In this briefing:
- Newmark Group Inc (NMRK US): Valuation/Fundamentals Mismatch, Stock Trades At Bargain Levels
- Bank of Zhengzhou: “Bend One Cubit, Make Eight Cubits Straight”
- Jiangxi Bank: “No Sooner Has One Pushed a Gourd Under Water than Another Pops Up”
- “Deep Doubts, Deep Wisdom; Small Doubts, Little Wisdom”
- Bank of China: A Rich Dividend Yield Backed by the PRC.
1. Newmark Group Inc (NMRK US): Valuation/Fundamentals Mismatch, Stock Trades At Bargain Levels
Having gained ~30% in a little more than two months following its full separation from BGC Partners (BGCP US) at the end of November 2018 after a dismal share price performance since coming to the market in a partial IPO at the end of December 2017, the shares of commercial real estate services company, Newmark Group (NMRK US) have experienced another slide over the past several weeks despite its cheap valuation which belies its positive fundanmental drivers and peer group comparisons.
Notwithstanding its robust fundamentals, notice of alterations it plans to make to its Non-GAAP earnings presentations to bring them more into line with many other US-listed companies, has brought the company into the headlights of the ongoing controversy caused by this topic, and in particular with respect to the treatement of stock-based compensation in Non-GAAP earnings. While Newmark follows many other companies by excluding it from Adjusted Earnings, its heavy use of stock-based compensation, which it intends to lessen going forward, makes it an easy target for critique of its earnings presentations. Nevertheless, we assess that Newmark is at least 35% undervalued relative to its peers after incorparting stock compensation expenses in its earnings-based valuation metrics. It is also noteworthy that Newmark is currently paying shareholders a yield of ~4% against barely any dividend being paid out by peers
2. Bank of Zhengzhou: “Bend One Cubit, Make Eight Cubits Straight”
Bank Of Zhengzhou (6196 HK) reveals a picture of cascading asset toxicity and subpar earnings quality. As elsewhere in China, it is difficult to decipher whether better NPL recognition is behind this profound asset quality deterioration or poor underwriting practice and discipline combined with troubled debtors: the answer may lie somewhere in between.
While the low PH Score (a value-quality gauge) of 4.7 is supported by a lowly valuation metric (earnings quality is not reassuring), it is more a testament to -and reflection of- core eroding fundamental trends across the board. Regarding trends, Capital Adequacy and Provisioning were the variables to post a positive change. But even then, not all Capitalisation and Provisioning metrics moved in the right direction.
Franchise Valuation at 12% does not indicate that the bank is especially cheap though P/Book of 0.64x is below the regional median of 0.78x.
3. Jiangxi Bank: “No Sooner Has One Pushed a Gourd Under Water than Another Pops Up”
Jiangxi Bank Co Ltd (1916 HK) initially attracted our attention with a subpar PH Score (a quantamental value-quality gauge). The bank only scored positively on Capital Adequacy and Efficiency trends. The latter is almost certainly not a true picture.
Further analysis reveals a bank ratcheting up the credit spigot exuberantly on the back of poor asset quality fundamentals (booming substandard loans and SML expansion) with ensuing elevated asset writedowns weighing on a reducing bottom-line despite gains from securities and a lower tax provision.
Valuations do not fully reflect a somewhat challenging picture. Shares trade at Book Value vs a regional median of 0.8x, at a Franchise Valuation of 13% vs a regional median of 9%, and at an Earnings Yield of 8.4% vs a regional median of 10%. Based on FY18 data, this is a bank that should trade at a discount rather than at a premium to peers.
4. “Deep Doubts, Deep Wisdom; Small Doubts, Little Wisdom”
Postal Savings Bank Of China (1658 HK) is outgrowing its peers on the top-line given exuberant pace of credit growth (especially in consumer lending such as credit cards but also in corporate and in agriculture). Expansion in Interest Income on earning assets is well in excess of an increase in Interest Expenses on interest-bearing Liabilities. This is not always the case in China today. Fee income is also growing by double-digits too. The bank has a huge deposit base and Liquidity is ample. In addition, “Jaws” stand out as being highly positive at 20pts given aforementioned top-line growth coupled with OPEX restraint.
However, capital remains tight and asset quality has deteriorated markedly. Despite the top-line growth and cost-control, an increasing amount of pre-impairment Income is being consumed by loan loss provisions and other asset writedowns. Substandard loans have exploded while loss loans have climbed forcefully. The bank shapes as if it is striving to grow itself out an asset quality bind. Given Balance Sheet risks, the bank has adjusted its provisioning accordingly.
The relatively meagre capital position (for example Equity/Assets or Basel 111 Leverage Ratio) while improving is surely the reason why Postal Savings cannot pay a higher dividend in comparison with say Agricultural Bank Of China (1288 HK) , Bank Of China (601988 CH), and China Construction Bank (601939 CH) which all command yields in excess of 5% and rate as income stocks. The Dividend Yield here though is not unattractive at 3.9%.
The PH Score of 7.7 encompasses valuation as well as generally positive metric progression. Combined with an underbought technical position and an additional valuation filter, the bank stands out with the aforementioned strategic peers in the top decile of global bank opportunity. Valuations are not stretched: shares trade at a P/Book of 0.74x, a Franchise Valuation of 4%, and an Earnings Yield of 15.5%.
Despite the aforementioned deep concerns and caveats, we believe that Postal Savings Bank is a valuable, liquid, deposit-rich franchise with a capacity to grow.
5. 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.
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