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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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.
Since my last insight on RHT Health Trust (RHT SP) on 29th Jan 2019 – RHT Health Trust – Cash on Sale , investors who bought into RHT Health Trust at S$0.029 per unit would have netted a return on investment of 40.7% if they sell out today, including the cash distribution that they have received in 1st March.
Since last insight in January, RHT reported major changes to its Board of Directors and Management. The strong background of the new BOD and CEO in investment banking and REIT management will be valuable to RHT as it progresses to transform itself and acquire new business/assets to inject into the Trust.
Key investment thesis remains unchanged. RHT Health Trust is an event-driven play and the catalyst will be the announcement of an RTO deal to inject new assets/business into the Trust. This will be the key driver to further upside in RHT.
Proposed investment strategy at this stage is to hold on to the investment in RHT and look for opportunities to add if RHT trades lower. Target entry price is S$0.016 per unit, which translates to a NAV discount of 27.3%.
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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.
Since my last insight on RHT Health Trust (RHT SP) on 29th Jan 2019 – RHT Health Trust – Cash on Sale , investors who bought into RHT Health Trust at S$0.029 per unit would have netted a return on investment of 40.7% if they sell out today, including the cash distribution that they have received in 1st March.
Since last insight in January, RHT reported major changes to its Board of Directors and Management. The strong background of the new BOD and CEO in investment banking and REIT management will be valuable to RHT as it progresses to transform itself and acquire new business/assets to inject into the Trust.
Key investment thesis remains unchanged. RHT Health Trust is an event-driven play and the catalyst will be the announcement of an RTO deal to inject new assets/business into the Trust. This will be the key driver to further upside in RHT.
Proposed investment strategy at this stage is to hold on to the investment in RHT and look for opportunities to add if RHT trades lower. Target entry price is S$0.016 per unit, which translates to a NAV discount of 27.3%.
“Beware the Ides of March”: the soothsayer’s repeated warning to ancient Rome’s most famous emperor in William Shakespeare’s play ‘Julius Caesar’. Caesar ignores the warning and is assassinated later that day by his colleagues on the steps of the Senate. We have been warning investors in Japanese bank stocks for the last few years to “beware the Ides of March”, advising them to be very underweight in the sector (or preferably out of the sector entirely) by 15 March each year to avoid the risk of incurring a similar fate at the hands of their investment colleagues as befell Julius Caesar on 15 March 44BC. We are now well past the Ides of March and, true to form, the sector has already peaked and lost momentum after a brief post-Santa rally. ‘Caveat emptor! (May the buyer beware!)’ remains our Caesarean soothsayer warning to would-be investors in Japanese bank stocks in 2019.
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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.
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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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.
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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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.
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.
My previous insight Top Consumer Themes in Vietnam notes the clear cut strategy of investing in consumer growth stocks at reasonable valuation, while avoiding some of the over-hyped momentum names that trade at unreasonable multiples. Another interesting trend to note in the market includes the lower valuation of select stocks that are positioned in key, high growth sectors, which are by no means value traps. After eliminating value traps and overvalued momentum names, it is clear to see the VN Index offers asymmetric value for investors. The attractively priced consumer growth stocks and value names are both relatively favorable compared to that of other frontier markets ( less favorable macro picture but similar valuation in many cases).
Some of the themes mentioned in this insight are an indirect play on China’s economic transformation, as it chooses to “export” some of its less sophisticated economic activities to other frontier markets ( ie. coal in Mongolia and textiles in other frontier markets). This has intensified recently on the back of trade war tension. Stocks in Vietnam that are in sectors positioned to benefit from this trade at relatively depressed valuations.
I included an overview of the following themes and some stocks positioned in these areas:
Power is an appropriate way to access Vietnam’s broad based economic growth: Investment in power stocks is an indirect play on Vietnam’s continued growth in manufacturing and the country’s improved standards of living.
Industrial park operators are attractively priced and offer exposure to Vietnam’s manufacturing narrative, which is a very straight forward growth narrative: Industrial park operators have relatively guaranteed success and have been able to attract large names such as Samsung and LG.
