In this briefing:
- Saigon Hanoi Commercial: A Forsaken Franchise
- Shin Kong Financial: Bargain or Value Trap?
- Amorepacific Group and Corp Pair Trade
- South Korea’s Plummeting Population Growth – Long Term Structural Impact on Korean Banks
1. Saigon Hanoi Commercial: A Forsaken Franchise
Value-quality trends at Saigon Hanoi Commericial (SHB VN) stand out within Vietnam’s improving banking universe. Key metrics/signals at 9M18 underline positive fundamental momentum embodied in a high PH Score™. SHB’s improvements reflect macro backdrop (upgraded sovereign strength).
Formerly known as Nhon Ai Rural Commercial, SHB incorporated Hanoi Building Commercial Bank and Vinaconex – Viettel Finance in 2012 and 2017, respectively, in line with system restructuring. SHB borrows short in order to lend short and long as well as purchase high-yielding government bonds. More than 79% of loans stem from credit provision up to 1 month and from 1-3 months, broadly matching short-duration market funding. (The liquidity gap is sound). Credit is diverse with an emphasis on agriculture, manufacturing and wholesale and retail trade. SHB is increasing higher-margin consumer lending which represents just 22% of the loan portfolio. Some 8% of the portfolio relates to state-owned enterprises.
Vietnam exhibits broad-based, mild-inflationary, growth. Reforms continue in the banking sector, privatisations and reducing red tape. However, economic distortions and capacity constraints remain, as do external and domestic risks and longer-term challenges. The robust economy though provides an opportunity for additional reforms to boost investment, ensure durable growth and resilient balance sheets, and reduce the external surplus.
Regarding banks, SOCBs need to be capitalized with government funds, and private sector and foreign ownership limits raised (lifting a 30% foreign investor limit to banking and aviation is underway). Vietnam needs to develop a macroprudential framework and to enhance data quality on balance sheet exposures to better monitor and manage risks, and to ensure that robust liquidity and crisis management frameworks are in place from a legal and operational perspective in order to mitigate financial sector risks. The broad picture though reflects an improved macro profile combined with progress at banks in writing off legacy problem assets and boosting capitalisation – especially in the case of ABB, ACB, Military Bank, OCB, TPbank, VIB, and Techcombank. However, Sacombank faces a significant risk from its problem assets while VP is constrained by risk from its consumer finance portfolio.
Shares of SHB trade on an earnings yield of 20%, a P/B of 0.5x, and a franchise value of 4% with the tailwinds of a quintile 1 PH Score™. A RSI of 39 intimates that shares are under bought. Shares have had a poor run of late (no doubt reflecting caveats mentioned below) and may have found a bottom. Caveats include modest solvency (similar to Sacombank, MCB, Lien Viet, BIDV, Vietcombank, Vietinbank), a model reliance on market funding as opposed to CASA, soft loan growth, slow fee income revenues, and inefficiencies within its operations in the northern zone of Vietnam.
2. Shin Kong Financial: Bargain or Value Trap?
Analysing Shin Kong Financial Holding (2888 TT)is like evaluating an investment trust with operating cash flow and a robust demand deposit funding base derived from 106 bank branches. The consolidated asset-base (68% of which consists of securities) is a float (long for claim reserves and short for premium reserves) composed of low beta high dividend yielding stocks but mainly overseas FI, some NT$1.7trillion worth yielding 4.7%, as well as loans (20% of Assets).
SKFH is the holding for life insurance (SKL), the bank (SKB), property insurance, mainly auto and fire insurance (SKPIA), the investment trust (SKIT), Masterlink securities, and VC operations (SKVC). SKFH is mainly life insurance (73% of Assets) and the bank (24%).
Management is focused on enhancing integration initiatives, efficiencies, initiatives and synergies within the Group. “Shin Kong: Pioneering a digital mobile future” is a programme to drive digital evolution through AI, big data, and smart robots.
With 317 branches, the secure and mature insurance franchise (mainly life but also health) is concentrated on selling foreign FX protection and policies in order to support interest spreads and contain hedging costs. While Net Profit at the life insurance subsidiary jumped exuberantly at 9M18, there were signs of deterioration in the underlying underwriting business with the claims: premium plus expenses: premium ratios eroding somewhat which shows up in the Consolidated statement in a decrease in “Net Income on Life Insurance”.
The bank is scaling up its presence in wealth management (bancassurance, mutual funds), trade finance, syndicated loans, and retail plus SME credit. Fee income is now 20% of total Revenues. A negative take, as elsewhere, was the rise in interest expenses after Fed tightening though this helps improve returns from life insurers’ assets, which have a shorter duration than their insurance liabilities. However, value-quality trends at SKB (the bank) are positive. Key metrics/signals at 9M18 in consolidated accounts and separate bank statements underline positive fundamental momentum embodied in a high PH Score™.
Consolidated results perhaps better reflect earnings pressures in insurance than the life insurance Balance Sheet as well as showing gains from FX and the sale of investments across divisions and a solid banking performance despite aforementioned interest expenses growth.
Shares of SKFH trade on an earnings yield of 21%, a P/B of 0.57x, a franchise value of 15%, and a Dividend Yield of 4% with the tailwinds of a decile 1 PH Score™. A RSI of 36 intimates that shares are under bought. Shares have had a poor run of late with the P/B at a 3-year low, and may have found a bottom. Caveats include underlying insurance results, the tough underwriting environment, and scale and interest costs within the banking franchise. The jury is out as to whether SKFH might be a value trap.
3. Amorepacific Group and Corp Pair Trade
This insight delves into make or break levels for a pair trade in being long Amorepacific Group (002790 KS) (APG) over Amorepacific Corp (090430 KS) (APC) with key hurdles/targets and floor support.
Curtis Lehnert puts forth the fundamental argument in TRADE IDEA: Amorepacific (002790 KS) Stub: A Beautiful Opportunity and we thought pivotal chart points would help round out this trade idea.
Holding floor support is vital for this trade to work. In absolute terms both APG and APC display similarly weak chart structures with risk of a final bout of weakness. APG displays a more depressed chart reading however.
4. South Korea’s Plummeting Population Growth – Long Term Structural Impact on Korean Banks
It was reported that South Korea’s population increased only 0.09% YoY at the end of 2018. The population growth has been declining in the past three decades in Korea. The population growth rate of 0.09% YoY in 2018 is even lower than the growth rate of 0.16% YoY in 2017. (Source: Korean Ministry of the Interior and Safety) The previous general estimates by various government agencies/research institutes of when the population in South Korea would decline were around 2028-2032.
With the new available data, it is likely that these estimates will be revised drastically. In fact, it is possible that South Korea’s population could start declining around 2020-2022, contrary to previous estimates that suggested that South Korea’s population to start declining around 2028-2032.
The two leading Korean banks including Shinhan Financial (055550 KS) and Kb Financial Group (105560 KS) have been in a decade plus bear market. While these stocks may move up or down 10-15% within a short period of time, we think they are a structural, long-term short. Bank of Korea has been hesitant on raising the base interest rate. There are simply an overwhelming pressure to not to crash the real estate market. Because of this enormous pressure, the Korean banks have been losing out on the higher interest rate spreads they could have earned if the interest rates were raised much higher.
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