Geo Energy Resources (GERL SP) reported weak 4Q18 results late last month. The reason for the 5M USD net loss in 4Q18 was mainly due to Chinese import restrictions for Indonesian coal in November and December last year. With the import quota removed as of January ICI4 coal prices have rebounded from +/-30 USD/ton late 2018 to 40 USD/ton this week.
Geo remains in deep value territory (3x EV/EBITDA) as the company still has over 200M USD+ in cash it raised from a 300M USD bond placing almost 18 months ago. While the CEO announced plans to organize a HK dual listing in 1H19 this cannot materialize unless management can execute on a significant acquisition opportunity it has been considering for the last twelve months. With Indonesian elections coming up next month the hope is that clarity on this potential transaction can be sorted by late 1H19.
While Europe is obsessed with Climate Change doomsday scenarios being shouted around by school-skipping teenagers, the reality is that three out of four of the most populated countries in the world (China, India and Indonesia) will remain heavy users of coal for decades to come. With cleaner coal technology being the key differentiator how much pollution is emitted.
My Fair Value estimate (Base case) remains 0.35 SGD or 89% upside. Please recall, Macquarie paid 0.29 SGD for a 5% stake in November 2018 and had warrants issued to it at 0.33 SGD.
Last Friday, Hitachi (6501) was reported to be considering selling Hitachi Chemical (4217), according to media sources over the weekend. This has sent Hitachi Chemical and its parent into a frenzy with Hitachi Chemical ADR up 13% last Friday. We believe this news is relevant for Hitachi High Tech because both subsidiaries are 51-52% consolidated by the parent Hitachi, and both have arguably businesses with little synergy with the parent. We believe that Hitachi High Tech is also rumored to be on the block for sale or spin-off. Media sources say that Hitachi is considering a sale of Hitachi Chemical and would reap Y300bn. The current value of their 51% ownership in Hitachi Chemical is Y211bn, and thus there is 42% implied upside if the Y300bn figure is achieved.
To recap Q3 results for Hitachi High Tech from January 31, 2019, the numbers were decent with earnings above consensus forecasts by 33% for Q3 (Y15.8bn OP versus Y13.8bn forecast). The profit rise was due to improved margins in medical and continued strength in process semiconductor equipment. The shares are up 20% year-to-date, outperforming the Nikkei by 15%. Some of the fears of a sharp slowdown in semiconductor have been nullified by the continued strength in logic chip investments as well as the improved profitability in medical clinical analyzers. Medical profits soared 46% YoY in Q3 to Y7.6bn on a 13% YoY increase in revenues. OP margin improved from 12.3% to 15.8% YoY.
Bank Alfalah (BAFL PA) is heading in the right direction as testified by its metric progression, embodied in its quintile 1 PH Score™.
Valuations are not stretched – especially the Total return Ratio of 1.8x and an Earnings Yield of 14.5%.
Combining the fundamental momentum signals (PH Score™) with franchise valuation, and a low RSI, places BAFL PA in the top decile of bank opportunities globally.
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Geo Energy Resources (GERL SP) reported weak 4Q18 results late last month. The reason for the 5M USD net loss in 4Q18 was mainly due to Chinese import restrictions for Indonesian coal in November and December last year. With the import quota removed as of January ICI4 coal prices have rebounded from +/-30 USD/ton late 2018 to 40 USD/ton this week.
Geo remains in deep value territory (3x EV/EBITDA) as the company still has over 200M USD+ in cash it raised from a 300M USD bond placing almost 18 months ago. While the CEO announced plans to organize a HK dual listing in 1H19 this cannot materialize unless management can execute on a significant acquisition opportunity it has been considering for the last twelve months. With Indonesian elections coming up next month the hope is that clarity on this potential transaction can be sorted by late 1H19.
While Europe is obsessed with Climate Change doomsday scenarios being shouted around by school-skipping teenagers, the reality is that three out of four of the most populated countries in the world (China, India and Indonesia) will remain heavy users of coal for decades to come. With cleaner coal technology being the key differentiator how much pollution is emitted.
My Fair Value estimate (Base case) remains 0.35 SGD or 89% upside. Please recall, Macquarie paid 0.29 SGD for a 5% stake in November 2018 and had warrants issued to it at 0.33 SGD.
Last Friday, Hitachi (6501) was reported to be considering selling Hitachi Chemical (4217), according to media sources over the weekend. This has sent Hitachi Chemical and its parent into a frenzy with Hitachi Chemical ADR up 13% last Friday. We believe this news is relevant for Hitachi High Tech because both subsidiaries are 51-52% consolidated by the parent Hitachi, and both have arguably businesses with little synergy with the parent. We believe that Hitachi High Tech is also rumored to be on the block for sale or spin-off. Media sources say that Hitachi is considering a sale of Hitachi Chemical and would reap Y300bn. The current value of their 51% ownership in Hitachi Chemical is Y211bn, and thus there is 42% implied upside if the Y300bn figure is achieved.