Vietnam’s textile industry will be a key driver of growth moving forward: Vietnam’s textile industry has continued its course of growth, even though it has been moving into electronics exports and also facing increased competition from lower cost countries such as Bangladesh.
Port stocks are extremely cheap, as perceived risk is greater than actual risk: The valuation for port operators has also become very depressed in recent years, though this is clearly a strong long term growth areas for Vietnam’s stock market.
Vietnam’s agriculture growth recently reached a 7 year high, though growth still remains in the lower single digits and below the country’s average GDP growth.
Plastic and steel stand out as high growth areas, though margins are sensitive to commodity price movements.
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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.
Since my last insight on RHT Health Trust (RHT SP) on 29th Jan 2019 – RHT Health Trust – Cash on Sale , investors who bought into RHT Health Trust at S$0.029 per unit would have netted a return on investment of 40.7% if they sell out today, including the cash distribution that they have received in 1st March.
Since last insight in January, RHT reported major changes to its Board of Directors and Management. The strong background of the new BOD and CEO in investment banking and REIT management will be valuable to RHT as it progresses to transform itself and acquire new business/assets to inject into the Trust.
Key investment thesis remains unchanged. RHT Health Trust is an event-driven play and the catalyst will be the announcement of an RTO deal to inject new assets/business into the Trust. This will be the key driver to further upside in RHT.
Proposed investment strategy at this stage is to hold on to the investment in RHT and look for opportunities to add if RHT trades lower. Target entry price is S$0.016 per unit, which translates to a NAV discount of 27.3%.
“Beware the Ides of March”: the soothsayer’s repeated warning to ancient Rome’s most famous emperor in William Shakespeare’s play ‘Julius Caesar’. Caesar ignores the warning and is assassinated later that day by his colleagues on the steps of the Senate. We have been warning investors in Japanese bank stocks for the last few years to “beware the Ides of March”, advising them to be very underweight in the sector (or preferably out of the sector entirely) by 15 March each year to avoid the risk of incurring a similar fate at the hands of their investment colleagues as befell Julius Caesar on 15 March 44BC. We are now well past the Ides of March and, true to form, the sector has already peaked and lost momentum after a brief post-Santa rally. ‘Caveat emptor! (May the buyer beware!)’ remains our Caesarean soothsayer warning to would-be investors in Japanese bank stocks in 2019.
Huishang Bank Corp Ltd H (3698 HK) looks interesting at first. Some trends are moving in the right direction and the valuation is hardly stretched.
So it seems. Closer inspection reveals subpar earnings quality and pressure on the top line from an elevated growth in funding costs and a double-digit reduction in income from non-credit earning assets. Impairments weighed heavily on the bottom line. Underlying “jaws” were extremely negative, putting the decrease in the Cost-Income ratio into perspective.
An improving NPL ratio of 0.95% (or 1.04% depending on which one you use) does not tell the whole story at all. Asset quality issues, of course, come through in the income statement with writedowns and loan loss provisions consuming a huge (and increasing) chunk of pre-impairment profit. The Balance Sheet exhibits strains and stresses from an explosion of doubtful loans, rising substandard loans, and arguably an unhealthy expansion of special mention loans. At least “unimpaired past-due” loans have moderated though they stand at 45% of headline NPLs. Some key capitalisation metrics are deteriorating while liquidity erodes given the 23% growth in credit which flatters the problem loan picture.
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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.
My previous insight Top Consumer Themes in Vietnam notes the clear cut strategy of investing in consumer growth stocks at reasonable valuation, while avoiding some of the over-hyped momentum names that trade at unreasonable multiples. Another interesting trend to note in the market includes the lower valuation of select stocks that are positioned in key, high growth sectors, which are by no means value traps. After eliminating value traps and overvalued momentum names, it is clear to see the VN Index offers asymmetric value for investors. The attractively priced consumer growth stocks and value names are both relatively favorable compared to that of other frontier markets ( less favorable macro picture but similar valuation in many cases).
Some of the themes mentioned in this insight are an indirect play on China’s economic transformation, as it chooses to “export” some of its less sophisticated economic activities to other frontier markets ( ie. coal in Mongolia and textiles in other frontier markets). This has intensified recently on the back of trade war tension. Stocks in Vietnam that are in sectors positioned to benefit from this trade at relatively depressed valuations.
