In this briefing:
- Bank of China: A Rich Dividend Yield Backed by the PRC.
- What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?
- Monthly Geopolitical Comment: Markets Are Still Waiting for the Result of US-China Trade Talks
- HK Connect Discovery – March Snapshot (WH Group, Air China)
- Dongzheng Auto Finance (东正汽车金融) Trading Update – Could Be Worth Setting up a Trade
1. 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.
2. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?
Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States. Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress.
3. Monthly Geopolitical Comment: Markets Are Still Waiting for the Result of US-China Trade Talks
The future of the US and China relationship remains the most significant geopolitical and economic issue watched by the markets. While the markets prefer to focus on the positives, the eventual outcome of the talks may yet prove disappointing. Meanwhile, a rift is emerging among EU members who have diverging attitudes to cooperation with China. Authorities in Turkey have again spooked investors with their ham-fisted approach to markets. In Ukraine, comedian Zelensky has won in the first round of the presidential poll. In India, sabre-rattling continues ahead of parliamentary elections despite the de-escalation of tensions with neighbouring Pakistan.
4. 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
- HK Connect Discovery Weekly: PICC, Xinyi Solar (2019-03-08)
- HK Connect Discovery Weekly: Eligibility Adjustment (2019-03-15)
- HK Connect Discovery Weekly: Mainland Investors Buying WH Group (2019-03-22)
5. Dongzheng Auto Finance (东正汽车金融) Trading Update – Could Be Worth Setting up a Trade
Dongzheng Automotive Finance (2718 HK) raised US$208m at a fixed price of HK$3.06 per share. We have covered the IPO extensively in:
- Dongzheng Auto Finance (东正汽车金融) Pre-IPO Review – Dependent on Dealership Network for Growth
- Dongzheng Auto Finance (东正汽车金融) IPO Review – Better off Buying the Parent
- Dongzheng Auto Finance (东正汽车金融) IPO Review – Relaunched at Lower Price
In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