To recap Q3 results for Hitachi High Tech from January 31, 2019, the numbers were decent with earnings above consensus forecasts by 33% for Q3 (Y15.8bn OP versus Y13.8bn forecast). The profit rise was due to improved margins in medical and continued strength in process semiconductor equipment. The shares are up 20% year-to-date, outperforming the Nikkei by 15%. Some of the fears of a sharp slowdown in semiconductor have been nullified by the continued strength in logic chip investments as well as the improved profitability in medical clinical analyzers. Medical profits soared 46% YoY in Q3 to Y7.6bn on a 13% YoY increase in revenues. OP margin improved from 12.3% to 15.8% YoY.
Bank Alfalah (BAFL PA) is heading in the right direction as testified by its metric progression, embodied in its quintile 1 PH Score™.
Valuations are not stretched – especially the Total return Ratio of 1.8x and an Earnings Yield of 14.5%.
Combining the fundamental momentum signals (PH Score™) with franchise valuation, and a low RSI, places BAFL PA in the top decile of bank opportunities globally.
Better-than-expected February inflation of 3.8%YoY wasn’t just a ‘base effect’ result. Broad food and transport CPI readings probably benefited from a year-ago, statistical high. It’s not the same for most of the non-food CPI items like rental & household utilities, and restaurant & miscellaneous goods & services that comprise discretionary expenditures. Lacking the base effect, inflation within this group seemed to have shed off last year’s price catalysts led by TRAIN’s excise hikes, high oil prices and supply shocks.
Based on the PSA’s seasonally adjusted data, headline inflation’s annualized pace was a benign 1.2%.
Our updated monthly time series extrapolation showed headline inflation bottoming out at 1.3%YoY-1.4%YoY in September-October this year.
Sustained liquidity tightness amid inflation’s benign pace with a trajectory settling in the BSP’s target range could facilitate a staggered bank reserve ratio cut of 2% starting 2Q19.
With the pro-growth bias of newly appointed BSP chief Benjamin Diokno (former Budget Secretary), the likelihood of a 25bp policy rate cut has been elevated in 3Q19 when inflation this year is expected to hit rock bottom and the ensuing size of positive, real interest rates could risk threatening growth.
Considering potential macro upsides this year, e.g., inflation bottoming out alongside consumption recovery, buying risk assets on dips is still the norm.
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King’S Town Bank (2809 TT) flags up some amber signals with the growth of funding and credit costs, huge asset writedowns on financial assets, and a shrinking bottom line that barely resembles Comprehensive Income.
This all may signal a management team getting to grips with some asset problems and navigating the ship into calmer waters. Or is the bank being cleaned up for sale? The bank was rumoured to be interested in Entie Commercial Bank (2849 TT).
Our PH Score™ (our fundamental trend and value-quality indicator) though is subpar at 2.5 (bottom quintile globally) and the RSI (14 day) is high at 77. We would prefer to see an elevated PH Score™ and a low RSI. “If a business does well, the stock will follow”. We are intrigued.
If the bank was trading on a Franchise Valuation of 8% (Asia Pacific median including Japan), shares might be more compelling. But Market Cap./Deposits stands at 20%. The median P/Book in the region (including Japan) stands at 0.8x versus 1.1x at King’s Town.
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King’S Town Bank (2809 TT) flags up some amber signals with the growth of funding and credit costs, huge asset writedowns on financial assets, and a shrinking bottom line that barely resembles Comprehensive Income.
This all may signal a management team getting to grips with some asset problems and navigating the ship into calmer waters. Or is the bank being cleaned up for sale? The bank was rumoured to be interested in Entie Commercial Bank (2849 TT).
Our PH Score™ (our fundamental trend and value-quality indicator) though is subpar at 2.5 (bottom quintile globally) and the RSI (14 day) is high at 77. We would prefer to see an elevated PH Score™ and a low RSI. “If a business does well, the stock will follow”. We are intrigued.
If the bank was trading on a Franchise Valuation of 8% (Asia Pacific median including Japan), shares might be more compelling. But Market Cap./Deposits stands at 20%. The median P/Book in the region (including Japan) stands at 0.8x versus 1.1x at King’s Town.
