In this briefing:
- Japan 5G Spectrum Allocations In-Line With Expectations
- China Minsheng: Unless There Is Opposing Wind, a Kite Cannot Rise.
- Taiwan Business Bank: Catching the Sun’s Rays
- Indonesia Property-In Search of the End of the Rainbow- Part 7 – Kawasan Industri Jababeka (KIJA IJ)
- Guangzhou Rural: All the Shakespearoes?
1. Japan 5G Spectrum Allocations In-Line With Expectations
The Ministry of Industry Affairs and Communications (MIC, the regulator) announced 5G spectrum allocations today with KDDI and NTT DoCoMo securing three bands and Rakuten and Softbank two, in line with one of the two expected scenarios we discussed last month. This dramatically expands the spectrum portfolio for the industry and sets the stage for the deployment of 5G services in later this year and in 2020. We think all operators benefit although sentiment may favor Rakuten for receiving two more bands and KDDI/DoCoMo for receiving the highest allocations.
2. China Minsheng: Unless There Is Opposing Wind, a Kite Cannot Rise.
Profitability at China Minsheng Banking A (600016 CH) in 2018 slipped. Similar to other Chinese lenders, rising Loan Loss Provisions exerted a negative pull on the bottom-line, testament to gnawing Asset Quality issues. In addition, similar to some banks, the top-line came under pressure from the rising cost of source of funding. Also the bank was not alone in juicing up its bottom-line with hefty trading gains. Thus Earnings Quality could have been better.
Given the underlying squeeze on core Income, it was encouraging to see management at least restrain OPEX.
Regarding Asset quality, write-offs soared by 153% YoY while substandard and loss Loans jumped by 68% YoY and 14%, respectively, and Loan Loss Provisions rose by 35.6% YoY. It is perhaps a little surprising then that coverage ratios decreased given the trend in credit costs, NPL migration, and charge-offs.
LDR remains quite high though credit growth last year was not gung-ho and broadly in line with Deposit expansion. We do note though a ratcheting up of CRE lending which jumped from 8.8% of the total Loan book to 12.3%.
Shares do not appear optically dear: the bank trades on a P/Book, FV, Dividend and Earnings Yields of 0.7x, 9%, 5.2% and 17.4%, respectively. However, we see better quality value elsewhere, in particular at “The Big Four” which can be termed safer Income opportunities.
3. Taiwan Business Bank: Catching the Sun’s Rays
Taiwan Business Bank (2834 TT) ticks most of the boxes with a PH Score of 10. This is a top decile performance globally in terms of fundamental trends from our quantamental value-quality gauge.
We would caution that the asset quality is not as crystalline as the reduced NPL ratio indicates given that rising impaired loans represent 5x NPLs. We await greater granularity from further analysis of the NPL breakdown by category. Having said that, the impaired loan ratio is still pretty low and manageable at 1.48% while Provisioning -on an upward trend- should reflect increasing non-NPL but impaired assets.
Results were markedly impacted by a palpable reduction in Loan Loss Provisions which will be a response, we assume, to lower problem loans or NPLs as well as very strong recoveries (net negative charge-offs), rather than higher impaired Loans.
In addition, the trend in Efficiency may not be as good as it appears to be given that OPEX expansion outpaced “Underlying Income” expansion. The latter was impacted by a sharp increase in Interest Expenses from Deposits especially, as well as a tepid Fee Income performance. While Interest Income from non-credit assets rose robustly, the core Interest Income on Loans firmed by 11.4% YoY, for a YoY gain of NT2.3bn, despite a modest decrease in the Loan portfolio in such a low margin environment. Interestingly, Loan recoveries also saw a NT2.3bn gain.
Valuation is quite appealing given the tailwinds of a high PH Score. FV, P/Book, and Earnings Yield stand at 6%, 0.9x, and 10%, respectively.
4. Indonesia Property-In Search of the End of the Rainbow- Part 7 – Kawasan Industri Jababeka (KIJA 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.
In the seventh company in ongoing Smartkarma Originals series on the property space in Indonesia, we now look at Indonesia’s oldest Industrial Estate developer and operator Kawasan Industri Jababeka (KIJA IJ). The company’s largest and the original estate is in Cikarang to the East of Jakarta and comprises 1,239 hectares of industrial land bank and a masterplan of 5,600 ha.
It has a blue chip customer base both local and foreign at Cikarang including Unilever Indonesia (UNVR IJ), Samsung Electronics (005930 KS), as well as a number of Japanese automakers and their related suppliers.
