In this briefing:
- 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. 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.
2. 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.
3. 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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