The data and text from Oversea Chinese Banking Corp. (OCBC SP) is difficult to square. It talks about improved credit quality, but its NPLs are up both YoY and QoQ. In the bank’s Pillar 3 disclosure it notes that ‘risk-weighted assets (RWA) were largely stable in the quarter primarily due to improving asset quality.’ In its financial supplement it reports NPLs of S$3,938m compared with S$3,594m, in 4Q18 and 3Q18. This is nearly 10% higher QoQ. The reality is that OCBC ramped up credit costs in 4Q18 to nearly 3x its full 9M18 charge and despite this, its NPL cover is now down to 57% from 78% a year ago. To us this appears like marked deterioration. And even QoQ, where NPL cover was 65% in 3Q18. The risk now is that credit costs during the current year are more like 4Q18 or higher, rather than the paltry figures seen during full year 2018. We do not believe the market is expecting this.
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King’S Town Bank (2809 TT) flags up some amber signals with the growth of funding and credit costs, huge asset writedowns on financial assets, and a shrinking bottom line that barely resembles Comprehensive Income.
This all may signal a management team getting to grips with some asset problems and navigating the ship into calmer waters. Or is the bank being cleaned up for sale? The bank was rumoured to be interested in Entie Commercial Bank (2849 TT).
Our PH Score™ (our fundamental trend and value-quality indicator) though is subpar at 2.5 (bottom quintile globally) and the RSI (14 day) is high at 77. We would prefer to see an elevated PH Score™ and a low RSI. “If a business does well, the stock will follow”. We are intrigued.
If the bank was trading on a Franchise Valuation of 8% (Asia Pacific median including Japan), shares might be more compelling. But Market Cap./Deposits stands at 20%. The median P/Book in the region (including Japan) stands at 0.8x versus 1.1x at King’s Town.
The data and text from Oversea Chinese Banking Corp. (OCBC SP) is difficult to square. It talks about improved credit quality, but its NPLs are up both YoY and QoQ. In the bank’s Pillar 3 disclosure it notes that ‘risk-weighted assets (RWA) were largely stable in the quarter primarily due to improving asset quality.’ In its financial supplement it reports NPLs of S$3,938m compared with S$3,594m, in 4Q18 and 3Q18. This is nearly 10% higher QoQ. The reality is that OCBC ramped up credit costs in 4Q18 to nearly 3x its full 9M18 charge and despite this, its NPL cover is now down to 57% from 78% a year ago. To us this appears like marked deterioration. And even QoQ, where NPL cover was 65% in 3Q18. The risk now is that credit costs during the current year are more like 4Q18 or higher, rather than the paltry figures seen during full year 2018. We do not believe the market is expecting this.
Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.
In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets – a legacy from its 20th century role as a branch-based deposit taker and lender – and is now positioning itself for 21st century ‘cashless’ banking centred on electronic transaction and payment systems. While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP) slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.
We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.
MHFG’s uneconomic asset problems are far from unique. This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.
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I am partial to a bit of Confucius. Or to such thinking. Now and again. The chairman of Guangzhou Rural Commercial Bank (1551 HK) has a Confucian message (scholars will no doubt berate me) at the beginning of the report and accounts: “A single spark can start a prairie fire while a crack can lead to ice breaking”. From what I can glean, the chairman is alluding to the forty year process of China’s emergence. No satanic conflagration intended or any portends of global warming. For some reason, a tune by the 1970s new-wave group, The Stranglers, passed through my mind: “He got an ice pick that made his ears burn” and “They watched their Rome burn”. Cultural differences perhaps.
Guangzhou Rural Commercial Bank (1551 HK) shares many of the issues that affect Chinese lenders today. (The “Big four” are much less susceptible to deep stresses in this environment). Unsurprisingly, Asset Quality issues weigh on these results and earnings quality is subpar with trading gains and other assorted non-operating or “other items” playing a big part in the composition of Pre-Tax Profit. The latter flatters the “improving” headline Cost-Income ratio which is not really an indicator of greater efficiency here. In fact underlying “jaws” are highly negative. It is thus surprising that the wage bill should shoot up 30% YoY in such austere times. Given the aforementioned Asset Quality issues, such as booming substandard loans, ballooning credit costs, and high charge-offs, the “improving” NPL ratio is flattered by an exuberant denominator. Asset Quality does look volatile. The Liquidity Coverage Ratio and LDR duly eroded.
Where the bank does better, in contrast to many other Chinese lenders, is on Net Interest Income. Guangzhou seems to have reduced its funding costs markedly. The bank managed to lower its corporate time deposit rates especially. The result is that Interest Expenses on Deposits rose by just 6.4% YoY. Liability management seems to be behind a reduction in Debt/Equity from 2.79x to 1.62x, thus decreasing Debt funding costs by 24% YoY. Spurred by corporate credit growth of 38% YoY, Interest Income on Loans climbed by 31% YoY. However, the bank does share an issue with some other lenders – a collapse in Interest Income on non-credit earning assets. This is, in part, due to a shrinkage of its FI holdings by some CN89.5bn. This means that despite the credit spurt, Interest Income in its totality edged up by barely 1% YoY. A disappointing performance on fee income (custody, wealth management, advisory) reduced Total underlying Income growth to 6% YoY. That 6% is all about rampant corporate credit supply and lower corporate deposit and debt interest costs.