The company has also expanded its presence to Kendal, close to Semarang in Central Java, where it has a joint venture with Singapore listed company Sembcorp Industries (SCI SP). This estate covers a total area of 2,700 ha to be developed in three phases over a period of 25 years and is focused on manufacturing in industries.
The company also has successfully installed a 140 MW gas-fired power station at its Cikarang, providing a recurrent stream utility-type earnings, which cushion against the volatility in its industrial estate and property earnings. After some issues with one of its boilers (non-recurrent) and issues early last year with PLN, this asset now looks set to provide a stable earnings stream for the company.
KIJA has also built a dry-port at Cikarang estate which has been increasing throughput by around +25% every year, providing its customers with the facility for customs clearance at a faster pace of that at the Tanjong Priok port, as well as logistics support.
After two difficult years where the company has been hit by a combination of problems at its power plant, foreign exchange write-downs, and slower demand for industrial plots, the company now looks set to see a strong recovery in earnings in 2019 and beyond.
The company has seen coverage from equity analysts dwindle, which means there are no consensus estimates but it looks attractive from both a PBV and an NAV basis trading on 0.85x FY19E PBV and at a 73% discount to NAV. If the company were to trade back to its historical mean from a PBV and PER point of view, this would imply an upside of 33% to IDR325, using a blend of the two measures. An absence of one-off charges in 2019 and a pick up in industrial sales should mean a significant recovery in earnings, putting the company on an FY19E PER multiple of 9.7x, which is by no means expensive given its strategic positioning and given that this is a recovery story.
5. Guangzhou Rural: All the Shakespearoes?
I am partial to a bit of Confucius. Or to such thinking. Now and again. The chairman of Guangzhou Rural Commercial Bank (1551 HK) has a Confucian message (scholars will no doubt berate me) at the beginning of the report and accounts: “A single spark can start a prairie fire while a crack can lead to ice breaking”. From what I can glean, the chairman is alluding to the forty year process of China’s emergence. No satanic conflagration intended or any portends of global warming. For some reason, a tune by the 1970s new-wave group, The Stranglers, passed through my mind: “He got an ice pick that made his ears burn” and “They watched their Rome burn”. Cultural differences perhaps.
Guangzhou Rural Commercial Bank (1551 HK) shares many of the issues that affect Chinese lenders today. (The “Big four” are much less susceptible to deep stresses in this environment). Unsurprisingly, Asset Quality issues weigh on these results and earnings quality is subpar with trading gains and other assorted non-operating or “other items” playing a big part in the composition of Pre-Tax Profit. The latter flatters the “improving” headline Cost-Income ratio which is not really an indicator of greater efficiency here. In fact underlying “jaws” are highly negative. It is thus surprising that the wage bill should shoot up 30% YoY in such austere times. Given the aforementioned Asset Quality issues, such as booming substandard loans, ballooning credit costs, and high charge-offs, the “improving” NPL ratio is flattered by an exuberant denominator. Asset Quality does look volatile. The Liquidity Coverage Ratio and LDR duly eroded.
Where the bank does better, in contrast to many other Chinese lenders, is on Net Interest Income. Guangzhou seems to have reduced its funding costs markedly. The bank managed to lower its corporate time deposit rates especially. The result is that Interest Expenses on Deposits rose by just 6.4% YoY. Liability management seems to be behind a reduction in Debt/Equity from 2.79x to 1.62x, thus decreasing Debt funding costs by 24% YoY. Spurred by corporate credit growth of 38% YoY, Interest Income on Loans climbed by 31% YoY. However, the bank does share an issue with some other lenders – a collapse in Interest Income on non-credit earning assets. This is, in part, due to a shrinkage of its FI holdings by some CN89.5bn. This means that despite the credit spurt, Interest Income in its totality edged up by barely 1% YoY. A disappointing performance on fee income (custody, wealth management, advisory) reduced Total underlying Income growth to 6% YoY. That 6% is all about rampant corporate credit supply and lower corporate deposit and debt interest costs.
Trends are thus decidedly mixed given the underlying picture behind the positive headline fundamental change in Efficiency, Asset Quality and ROAA. Liquidity deteriorated. It must be said that Provisioning was enhanced, Capitalisation moved in the right direction, while NIM and Interest Spread both improved.
Shares are trading at optically quite tempting levels: Earnings Yield of 17%, P/Book of 0.8x, and FV of 8%. But if you desire a Dividend Yield of 5%, or a similar level of aforementioned valuation, a safer bet would be with “The Big Four”.
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.
