Brief Value Investing: China Construction Bank: Not Strategically Dear and more

In this briefing:

1. China Construction Bank: Not Strategically Dear
2. Indonesia Property – In Search of the End of the Rainbow – Part 6 – Intiland Development (DILD IJ)
3. Angang Steel: PMI Recovery to Support Shares: Close Short
4. Billionaire Carl Icahn’s Run at Caesars Has yet to Move Stock. What Doesn’t the Market See?
5. Brazil Politics; The “Noise” On Pension Reform Is an Investor Opportunity

1. China Construction Bank: Not Strategically Dear

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.

2. Indonesia Property – In Search of the End of the Rainbow – Part 6 – Intiland Development (DILD IJ)

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.

3. Angang Steel: PMI Recovery to Support Shares: Close Short

INVESTMENT VIEW:
The recovery in China’s March PMI index to 50.8 shows an unexpected expansion in economic activity.  Historically, there is a strong correlation between the PMI and Chinese steel prices as well as Angang’s share price. 

We close our short on Angang Steel Co Ltd (H) (347 HK) shares. 

4. Billionaire Carl Icahn’s Run at Caesars Has yet to Move Stock. What Doesn’t the Market See?

• Carl Icahn has built his position since February 7th to where he now controls over 28% of the stock of Caesars Entertainment Corporation.
• He has already put three members on the board and will get a fourth seat if management can’t name a new CEO by April 15th.
• Icahn’s track record in casino deals has made him over $2.5bn since 1998/ Investors who joined him have made solid returns, deal after deals.

5. Brazil Politics; The “Noise” On Pension Reform Is an Investor Opportunity

• Negative press “noise” on the pension reform process, with heightened friction between the Executive and the Legislature, has hit the currency and equity markets
• This reflects the Bolsonaro administration’s limited engagement with the Legislature so far on pension reform
• Finance Minister Paulo Guedes is spearheading the effort on pension reform, and has the support of Rodrigo Maia, the leader of the Chamber of Deputies
• The latest poll on pension reform voting intentions in the Chamber suggest it is heading in the right direction, but that the administration needs to accelerate support to get the legislation approved; we see 3Q19 more likely than 2Q19 for pension reform approval
• We see the equity market and currency corrections as an opportunity, and we highlight our positive view on Banco Do Brasil Sa (BBAS3 BZ)