Trends are thus decidedly mixed given the underlying picture behind the positive headline fundamental change in Efficiency, Asset Quality and ROAA. Liquidity deteriorated. It must be said that Provisioning was enhanced, Capitalisation moved in the right direction, while NIM and Interest Spread both improved.
Shares are trading at optically quite tempting levels: Earnings Yield of 17%, P/Book of 0.8x, and FV of 8%. But if you desire a Dividend Yield of 5%, or a similar level of aforementioned valuation, a safer bet would be with “The Big Four”.
ICBC (H) (1398 HK) delivered a robust PH Score of 8.5 – our quantamental value-quality gauge.
A highlight was the trend in cost-control. The bank delivered underlying “jaws” of 420bps. Besides OPEX restraint, including payroll, Efficiency gains were supported by robust underlying top-line expansion as growth in interest income on earning assets, underpinned by moderate credit growth, broadly matched expansion of interest expenses on interest-bearing Liabilities. This combination is not so prevalent in China these days, especially in smaller or medium-sized lenders.
It is well-flagged that the system is grappling with Asset Quality issues and there is a debate about the interrelated property market. ICBC is not immune, similar to other SOEs, from migration of souring loans. However, by China standards, rising asset writedowns which exerted a negative pull on Pre-Tax Profit as a % of pre-impairment Operating Profit, high charge-offs, and swelling (though not exploding) substandard and loss loans look arguably manageable given ICBC‘s sheer scale. The Asset Quality issue here is also not as bad as it was in bygone years (2004 springs to mind) when capital injections, asset transfers, and government-subsidised bad loan disposals were the order of the day. This is a “Big Four” player.
Shares are not expensive. ICBC trades at a P/Book of 0.8x, a Franchise Valuation of 10%, an Earnings Yield of 16.7%, a Dividend Yield of 4.9%, and a Total Return Ratio of 1.6x.
Having gained ~30% in a little more than two months following its full separation from BGC Partners (BGCP US) at the end of November 2018 after a dismal share price performance since coming to the market in a partial IPO at the end of December 2017, the shares of commercial real estate services company, Newmark Group (NMRK US) have experienced another slide over the past several weeks despite its cheap valuation which belies its positive fundanmental drivers and peer group comparisons.
Notwithstanding its robust fundamentals, notice of alterations it plans to make to its Non-GAAP earnings presentations to bring them more into line with many other US-listed companies, has brought the company into the headlights of the ongoing controversy caused by this topic, and in particular with respect to the treatement of stock-based compensation in Non-GAAP earnings. While Newmark follows many other companies by excluding it from Adjusted Earnings, its heavy use of stock-based compensation, which it intends to lessen going forward, makes it an easy target for critique of its earnings presentations. Nevertheless, we assess that Newmark is at least 35% undervalued relative to its peers after incorparting stock compensation expenses in its earnings-based valuation metrics. It is also noteworthy that Newmark is currently paying shareholders a yield of ~4% against barely any dividend being paid out by peers
Bank Of Zhengzhou (6196 HK) reveals a picture of cascading asset toxicity and subpar earnings quality. As elsewhere in China, it is difficult to decipher whether better NPL recognition is behind this profound asset quality deterioration or poor underwriting practice and discipline combined with troubled debtors: the answer may lie somewhere in between.
While the low PH Score (a value-quality gauge) of 4.7 is supported by a lowly valuation metric (earnings quality is not reassuring), it is more a testament to -and reflection of- core eroding fundamental trends across the board. Regarding trends, Capital Adequacy and Provisioning were the variables to post a positive change. But even then, not all Capitalisation and Provisioning metrics moved in the right direction.
Franchise Valuation at 12% does not indicate that the bank is especially cheap though P/Book of 0.64x is below the regional median of 0.78x.
Jiangxi Bank Co Ltd (1916 HK) initially attracted our attention with a subpar PH Score (a quantamental value-quality gauge). The bank only scored positively on Capital Adequacy and Efficiency trends. The latter is almost certainly not a true picture.
Further analysis reveals a bank ratcheting up the credit spigot exuberantly on the back of poor asset quality fundamentals (booming substandard loans and SML expansion) with ensuing elevated asset writedowns weighing on a reducing bottom-line despite gains from securities and a lower tax provision.
