Brief Equities Bottom-Up: HSBC – Meteoric Rise in Credit Costs and more

In this briefing:

1. HSBC – Meteoric Rise in Credit Costs
2. Quick Read of 2019 Government Work Report – Bulls and Bears
3. Sell Lenovo: Profit Is an Illusion, Liabilities Are Rising and There Is Little Real Equity Value
4. Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019.
5. Shanghai/Shenzhen Connect – $8.4 Bn Inflows in February (Kweichow Moutai, Aier Eye, Luxshare)

1. HSBC – Meteoric Rise in Credit Costs

The five-fold rise in HSBC Holdings (5 HK)’s latest quarterly credit costs compared with the first quarter of the year should not surprise our readers.  It was always the case that the bank’s provision expenses were too low, not only in the first quarter of the year, but even through the third quarter. This is where following of lower headline bad loan figures wholly misleads. What really matters now is where credit costs will move in coming quarters and years. We offer long-perspective on this suggesting sizeable costs in 2019, where HSBC is now indicating “normalisation of credit costs going forward.” We note further observations from the bank’s granular disclosures that point toward worsening credit metrics, further supporting the notion of ‘normalisation’ or what we can simply call far higher credit costs. In any case, we do not believe most are expecting a wholesale rise in provision costs at HSBC, from current levels. 

2. Quick Read of 2019 Government Work Report – Bulls and Bears

The Premier Li Keqiang had just conducted an annual Government Work Report in the two session conference (两会) in Beijing this morning. In this insight, we will briefly walk through key points of his report and identify bulls and bears in the market.

While the theme of cost reduction benefits manufacturing companies, it will negative for some infrastructure service providers, such as telecom companies.

The full text in Chinese can be accessed here.

3. Sell Lenovo: Profit Is an Illusion, Liabilities Are Rising and There Is Little Real Equity Value

In Q3, Lenovo (992 HK) reported revenue growth – well ahead of market expectations, improved margins and US$1.9bn of cashflow.  This was a considerable surprise to us – and the market.  However, having analysed the results, most of the reported revenue and profit growth comes from the Fujitsu Ltd (6702 JP) acquisition. The rise in cashflow largely came from working capital, but also benefitted from the structure of the Fujitsu deal. We think real full-year cashflow after investment, US$0.8bn, will yet again, fail to cover finance costs and dividends, and Lenovo will need to borrow another US$400m.

4. Thai Telcos Struggle as All Three Seek to Gain Share While Spectrum Risk Looms Again in 2019.

Chris Hoare met the Thai telcos recently but did not come away particularly enthused. His view is that the market probably remains tough this year. The good news is that the low priced, limited speed with unlimited usage, offers have mostly been withdrawn. It will take 2-3 quarters for this to work through, as these were 12 month plans, but it does suggest improved data monetization as the year progresses. A lack of data monetization was the key reason behind the revenue slowdown in 2H18. However, with data usage now so high (around 10GB/month), and content services unlikely to lead to revenue growth in the foreseeable future, overall revenue recovery is likely to be modest. 

5. Shanghai/Shenzhen Connect – $8.4 Bn Inflows in February (Kweichow Moutai, Aier Eye, Luxshare)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Industrials, Consumer Staples, Consumer Discretionary, and Financials names. We estimate that total inflow into the A-share market via northbound trade amounted to USD 8.4 bn in February.