In this briefing:
- 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?
- ICBC: Opportunity in Disguise
- Newmark Group Inc (NMRK US): Valuation/Fundamentals Mismatch, Stock Trades At Bargain Levels
1. 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.
2. 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.
3. 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”.
4. ICBC: Opportunity in Disguise
ICBC (H) (1398 HK) delivered a robust PH Score of 8.5 – our quantamental value-quality gauge.
A highlight was the trend in cost-control. The bank delivered underlying “jaws” of 420bps. Besides OPEX restraint, including payroll, Efficiency gains were supported by robust underlying top-line expansion as growth in interest income on earning assets, underpinned by moderate credit growth, broadly matched expansion of interest expenses on interest-bearing Liabilities. This combination is not so prevalent in China these days, especially in smaller or medium-sized lenders.
It is well-flagged that the system is grappling with Asset Quality issues and there is a debate about the interrelated property market. ICBC is not immune, similar to other SOEs, from migration of souring loans. However, by China standards, rising asset writedowns which exerted a negative pull on Pre-Tax Profit as a % of pre-impairment Operating Profit, high charge-offs, and swelling (though not exploding) substandard and loss loans look arguably manageable given ICBC‘s sheer scale. The Asset Quality issue here is also not as bad as it was in bygone years (2004 springs to mind) when capital injections, asset transfers, and government-subsidised bad loan disposals were the order of the day. This is a “Big Four” player.
Shares are not expensive. ICBC trades at a P/Book of 0.8x, a Franchise Valuation of 10%, an Earnings Yield of 16.7%, a Dividend Yield of 4.9%, and a Total Return Ratio of 1.6x.
5. 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
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