Valuations do not fully reflect a somewhat challenging picture. Shares trade at Book Value vs a regional median of 0.8x, at a Franchise Valuation of 13% vs a regional median of 9%, and at an Earnings Yield of 8.4% vs a regional median of 10%. Based on FY18 data, this is a bank that should trade at a discount rather than at a premium to peers.
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ICBC (H) (1398 HK) delivered a robust PH Score of 8.5 – our quantamental value-quality gauge.
A highlight was the trend in cost-control. The bank delivered underlying “jaws” of 420bps. Besides OPEX restraint, including payroll, Efficiency gains were supported by robust underlying top-line expansion as growth in interest income on earning assets, underpinned by moderate credit growth, broadly matched expansion of interest expenses on interest-bearing Liabilities. This combination is not so prevalent in China these days, especially in smaller or medium-sized lenders.
It is well-flagged that the system is grappling with Asset Quality issues and there is a debate about the interrelated property market. ICBC is not immune, similar to other SOEs, from migration of souring loans. However, by China standards, rising asset writedowns which exerted a negative pull on Pre-Tax Profit as a % of pre-impairment Operating Profit, high charge-offs, and swelling (though not exploding) substandard and loss loans look arguably manageable given ICBC‘s sheer scale. The Asset Quality issue here is also not as bad as it was in bygone years (2004 springs to mind) when capital injections, asset transfers, and government-subsidised bad loan disposals were the order of the day. This is a “Big Four” player.
Shares are not expensive. ICBC trades at a P/Book of 0.8x, a Franchise Valuation of 10%, an Earnings Yield of 16.7%, a Dividend Yield of 4.9%, and a Total Return Ratio of 1.6x.
Having gained ~30% in a little more than two months following its full separation from BGC Partners (BGCP US) at the end of November 2018 after a dismal share price performance since coming to the market in a partial IPO at the end of December 2017, the shares of commercial real estate services company, Newmark Group (NMRK US) have experienced another slide over the past several weeks despite its cheap valuation which belies its positive fundanmental drivers and peer group comparisons.
Notwithstanding its robust fundamentals, notice of alterations it plans to make to its Non-GAAP earnings presentations to bring them more into line with many other US-listed companies, has brought the company into the headlights of the ongoing controversy caused by this topic, and in particular with respect to the treatement of stock-based compensation in Non-GAAP earnings. While Newmark follows many other companies by excluding it from Adjusted Earnings, its heavy use of stock-based compensation, which it intends to lessen going forward, makes it an easy target for critique of its earnings presentations. Nevertheless, we assess that Newmark is at least 35% undervalued relative to its peers after incorparting stock compensation expenses in its earnings-based valuation metrics. It is also noteworthy that Newmark is currently paying shareholders a yield of ~4% against barely any dividend being paid out by peers
Bank Of Zhengzhou (6196 HK) reveals a picture of cascading asset toxicity and subpar earnings quality. As elsewhere in China, it is difficult to decipher whether better NPL recognition is behind this profound asset quality deterioration or poor underwriting practice and discipline combined with troubled debtors: the answer may lie somewhere in between.
While the low PH Score (a value-quality gauge) of 4.7 is supported by a lowly valuation metric (earnings quality is not reassuring), it is more a testament to -and reflection of- core eroding fundamental trends across the board. Regarding trends, Capital Adequacy and Provisioning were the variables to post a positive change. But even then, not all Capitalisation and Provisioning metrics moved in the right direction.
Franchise Valuation at 12% does not indicate that the bank is especially cheap though P/Book of 0.64x is below the regional median of 0.78x.
Jiangxi Bank Co Ltd (1916 HK) initially attracted our attention with a subpar PH Score (a quantamental value-quality gauge). The bank only scored positively on Capital Adequacy and Efficiency trends. The latter is almost certainly not a true picture.
Further analysis reveals a bank ratcheting up the credit spigot exuberantly on the back of poor asset quality fundamentals (booming substandard loans and SML expansion) with ensuing elevated asset writedowns weighing on a reducing bottom-line despite gains from securities and a lower tax provision.
Valuations do not fully reflect a somewhat challenging picture. Shares trade at Book Value vs a regional median of 0.8x, at a Franchise Valuation of 13% vs a regional median of 9%, and at an Earnings Yield of 8.4% vs a regional median of 10%. Based on FY18 data, this is a bank that should trade at a discount rather than at a premium to peers.
Postal Savings Bank Of China (1658 HK) is outgrowing its peers on the top-line given exuberant pace of credit growth (especially in consumer lending such as credit cards but also in corporate and in agriculture). Expansion in Interest Income on earning assets is well in excess of an increase in Interest Expenses on interest-bearing Liabilities. This is not always the case in China today. Fee income is also growing by double-digits too. The bank has a huge deposit base and Liquidity is ample. In addition, “Jaws” stand out as being highly positive at 20pts given aforementioned top-line growth coupled with OPEX restraint.
