for food, energy, and housing; and*Stimulus Keeps Coming: 1Q21 GDP amounted to 6.4%, and 2Q21 GDP will be further boosted by the third round of stimulus checks. 1H21 should be boosted further by an expanded child tax care credit - becoming the fourth stimulus check of USD 110 bn - arguably even more effective if these monthly payments become a permanent source of income under President Biden’s tax plan. Infrastructure plan discussions are ongoing, and our belief is that nearly USD 2 tn in spending will be approved by Congress in late 1H21. The risk of a zero-to-negative GDP quarter for 1Q22 now becomes significant.

*Inflation Figures Are Wrong: The daily information be reported on inflation is simply wrong. There is actually an awful lot of inflation, and because central banks are controlling the narrative, we find the that the numbers are not being reported correctly. If energy, food, and housing costs are excluded from inflation reports, then inflation measurements are just wrong to begin with. Certainly, as consumers, we’d like to not be responsible for paying for food, energy, and housing; and*Stimulus Keeps Coming: 1Q21 GDP amounted to 6.4%, and 2Q21 GDP will be further boosted by the third round of stimulus checks. 1H21 should be boosted further by an expanded child tax care credit - becoming the fourth stimulus check of USD 110 bn - arguably even more effective if these monthly payments become a permanent source of income under President Biden’s tax plan. Infrastructure plan discussions are ongoing, and our belief is that nearly USD 2 tn in spending will be approved by Congress in late 1H21. The risk of a zero-to-negative GDP quarter for 1Q22 now becomes significant.

China Huarong Asset Management / Equity Bottom-Up

*Legacy Risks Strangling China Huarong: The issue appears to be China Huarong Asset Management’s (Huarong) legacy exposure associated with the misdeeds of its former Chairman, which still need to be addressed. Since our last note, Huarong still continues to teeter on the edge of insolvency and ongoing silence from Beijing has materially impacted funding costs. Huarong has until August 2021 to finally release its 2020 financial statements; and *Too Big Too Fail:  None of what is occurring should come as a surprise given mainland China's rapidly increasing debt position since the financial crisis - along with the same at its SOEs which are perceived to be too-big-to-fail and wield enormous political clout. A funding backstop from state-owned banks has been ordered by the China Banking and Insurance Regulatory Commission (CBIRC), and the mainland Chinese government is likely to again blink and make good on Huarong's significant debt obligations. Distressed investors should consider picking away at Huarong’s debt; we’ll believe it when see Beijing imposing losses on investors in SOEs.

*Legacy Risks Strangling China Huarong: The issue appears to be China Huarong Asset Management’s (Huarong) legacy exposure associated with the misdeeds of its former Chairman, which still need to be addressed. Since our last note, Huarong still continues to teeter on the edge of insolvency and ongoing silence from Beijing has materially impacted funding costs. Huarong has until August 2021 to finally release its 2020 financial statements; and *Too Big Too Fail:  None of what is occurring should come as a surprise given mainland China's rapidly increasing debt position since the financial crisis - along with the same at its SOEs which are perceived to be too-big-to-fail and wield enormous political clout. A funding backstop from state-owned banks has been ordered by the China Banking and Insurance Regulatory Commission (CBIRC), and the mainland Chinese government is likely to again blink and make good on Huarong's significant debt obligations. Distressed investors should consider picking away at Huarong’s debt; we’ll believe it when see Beijing imposing losses on investors in SOEs.

China Huarong Asset Management – Silence Is Golden

China

iShares FTSE A50 China Index ETF is an exchanged-traded fund established in Hong Kong. The investment objective of the iShares FTSE A50 China Index ETF is to provide investment results that, before fees and expenses, closely correspond to the performance of A50 Index.

iShares FTSE/Xinhua A50 China (2823 HK)

Waterdrop – Water Fall

WATERDROP: Waterdrop reported its first set of earnings results since its IPO, declining 206.6% YOY largely due to higher costs from a channel and...

Thomas J. Monaco

Link REIT – Hong Kong “Stabilizing”

LINK REIT: Link operating results only improved 4.5% HOH, driven by mainland China and overseas. Hong Kong retail portfolio remains a challenge, as...

Thomas J. Monaco

HSBC Holdings Plc – Head Still Buried In The Sand

HSBC HOLDINGS: A competitor call with management centered on benign Hong Kong/Asia. The Group aim is a CET1 of 14-14.5%. No mention HSBC North...

Thomas J. Monaco

The Fix Is In

US ECONOMY: Reported inflation is simply wrong, as central banks control the narrative. In addition, 2H21 should be boosted by an expanded child...

Thomas J. Monaco

China Huarong Asset Management – Silence Is Golden

CHINA HUARONG: Huarong's legacy exposure associated with the misdeeds of its former Chairman have caused to Huarong to teeter. Beijing is likely to...

Thomas J. Monaco