In this briefing:
- Hana Financial: Hand It to Hana
- Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position
- Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf
1. Hana Financial: Hand It to Hana
Fundamental trends at Hana Financial (086790 KS) are benign and stand out within South Korea’s improving and deep value banking universe. Key metrics/signal at 12M18 positive fundamental momentum and value-quality trends embodied in a high PH Score™.
Hana is an important constituent of South Korea’s Banking Sector, holding approximately 13% of the system total loans, 15% of deposits and about 40% of the nation’s trade finance due to the bank’s entrenched foreign-currency clearing system. This valuable franchise is backed by strengthening capitalisation, improving asset quality after a difficult period for banks grappling with corporate exposures, and discrete gains on Efficiency and Profitability post sizeable merger and integration costs.
Corporate governance remains an issue to monitor after the nepotism scandal of recent years and was covered by Douglas Kim last year.
Having said that, Hana is a slightly higher risk than peers with a HY profile given its default rating.
Shares of Hana are attractively priced, trading on earnings and dividend yields of 19% and 3.8%, respectively, a dividend-adjusted PEG factor of 2x, a P/B of 0.47x, and a franchise value of 5% with the tailwinds of a quintile 1 PH Score™. In line with regulatory change regarding higher DPRs, Hana will raise its dividend payout ratio to 25.5% in 2019 from 22.5% in 2018.
2. Valuetronics (VALUE SP): Trade War Uncertainty Continues, Downside Supported by Large Cash Position
Valuetronics reported its 3Q19 figures this week which showed a 7.5% decline in revenues but a small (+2.6%) increase in bottom line profits. Stronger margins in its ICE segment offset weakness in its CE segment.
Valuetronics Holdings (VALUE SP) remains a solid company run by a good management team with interesting clients in consumer electronics and automotive. The valuation of the company is cheap (5x ex-cash 2019 P/E) and the balance sheet is rock solid.
All these positives are currently being overshadowed by the US-China trade war as the company has 100% of its production in China and does 45.7% of its sales in North-America. While many companies try to downplay the impact of the trade-war Valuetronics cannot hide and the alternatives it is working on to offset the tariff impact will surely cause short-term disruption and increased costs.
YTD the share price is +12% as the market is hoping for a positive resolution to the US-China trade war. Management is cautious on macro political improvements as trade war friction is unlikely to dissipate soon. Given the weak outlook for its CE segment and no significant new customer wins in its ICE segment risk/reward does not seem very attractive despite good dividend yield and cheap valuation.
3. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf
Tokyo Kiraboshi Financial Group (7173 JP) (TKFG) progresses from bad to worse, and its stock price is behaving accordingly. Amidst volatile trading, the share price is gradually sinking back towards the 52-week intra-day low of ¥1,454 that was reached on Christmas Day 2018 before closing that day at ¥1,504. 3Q FY3/2019 (9 months to 31 December 2018) consolidated results represented a decline of over 56% YoY at the recurring profit level, with net profits down 34% YoY after tax adjustments. On a quarterly basis, Q3 (October-December 2018) net operating profits collapsed 96% to just ¥66 million, while recurring profits fell 68% YoY to just ¥565 million with a small net loss of ¥9 million as a result of lower fee income and sharply higher credit costs. Hardly a ‘glittering’ performance.
Trading on a forward-looking price/earnings multiple of 11.7x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.19x, TKFG is expensive compared to peer regional banks. Indeed, adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues raises the annualised PER to over 19x: roughly twice that of peer banks. TKFG’s RoA and RoE ratios are woefully low at 0.09% and 1.71% respectively, loan growth has shrunk to just +0.5% YoY, deposits have fallen alarmingly (down 4.5% YoY), and the overhead ratio has shot up to 95% in Q3. Yet, despite all these ‘red flags’, TKFG still managed to attract an aggregate foreign ownership of 17.4% as of 31 March 2018 (the most recent data publicly available): a strange choice. Caveat emptor (may the buyer beware) !
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