However, capital remains tight and asset quality has deteriorated markedly. Despite the top-line growth and cost-control, an increasing amount of pre-impairment Income is being consumed by loan loss provisions and other asset writedowns. Substandard loans have exploded while loss loans have climbed forcefully. The bank shapes as if it is striving to grow itself out an asset quality bind. Given Balance Sheet risks, the bank has adjusted its provisioning accordingly.
The relatively meagre capital position (for example Equity/Assets or Basel 111 Leverage Ratio) while improving is surely the reason why Postal Savings cannot pay a higher dividend in comparison with say Agricultural Bank Of China (1288 HK) , Bank Of China (601988 CH), and China Construction Bank (601939 CH) which all command yields in excess of 5% and rate as income stocks. The Dividend Yield here though is not unattractive at 3.9%.
The PH Score of 7.7 encompasses valuation as well as generally positive metric progression. Combined with an underbought technical position and an additional valuation filter, the bank stands out with the aforementioned strategic peers in the top decile of global bank opportunity. Valuations are not stretched: shares trade at a P/Book of 0.74x, a Franchise Valuation of 4%, and an Earnings Yield of 15.5%.
Despite the aforementioned deep concerns and caveats, we believe that Postal Savings Bank is a valuable, liquid, deposit-rich franchise with a capacity to grow.
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Having gained ~30% in a little more than two months following its full separation from BGC Partners (BGCP US) at the end of November 2018 after a dismal share price performance since coming to the market in a partial IPO at the end of December 2017, the shares of commercial real estate services company, Newmark Group (NMRK US) have experienced another slide over the past several weeks despite its cheap valuation which belies its positive fundanmental drivers and peer group comparisons.
Notwithstanding its robust fundamentals, notice of alterations it plans to make to its Non-GAAP earnings presentations to bring them more into line with many other US-listed companies, has brought the company into the headlights of the ongoing controversy caused by this topic, and in particular with respect to the treatement of stock-based compensation in Non-GAAP earnings. While Newmark follows many other companies by excluding it from Adjusted Earnings, its heavy use of stock-based compensation, which it intends to lessen going forward, makes it an easy target for critique of its earnings presentations. Nevertheless, we assess that Newmark is at least 35% undervalued relative to its peers after incorparting stock compensation expenses in its earnings-based valuation metrics. It is also noteworthy that Newmark is currently paying shareholders a yield of ~4% against barely any dividend being paid out by peers
Bank Of Zhengzhou (6196 HK) reveals a picture of cascading asset toxicity and subpar earnings quality. As elsewhere in China, it is difficult to decipher whether better NPL recognition is behind this profound asset quality deterioration or poor underwriting practice and discipline combined with troubled debtors: the answer may lie somewhere in between.
While the low PH Score (a value-quality gauge) of 4.7 is supported by a lowly valuation metric (earnings quality is not reassuring), it is more a testament to -and reflection of- core eroding fundamental trends across the board. Regarding trends, Capital Adequacy and Provisioning were the variables to post a positive change. But even then, not all Capitalisation and Provisioning metrics moved in the right direction.
Franchise Valuation at 12% does not indicate that the bank is especially cheap though P/Book of 0.64x is below the regional median of 0.78x.
Jiangxi Bank Co Ltd (1916 HK) initially attracted our attention with a subpar PH Score (a quantamental value-quality gauge). The bank only scored positively on Capital Adequacy and Efficiency trends. The latter is almost certainly not a true picture.
Further analysis reveals a bank ratcheting up the credit spigot exuberantly on the back of poor asset quality fundamentals (booming substandard loans and SML expansion) with ensuing elevated asset writedowns weighing on a reducing bottom-line despite gains from securities and a lower tax provision.
Valuations do not fully reflect a somewhat challenging picture. Shares trade at Book Value vs a regional median of 0.8x, at a Franchise Valuation of 13% vs a regional median of 9%, and at an Earnings Yield of 8.4% vs a regional median of 10%. Based on FY18 data, this is a bank that should trade at a discount rather than at a premium to peers.
Postal Savings Bank Of China (1658 HK) is outgrowing its peers on the top-line given exuberant pace of credit growth (especially in consumer lending such as credit cards but also in corporate and in agriculture). Expansion in Interest Income on earning assets is well in excess of an increase in Interest Expenses on interest-bearing Liabilities. This is not always the case in China today. Fee income is also growing by double-digits too. The bank has a huge deposit base and Liquidity is ample. In addition, “Jaws” stand out as being highly positive at 20pts given aforementioned top-line growth coupled with OPEX restraint.