I included an overview of the following themes and some stocks positioned in these areas:
Power is an appropriate way to access Vietnam’s broad based economic growth: Investment in power stocks is an indirect play on Vietnam’s continued growth in manufacturing and the country’s improved standards of living.
Industrial park operators are attractively priced and offer exposure to Vietnam’s manufacturing narrative, which is a very straight forward growth narrative: Industrial park operators have relatively guaranteed success and have been able to attract large names such as Samsung and LG.
Vietnam’s textile industry will be a key driver of growth moving forward: Vietnam’s textile industry has continued its course of growth, even though it has been moving into electronics exports and also facing increased competition from lower cost countries such as Bangladesh.
Port stocks are extremely cheap, as perceived risk is greater than actual risk: The valuation for port operators has also become very depressed in recent years, though this is clearly a strong long term growth areas for Vietnam’s stock market.
Vietnam’s agriculture growth recently reached a 7 year high, though growth still remains in the lower single digits and below the country’s average GDP growth.
Plastic and steel stand out as high growth areas, though margins are sensitive to commodity price movements.
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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.
Since my last insight on RHT Health Trust (RHT SP) on 29th Jan 2019 – RHT Health Trust – Cash on Sale , investors who bought into RHT Health Trust at S$0.029 per unit would have netted a return on investment of 40.7% if they sell out today, including the cash distribution that they have received in 1st March.
Since last insight in January, RHT reported major changes to its Board of Directors and Management. The strong background of the new BOD and CEO in investment banking and REIT management will be valuable to RHT as it progresses to transform itself and acquire new business/assets to inject into the Trust.
Key investment thesis remains unchanged. RHT Health Trust is an event-driven play and the catalyst will be the announcement of an RTO deal to inject new assets/business into the Trust. This will be the key driver to further upside in RHT.
Proposed investment strategy at this stage is to hold on to the investment in RHT and look for opportunities to add if RHT trades lower. Target entry price is S$0.016 per unit, which translates to a NAV discount of 27.3%.
“Beware the Ides of March”: the soothsayer’s repeated warning to ancient Rome’s most famous emperor in William Shakespeare’s play ‘Julius Caesar’. Caesar ignores the warning and is assassinated later that day by his colleagues on the steps of the Senate. We have been warning investors in Japanese bank stocks for the last few years to “beware the Ides of March”, advising them to be very underweight in the sector (or preferably out of the sector entirely) by 15 March each year to avoid the risk of incurring a similar fate at the hands of their investment colleagues as befell Julius Caesar on 15 March 44BC. We are now well past the Ides of March and, true to form, the sector has already peaked and lost momentum after a brief post-Santa rally. ‘Caveat emptor! (May the buyer beware!)’ remains our Caesarean soothsayer warning to would-be investors in Japanese bank stocks in 2019.
Huishang Bank Corp Ltd H (3698 HK) looks interesting at first. Some trends are moving in the right direction and the valuation is hardly stretched.
So it seems. Closer inspection reveals subpar earnings quality and pressure on the top line from an elevated growth in funding costs and a double-digit reduction in income from non-credit earning assets. Impairments weighed heavily on the bottom line. Underlying “jaws” were extremely negative, putting the decrease in the Cost-Income ratio into perspective.
An improving NPL ratio of 0.95% (or 1.04% depending on which one you use) does not tell the whole story at all. Asset quality issues, of course, come through in the income statement with writedowns and loan loss provisions consuming a huge (and increasing) chunk of pre-impairment profit. The Balance Sheet exhibits strains and stresses from an explosion of doubtful loans, rising substandard loans, and arguably an unhealthy expansion of special mention loans. At least “unimpaired past-due” loans have moderated though they stand at 45% of headline NPLs. Some key capitalisation metrics are deteriorating while liquidity erodes given the 23% growth in credit which flatters the problem loan picture.
