In this briefing:
- “Deep Doubts, Deep Wisdom; Small Doubts, Little Wisdom”
- Bank of China: A Rich Dividend Yield Backed by the PRC.
- Malaysian Telcos: Look for Improvements to Continue in 2019.
- Toyota: Hitting the Hybrid Accelerator and Towing Suzuki and Mazda in Its Wake
- HK Connect Discovery – March Snapshot (WH Group, Air China)
1. “Deep Doubts, Deep Wisdom; Small Doubts, Little Wisdom”
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.
2. Bank of China: A Rich Dividend Yield Backed by the PRC.
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.
3. Malaysian Telcos: Look for Improvements to Continue in 2019.
The 4Q18 numbers released by the Malaysia wireless operators, showed stable trends vs 3Q. Market service revenue growth of -1.1% YoY was stable, with Maxis (MAXIS MK) the only operator able to slightly increase its market share (again). While 2H18 marked a small break in the Malaysian wireless sector recovery, guidance for 2019 looks broadly encouraging.
- Axiata (AXIATA MK) expects a “promising 2019” with revenue and profit growth momentum (across the board),
- Maxis guides for a slight improvement of revenues, albeit with EBITDA declining due to new business opportunities, and
- DIGI (DIGI MK) which is a bit more cautious, expects flat revenues.
Data usage is already very high in Malaysia, but we expect growth to continue (at a slower pace) supported by youthful demographics (younger people use more video on mobile). The Malaysian operators have done a reasonable job at monetizing data growth so far.
Chris Hoare turned more positive on Malaysian telcos in early 2019 as affordability has improved and there is a new profitable growth opportunity in fibre wholesale (with Telekom Malaysia (T MK) being forced to offer at low prices). Operating trends have also improved and we expect this to continue. In January, we upgraded Axiata to Buy and both Maxis and Digi to Neutral. None of them are “cheap” with Maxis (MAXIS MK) and DIGI (DIGI MK) on 11-13x EV:EBITDA, and Axiata on a more reasonable 6.5x.
4. Toyota: Hitting the Hybrid Accelerator and Towing Suzuki and Mazda in Its Wake
The Nikkei announced this morning that Toyota Motor (7203 JP) was considering opening up its portfolio of hybrid patents for outside use, possibly for free.
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.
5. HK Connect Discovery – March Snapshot (WH Group, Air China)
This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turned from outflow in February to inflow in March. Chinese investors were also buying Consumer Staples and Consumer Discretionary stocks.
Our March Coverage of Hong Kong Connect southbound flow
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