However, capital remains tight and asset quality has deteriorated markedly. Despite the top-line growth and cost-control, an increasing amount of pre-impairment Income is being consumed by loan loss provisions and other asset writedowns. Substandard loans have exploded while loss loans have climbed forcefully. The bank shapes as if it is striving to grow itself out an asset quality bind. Given Balance Sheet risks, the bank has adjusted its provisioning accordingly.
The relatively meagre capital position (for example Equity/Assets or Basel 111 Leverage Ratio) while improving is surely the reason why Postal Savings cannot pay a higher dividend in comparison with say Agricultural Bank Of China (1288 HK) , Bank Of China (601988 CH), and China Construction Bank (601939 CH) which all command yields in excess of 5% and rate as income stocks. The Dividend Yield here though is not unattractive at 3.9%.
The PH Score of 7.7 encompasses valuation as well as generally positive metric progression. Combined with an underbought technical position and an additional valuation filter, the bank stands out with the aforementioned strategic peers in the top decile of global bank opportunity. Valuations are not stretched: shares trade at a P/Book of 0.74x, a Franchise Valuation of 4%, and an Earnings Yield of 15.5%.
Despite the aforementioned deep concerns and caveats, we believe that Postal Savings Bank is a valuable, liquid, deposit-rich franchise with a capacity to grow.
In terms of fundamental momentum and trends (our core focus) Bank Of China (601988 CH) reported a mixed set of numbers at FY18.
While systemic asset quality issues weigh heavily on results, the bank has prudently improved its liquidity metrics, enhanced its provisioning, while cost-control remains exemplary in the face of stresses from loan quality and some systemic funding cost pressure. Underlying “jaws” are highly positive at 558bps. The improvement in Efficiency is a plus signal amidst the asset quality smoke.
All in all, it’s a stable rather than a gung-ho picture. Pre-tax Profit has barely budged since 2014.
But you are being paid for the risk which ultimately lies with the PRC. The Dividend Yield stands at 5.7%. This makes shares attractive as they are at the other Chinese core strategic lenders. P/Book and Franchise Valuation lie at 0.6x and 7% while the earnings yield has reached 19%. A PH Score of 7.6 reflects valuation to a great extent as well as reasonable metric progression. This looks like a coupon-clipping opportunity.
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Mizuho Financial Group (8411 JP) (MHFG) has slashed its forecast for FY3/2019 consolidated net profits from ¥570 billion to just ¥80 billion, citing previously-unbudgeted write-downs on physical branch assets and retail banking software, as well as valuation losses on marking to market part of the group’s foreign bond portfolio, especially on derivative products. Total additional costs to be incurred in FY3/2019 are now expected to be around ¥680 billion.
In effect, MHFG is attempting to ‘clear the decks’ of redundant and uneconomic assets – a legacy from its 20th century role as a branch-based deposit taker and lender – and is now positioning itself for 21st century ‘cashless’ banking centred on electronic transaction and payment systems. While this is a laudable effort, MHFG is late to do this; rivals Mitsubishi Ufj Financial Group (8306 JP) and Sumitomo Mitsui Financial Group (8316 JP) slimmed down their branch networks in FY3/2018, incurring heavy costs in doing so.
We remain skeptical that this signals the end of MHFG’s problems, and continue to recommend an Underweight position in Japanese bank stocks generally.
MHFG’s uneconomic asset problems are far from unique. This news may just be the first of a succession of similar announcements from other banks over the next 2-3 years as they face not only an ongoing ultra-low interest rate environment but now also the stark economic realities of a declining local population, high overheads as a result of over-manned and under-utilised branches, a clear shift towards Internet banking and the increasing use of ‘cashless’ alternative payment systems by retail customers.
Profitability is elevated with chunky NIMs and spreads, fee income and insurance are performing well, and OPEX is under control. Capital Adequacy and CIR look healthy.
However, we are concerned about rising interest costs, at a pace in excess of interest income generation.
The bank also seems to be stretching a little in terms of quality income to reach the Net Profit line with “other non-interest interest income” and gains on securities. The bottom line falls a little short of a comprehensive income assessment.
In addition, asset quality remains a thorny issue. The Balance Sheet continues to be much more toxic than the sedate NPL ratio. This relates to the micro focus.
Debt to Equity is on the rise.
Overall, trends are no better than average – as testified by a PH Score of 5.
Trading on a P/Book of 2.6x and an earnings yield of 7.3%, we believe that valuation is somewhat rich irrespective of the bank’s strengths. A franchise valuation of 52% versus a median of 8% in Asia Pacific seals the deal.