China Construction Bank (601939 CH) FY18 results reflected stability and some encouraging signs of positive fundamental momentum. The highlights were a positive “underlying jaws” of 220bps, fortified Capital Adequacy, enhanced Provisioning, and firmer net interest spread and margin. Liquidity remains prudent with credit and deposit growth both expanding by mid-single digits. In addition, the top-line exhibited solid growth with funding expense growth (an issue elsewhere) only mildly in excess of interest income growth. Sharply higher asset loan loss provisions reflected the ongoing battle with troubling systemic asset quality challenges.
CCB is committed to becoming a core comprehensive service provider for smart city development, in alignment with government strategic targets. In terms of technology, AI robots (in wealth management, for example), Intelligent Risk Management Platforms, Biometric verification plus a public and private “cloud ecosphere” are evolving. Big data is developing with data warehouse integrating internal and external data; with enterprise data management and application architecture; and via working platforms. CCB is wedded to IoT, blockchain as well as big data in industry chain finance, via internet-based “e Xin Tong”, “e Xin Tong” and “e Qi Tong”. The bank has a strategy of Mobile First, provision of internet-based smart financial services, booming WeChat banking, and integration of online banking services that combines transactions, sales, and customer service.
Automation and “intelligence” is the bedrock of risk management: the key area today of what is a highly leveraged system. Here, CCB is integrating corporate and retail early warning systems and unifying the monitoring of different exposures. Management launched a “new generation” retail customer scorecard model, elevating the level of automation and “intelligence” of risk metrics. In addition, the bank is attaining greater recognition and control of fraud. Regarding the remote monitoring system, CCB is adapting to the fast development of information, network and big data technology, by building a monitoring system with unified plans, standards, software and hardware.
While CCB trades at a P/Book of 0.8x (regional median, including Japan) and a franchise valuation of 9% (regional median, including Japan), the Earnings Yield of 17.4% is well in excess of regional median of 10%. The combination of a top decile PH Score™, capturing fundamental momentum, an underbought technical signal, and a reasonable franchise valuation position CCB in the top decile of opportunity globally. For a core strategic policy bank, this represents an opportunity.
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Since my last insight on RHT Health Trust (RHT SP) on 29th Jan 2019 – RHT Health Trust – Cash on Sale , investors who bought into RHT Health Trust at S$0.029 per unit would have netted a return on investment of 40.7% if they sell out today, including the cash distribution that they have received in 1st March.
Since last insight in January, RHT reported major changes to its Board of Directors and Management. The strong background of the new BOD and CEO in investment banking and REIT management will be valuable to RHT as it progresses to transform itself and acquire new business/assets to inject into the Trust.
Key investment thesis remains unchanged. RHT Health Trust is an event-driven play and the catalyst will be the announcement of an RTO deal to inject new assets/business into the Trust. This will be the key driver to further upside in RHT.
Proposed investment strategy at this stage is to hold on to the investment in RHT and look for opportunities to add if RHT trades lower. Target entry price is S$0.016 per unit, which translates to a NAV discount of 27.3%.
“Beware the Ides of March”: the soothsayer’s repeated warning to ancient Rome’s most famous emperor in William Shakespeare’s play ‘Julius Caesar’. Caesar ignores the warning and is assassinated later that day by his colleagues on the steps of the Senate. We have been warning investors in Japanese bank stocks for the last few years to “beware the Ides of March”, advising them to be very underweight in the sector (or preferably out of the sector entirely) by 15 March each year to avoid the risk of incurring a similar fate at the hands of their investment colleagues as befell Julius Caesar on 15 March 44BC. We are now well past the Ides of March and, true to form, the sector has already peaked and lost momentum after a brief post-Santa rally. ‘Caveat emptor! (May the buyer beware!)’ remains our Caesarean soothsayer warning to would-be investors in Japanese bank stocks in 2019.
Huishang Bank Corp Ltd H (3698 HK) looks interesting at first. Some trends are moving in the right direction and the valuation is hardly stretched.
So it seems. Closer inspection reveals subpar earnings quality and pressure on the top line from an elevated growth in funding costs and a double-digit reduction in income from non-credit earning assets. Impairments weighed heavily on the bottom line. Underlying “jaws” were extremely negative, putting the decrease in the Cost-Income ratio into perspective.
