Brief Value Investing: Golden Agri Bull Pivots to Get Involved and more

In this briefing:

1. Golden Agri Bull Pivots to Get Involved
2. China Unicom Weak 4Q18 Mobile Results Offset by Strength in Fixed Line Business
3. Fujitec (6406) Value Buy
4. Philippines: No Dovish Pivot in the Monetary Board’s Latest Meeting
5. Bank of Tianjin: 太好了, 不可能是真的

1. Golden Agri Bull Pivots to Get Involved

Golden Agri Resources (GGR SP) has started a basing process below pivot support at 0.30 as the daily MACD cycle has not been confirming recent lows for a case of underlying supportive bull divergence (sell pressure dwindling as downside momentum tapers off).

Bull divergence outlined in the MACD is supportive on a macro basis, however there is downside risk stemming from the micro rising wedge. A fresh diverging low is expected to market a price low to work into.

Immediate inflection levels at 0.30 and 0.26 will dictate near term direction out of the micro rising wedge. Ideal downside projections are noted along with a bullish resistance threshold.

2. China Unicom Weak 4Q18 Mobile Results Offset by Strength in Fixed Line Business

China Unicom’s (762 HK) recent 4Q18 results were not great. The overall figures look ok due to strength in the fixed line business which offset weakness in mobile. However, they were the weakest of the three operators and the stock, which has had a strong run, now looks due for a pause. We have turned more cautious on the Chinese telcos on concerns that 5G spending could be higher than expected. Chris Hoare believes a major reason for the Chinese telcos outperforming in the past year has come from declining capex spending expectations. That trend may now start to reverse. While China Unicom has guided for only modest 5G capex in 2019 the focus will turn to 2020 where it is a much bigger issue and while we expect China Unicom to do a joint roll-out with China Telecom (728 HK) we expect the scale of the spending to be larger than an individual build. 

3. Fujitec (6406) Value Buy

The shares are cheap. The company is cash rich and owns 10% in treasury stock; it owned more last year but has cancelled 4%. It has some Y6bn in long term investment. EV in our view is Y57bn vs the current market cap of Y110bn. With ebitda next year coming in at Y15bn, EV/ebitda is under 4x. The shares yield 3.4% and trade at book. They have slightly underperformed the market over the last 12 months. For now, we view this as a defensive buy. There remain many issues longer term as to its place in the global elevator world. A potential positive, however, is that in May the company will announce a new mid-term plan and in it, they will outline their view as regards to shareholder returns for the next three years. They are aware that they are very over capitalised, so greater returns are a real possibility.

4. Philippines: No Dovish Pivot in the Monetary Board’s Latest Meeting

• The anticipated cut in the bank reserve ratio didn’t materialize in the latest Monetary Board (MB) meeting–the first one chaired by newly appointed BSP Gov. Benjamin Diokno. In the ANC televised interview, Diokno expressed his preference to reduce the high bank reserve requirement ratio (RRR: 18%) by 1% every quarter, fueling bond market excitement that severely compressed yields. The policy rate was also unchanged amid the dovish tone in the BSP’s press release after the meeting.

• According to a senior monetary official, the RRR cut is a ‘live’ issue. That the timing of any adjustment is key given the operational and policy implications of an RRR cut.

•  Accentuating the MB’s depiction of benign inflation is an inflation trajectory settled comfortably in its target band in 2019-20 with inflation expectations close to being anchored within the band as well.  Key downside risk to growth cited by the MB is the ‘current budget impasse in Congress is not resolved soon’. Prolonged El Niño is among those factors that can upset the broadly balanced risks to inflation.

• A BSP under a pro-growth BSP chief need not necessarily change the ‘sequencing and timing’ of monetary policy decisions/actions facing liquidity and growth challenges. Likelihood that 1Q GDP (May 9 release) may be given slight emphasis in the BSP’s shift to accommodation starting with the bank reserve cut.  
• We expect a bond market correction following excitement over the BSP’s dovish pivot this early that led to severe yield compression. Buy the 5yrs to short-duration on dips.

5. Bank of Tianjin: 太好了, 不可能是真的

Bank Of Tianjin (1578 HK) results at first look quite encouraging with firmer profitability, enhanced efficiency, improved capital adequacy, and increased provisioning.

Valuations are optically attractive: p/book of 0.5x, franchise valuation of 7%, earnings yield of 17%, and a total return ratio of 2.5x. These metrics are within the bargain hunter space.

However, optimism fades fast on closer inspection.

“Underlying” Income decreased by 21% YoY as the bank was squeezed by higher funding costs and non-interest expenses. Expenses on wholesale funding increased by 30% YoY. Debt funding now represents 71% of Gross Loans. Debt now stands at 4.3x SH. Funds. This type of funding has exploded by 10x since 2014. At the same time, deposits declined YoY. Deposits have increased by a more sedate 18% since 2014.

PT Profit would have been CNY1.4bn rather than CNY5.2bn but for hefty gains on securities. Loan loss provisions almost tripled YoY.

Regarding the Balance Sheet, Special Mention Loans rose sharply (+25% YoY) and represent 2.8x NPLs. A 127% and 108% YoY increase in “doubtful loans” and “loss loans” puts some perspective on a seemingly respectable NPL ratio of 1.64% and a LLR/NPLs of 250%.

Thus, Bank Of Tianjin (1578 HK) is cheap for a reason. We are reluctant to recommend taking a position at this juncture given the ongoing stresses in source of funding and asset quality.