Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Shin Kong Financial Holding / Equity Bottom-Up

Based on a valuation discrepancy and an oversold technical position, we supplied a tactical insight and recommendation into <a href="https://www.smartkarma.com/entities/shin-kong-financial-holding" target="_blank" rel="noopener" data-smartkarma-citation="entities:15351:1">Shin Kong Financial Holding (2888 TT)</a>, <a href="https://www.smartkarma.com/insights/shin-kong-financial-bargain-or-value-trap" target="_blank" rel="noopener" data-smartkarma-citation="insights:27353">Shin Kong Financial: Bargain or Value Trap?</a>  back in January.Based on eroding fundamental trends as testified by a very low PH Score and an overbought technical position today, we now believe that shares are ripe for a period of relative underperformance.SKFH is delivering a negative profit position in insurance, in trading, and in fee and commissions. In fact, trading (negative) and "other non-interest income" now account for 276% of PT Profit over the last 12 months. As SKFH does not have either a profitable fee income steam, insurance operation, or trading gains, it depends on dividends from equity instruments (and real estate rental to a lesser extent) to get anywhere near a Profit.Warning signals at FY18 were a deeply negative Comprehensive Income versus a reported Net Profit and a hefty drop in SH. Funds (especially at Life operation) despite Asset expansion.The technical position (overbought) today combines with negative fundamental trends and valuation (VFM) to place SKFH in the bottom decile of global financials by our VFM model. Shares are no longer excessively discounted, standing on a P/Book of 0.66x, Dividend Yield of 2.1% (vs a regional median of 2.76%), and a FV of 16% (vs a regional median of 9%). The PH Score of 2.4 compares with a regional median of 6.There are better opportunities elsewhere unless of course management manages to turnaround a creeking ship or corporate activity takes place.We are also cognisant that the insurance operation is taking more risk than peers with its investment portfolio. In addition, management seems focused on market share growth in life insurance premiums to the detriment of profitability in a highly competitive market. Pity as the banking side seems to be doing better (at least net interest income generation) though the segment is tempered by the expansion of funding costs in excess of interest income growth (as elsewhere) and the aforementioned negative profit on fees/commissions.

Based on a valuation discrepancy and an oversold technical position, we supplied a tactical insight and recommendation into Shin Kong Financial Holding (2888 TT), Shin Kong Financial: Bargain or Value Trap?  back in January.Based on eroding fundamental trends as testified by a very low PH Score and an overbought technical position today, we now believe that shares are ripe for a period of relative underperformance.SKFH is delivering a negative profit position in insurance, in trading, and in fee and commissions. In fact, trading (negative) and "other non-interest income" now account for 276% of PT Profit over the last 12 months. As SKFH does not have either a profitable fee income steam, insurance operation, or trading gains, it depends on dividends from equity instruments (and real estate rental to a lesser extent) to get anywhere near a Profit.Warning signals at FY18 were a deeply negative Comprehensive Income versus a reported Net Profit and a hefty drop in SH. Funds (especially at Life operation) despite Asset expansion.The technical position (overbought) today combines with negative fundamental trends and valuation (VFM) to place SKFH in the bottom decile of global financials by our VFM model. Shares are no longer excessively discounted, standing on a P/Book of 0.66x, Dividend Yield of 2.1% (vs a regional median of 2.76%), and a FV of 16% (vs a regional median of 9%). The PH Score of 2.4 compares with a regional median of 6.There are better opportunities elsewhere unless of course management manages to turnaround a creeking ship or corporate activity takes place.We are also cognisant that the insurance operation is taking more risk than peers with its investment portfolio. In addition, management seems focused on market share growth in life insurance premiums to the detriment of profitability in a highly competitive market. Pity as the banking side seems to be doing better (at least net interest income generation) though the segment is tempered by the expansion of funding costs in excess of interest income growth (as elsewhere) and the aforementioned negative profit on fees/commissions.

Shin Kong Financial: Relative Underperformance Ahead