An improving NPL ratio of 0.95% (or 1.04% depending on which one you use) does not tell the whole story at all. Asset quality issues, of course, come through in the income statement with writedowns and loan loss provisions consuming a huge (and increasing) chunk of pre-impairment profit. The Balance Sheet exhibits strains and stresses from an explosion of doubtful loans, rising substandard loans, and arguably an unhealthy expansion of special mention loans. At least “unimpaired past-due” loans have moderated though they stand at 45% of headline NPLs. Some key capitalisation metrics are deteriorating while liquidity erodes given the 23% growth in credit which flatters the problem loan picture.
China Construction Bank (601939 CH) FY18 results reflected stability and some encouraging signs of positive fundamental momentum. The highlights were a positive “underlying jaws” of 220bps, fortified Capital Adequacy, enhanced Provisioning, and firmer net interest spread and margin. Liquidity remains prudent with credit and deposit growth both expanding by mid-single digits. In addition, the top-line exhibited solid growth with funding expense growth (an issue elsewhere) only mildly in excess of interest income growth. Sharply higher asset loan loss provisions reflected the ongoing battle with troubling systemic asset quality challenges.
CCB is committed to becoming a core comprehensive service provider for smart city development, in alignment with government strategic targets. In terms of technology, AI robots (in wealth management, for example), Intelligent Risk Management Platforms, Biometric verification plus a public and private “cloud ecosphere” are evolving. Big data is developing with data warehouse integrating internal and external data; with enterprise data management and application architecture; and via working platforms. CCB is wedded to IoT, blockchain as well as big data in industry chain finance, via internet-based “e Xin Tong”, “e Xin Tong” and “e Qi Tong”. The bank has a strategy of Mobile First, provision of internet-based smart financial services, booming WeChat banking, and integration of online banking services that combines transactions, sales, and customer service.
Automation and “intelligence” is the bedrock of risk management: the key area today of what is a highly leveraged system. Here, CCB is integrating corporate and retail early warning systems and unifying the monitoring of different exposures. Management launched a “new generation” retail customer scorecard model, elevating the level of automation and “intelligence” of risk metrics. In addition, the bank is attaining greater recognition and control of fraud. Regarding the remote monitoring system, CCB is adapting to the fast development of information, network and big data technology, by building a monitoring system with unified plans, standards, software and hardware.
While CCB trades at a P/Book of 0.8x (regional median, including Japan) and a franchise valuation of 9% (regional median, including Japan), the Earnings Yield of 17.4% is well in excess of regional median of 10%. The combination of a top decile PH Score™, capturing fundamental momentum, an underbought technical signal, and a reasonable franchise valuation position CCB in the top decile of opportunity globally. For a core strategic policy bank, this represents an opportunity.
In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks.
The sixth company that we explore is Intiland Development (DILD IJ), a property developer that focuses on landed residential, industrial estates, high-end condominiums, and offices in Jakarta and Surabaya. DILD has a good track record in building and operating high-end condominiums and offices. But the property market slowdown, tighter mortgage regulations, and rising construction costs took a massive toll on the company’s balance sheet and margin.
DILD shows the worst operating cashflow performance versus peers. The operating cashflow is running at a massive deficit after the property market peak in 2013, driven mostly by worsening working capital cycle. Both consolidated gross margin and EBIT margin are also trending down over the past five years, showing the company’s inability to pass on costs. The biggest margin decline is visible in the offices, landed residential, and condominiums.
The total net asset value (NAV) for company’s landbank and investment properties is about IDR10.5tn, equivalent to IDR1,018 NAV per share. Despite an attractive Price-to-Book (PB) valuation and a chunky 65% discount to NAV, DILD still looks expensive on a Price-to-Earnings (PE) basis. Analysts have been downgrading earnings on lower margin expectation and weaker than expected cashflow generation that cause debt levels to remain high.
Consensus expects 16% EPS growth this year with revenues growing by 22%. We may see further downgrades post FY18 results as 9M18 EBIT only makes up 51% of consensus FY18 forecast. The government’s plan to reduce luxury taxes and allowing foreigners to hold strata title on Indonesian properties should bode well for DILD and serve as a potential catalyst in the short term. Our estimated fair value for DILD is at IDR 404 per share, suggesting 14% upside from the current levels.
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