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Bank Of Zhengzhou (6196 HK) reveals a picture of cascading asset toxicity and subpar earnings quality. As elsewhere in China, it is difficult to decipher whether better NPL recognition is behind this profound asset quality deterioration or poor underwriting practice and discipline combined with troubled debtors: the answer may lie somewhere in between.
While the low PH Score (a value-quality gauge) of 4.7 is supported by a lowly valuation metric (earnings quality is not reassuring), it is more a testament to -and reflection of- core eroding fundamental trends across the board. Regarding trends, Capital Adequacy and Provisioning were the variables to post a positive change. But even then, not all Capitalisation and Provisioning metrics moved in the right direction.
Franchise Valuation at 12% does not indicate that the bank is especially cheap though P/Book of 0.64x is below the regional median of 0.78x.
Jiangxi Bank Co Ltd (1916 HK) initially attracted our attention with a subpar PH Score (a quantamental value-quality gauge). The bank only scored positively on Capital Adequacy and Efficiency trends. The latter is almost certainly not a true picture.
Further analysis reveals a bank ratcheting up the credit spigot exuberantly on the back of poor asset quality fundamentals (booming substandard loans and SML expansion) with ensuing elevated asset writedowns weighing on a reducing bottom-line despite gains from securities and a lower tax provision.
Valuations do not fully reflect a somewhat challenging picture. Shares trade at Book Value vs a regional median of 0.8x, at a Franchise Valuation of 13% vs a regional median of 9%, and at an Earnings Yield of 8.4% vs a regional median of 10%. Based on FY18 data, this is a bank that should trade at a discount rather than at a premium to peers.
Postal Savings Bank Of China (1658 HK) is outgrowing its peers on the top-line given exuberant pace of credit growth (especially in consumer lending such as credit cards but also in corporate and in agriculture). Expansion in Interest Income on earning assets is well in excess of an increase in Interest Expenses on interest-bearing Liabilities. This is not always the case in China today. Fee income is also growing by double-digits too. The bank has a huge deposit base and Liquidity is ample. In addition, “Jaws” stand out as being highly positive at 20pts given aforementioned top-line growth coupled with OPEX restraint.
However, capital remains tight and asset quality has deteriorated markedly. Despite the top-line growth and cost-control, an increasing amount of pre-impairment Income is being consumed by loan loss provisions and other asset writedowns. Substandard loans have exploded while loss loans have climbed forcefully. The bank shapes as if it is striving to grow itself out an asset quality bind. Given Balance Sheet risks, the bank has adjusted its provisioning accordingly.
The relatively meagre capital position (for example Equity/Assets or Basel 111 Leverage Ratio) while improving is surely the reason why Postal Savings cannot pay a higher dividend in comparison with say Agricultural Bank Of China (1288 HK) , Bank Of China (601988 CH), and China Construction Bank (601939 CH) which all command yields in excess of 5% and rate as income stocks. The Dividend Yield here though is not unattractive at 3.9%.
The PH Score of 7.7 encompasses valuation as well as generally positive metric progression. Combined with an underbought technical position and an additional valuation filter, the bank stands out with the aforementioned strategic peers in the top decile of global bank opportunity. Valuations are not stretched: shares trade at a P/Book of 0.74x, a Franchise Valuation of 4%, and an Earnings Yield of 15.5%.
Despite the aforementioned deep concerns and caveats, we believe that Postal Savings Bank is a valuable, liquid, deposit-rich franchise with a capacity to grow.
In terms of fundamental momentum and trends (our core focus) Bank Of China (601988 CH) reported a mixed set of numbers at FY18.
While systemic asset quality issues weigh heavily on results, the bank has prudently improved its liquidity metrics, enhanced its provisioning, while cost-control remains exemplary in the face of stresses from loan quality and some systemic funding cost pressure. Underlying “jaws” are highly positive at 558bps. The improvement in Efficiency is a plus signal amidst the asset quality smoke.
All in all, it’s a stable rather than a gung-ho picture. Pre-tax Profit has barely budged since 2014.
But you are being paid for the risk which ultimately lies with the PRC. The Dividend Yield stands at 5.7%. This makes shares attractive as they are at the other Chinese core strategic lenders. P/Book and Franchise Valuation lie at 0.6x and 7% while the earnings yield has reached 19%. A PH Score of 7.6 reflects valuation to a great extent as well as reasonable metric progression. This looks like a coupon-clipping opportunity.
We recently visited Toyota at its Toyota city headquarters and spent some time discussing this very topic. We believe this move is being made with an eye towards China in particular and to an extent the US. We would also highlight the continuing development of Toyota’s relationship with Suzuki. As the automakers move slowly towards what is likely to be an eventual union, the sharing of hybrid technology with Suzuki could have a significant impact on the medium-term prospects of both automakers.
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