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Yum Cha 飲 茶 - chinastock.com.hk€¦ · Yum Cha 飲 茶 January 28, 2014 INDICES Closing DoD%...
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Yum Cha 飲 茶 January 28, 2014 INDICES Closing DoD% Hang Seng Index 21,976.1 (2.1) HSCEI 9,792.6 (2.2) Shanghai COMP 2,033.3 (1.0) Shenzhen COMP 1,083.2 (0.6) Gold 1,269.9 (0.0) BDIY 1,246.0 (2.0) Crude Oil, WTI(US$/BBL) 97.1 0.4 Crude Oil, BRENT(US$/BBL) 107.6 (0.2) HIBOR, 3-M 0.4 1.1 SHIBOR, 3-M 5.6 0.0 RMB/USD 6.05 (0.0) STRATEGY – China Credit Trust avoided default at the last minute but it will take time to un- tangle the deep-rooted problems caused by shadow banking. We may see some easing in domestic interest rates after the Lunar New Year holidays but they are likely to stay at least 100bps above the level in May 2013. We believe net-cash companies with decent earnings growth are in a better position to weather the storm. Based on some conservative criteria, we would like to highlight seven H-share companies for reference: (1) Dongfeng Motor (0489.HK); (2) China Machinery Engineering (1829.HK); (3) China Communication Ser- vices (0552.HK); (4) Sinopec Engineering (2386.HK); (5) Great Wall Motor (2333.HK); (6) Guangzhou Auto (2238.HK); and (7) Qingling Motors (1122.HK). We have a BUY rating on Great Wall Motor. TALKING POINTS CHART OF THE DAY— SOME RELIEF AS RMB3bn TRUST RESOLVED, BUT OVERHANG REMAINS Analyst: John Mulcahy, Managing Director The settlement of the RMB3bn trust product problem arising for Industrial and Commercial Bank of China, ICBC [1398.HK] appears to have been resolved, as discussed elsewhere in this note. But the solution of this particular problem has not removed the overhang from China’s banks, and the market is awaiting clarity on the real threats to China’s bank balance sheets before regaining confidence in the sector. The chart shows the performance of 16 A– and H- share banks (table on page 2) and the extent of the meltdown in the sector over the past year. Separately, we have considered the impact on the seven largest H-share banks of an increase in overall impairment provisions to 5% from the current ~2.5%, and also the impact if non- performing loans (NPLs) are increased to 5% and the provision coverage ratio (provisions as % of NPLs) is maintained at the current level. The less aggressive action would be to increase the provision level alone, and this would have the effect of cutting net profit for 2013 by 23% (Agricultural Bank of China) to more than 100% (Bank of Communications). In the second sce- nario, increase in NPLs to 5% and maintained provision coverage, all the banks will see a sub- stantial impact on their income statements and balance sheets, recording deep losses for the year, with a comparable impact on capital. We do not believe the most severe provisioning will be applied, as China has a tendency for forbearance; to extend maturities; and to move non- performing assets off bank balance sheets into “bad” banks, which created the major asset management companies (AMCs) a decade or so ago. But the scale of the credit issue con- fronting China —RMB10trn in trust products; RMB17.5trn in local government financing vehi- cles; and RMB10trn-12trn in wealth management products (WMPs) suggests that the banks will be forced to take a hit of some magnitude, and until the scale of that is clearer there is little prospect of a re-rating for the banks. DIARY NOTES FOR THIS WEEK Jan 27 Industrial Profits YoY [Previously: 13.2%] Jan 28 HSBC/Markit Manufacturing PMI [Previously: 50.5] Jan 31 Manufacturing PMI [Previously: 51.0] Source: Bloomberg
Transcript of Yum Cha 飲 茶 - chinastock.com.hk€¦ · Yum Cha 飲 茶 January 28, 2014 INDICES Closing DoD%...
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Yum Cha 飲 茶 January 28, 2014
INDICES Closing DoD%
Hang Seng Index
21,976.1
(2.1)
HSCEI
9,792.6
(2.2)
Shanghai COMP
2,033.3
(1.0)
Shenzhen COMP
1,083.2
(0.6)
Gold
1,269.9
(0.0)
BDIY
1,246.0
(2.0)
Crude Oil, WTI(US$/BBL)
97.1
0.4
Crude Oil, BRENT(US$/BBL)
107.6
(0.2)
HIBOR, 3-M
0.4
1.1
SHIBOR, 3-M
5.6
0.0
RMB/USD
6.05
(0.0)
STRATEGY – China Credit Trust avoided default at the last minute but it will take time to un-
tangle the deep-rooted problems caused by shadow banking. We may see some easing in
domestic interest rates after the Lunar New Year holidays but they are likely to stay at least
100bps above the level in May 2013. We believe net-cash companies with decent earnings
growth are in a better position to weather the storm. Based on some conservative criteria, we
would like to highlight seven H-share companies for reference: (1) Dongfeng Motor
(0489.HK); (2) China Machinery Engineering (1829.HK); (3) China Communication Ser-
vices (0552.HK); (4) Sinopec Engineering (2386.HK); (5) Great Wall Motor (2333.HK); (6)
Guangzhou Auto (2238.HK); and (7) Qingling Motors (1122.HK). We have a BUY rating
on Great Wall Motor.
TALKING POINTS
CHART OF THE DAY— SOME RELIEF AS RMB3bn TRUST RESOLVED, BUT OVERHANG REMAINS
Analyst: John Mulcahy, Managing Director
The settlement of the RMB3bn trust product problem arising for Industrial and Commercial
Bank of China, ICBC [1398.HK] appears to have been resolved, as discussed elsewhere in this
note. But the solution of this particular problem has not removed the overhang from China’s
banks, and the market is awaiting clarity on the real threats to China’s bank balance sheets
before regaining confidence in the sector. The chart shows the performance of 16 A– and H-
share banks (table on page 2) and the extent of the meltdown in the sector over the past year.
Separately, we have considered the impact on the seven largest H-share banks of an increase
in overall impairment provisions to 5% from the current ~2.5%, and also the impact if non-
performing loans (NPLs) are increased to 5% and the provision coverage ratio (provisions as
% of NPLs) is maintained at the current level. The less aggressive action would be to increase
the provision level alone, and this would have the effect of cutting net profit for 2013 by 23%
(Agricultural Bank of China) to more than 100% (Bank of Communications). In the second sce-
nario, increase in NPLs to 5% and maintained provision coverage, all the banks will see a sub-
stantial impact on their income statements and balance sheets, recording deep losses for the
year, with a comparable impact on capital. We do not believe the most severe provisioning will
be applied, as China has a tendency for forbearance; to extend maturities; and to move non-
performing assets off bank balance sheets into “bad” banks, which created the major asset
management companies (AMCs) a decade or so ago. But the scale of the credit issue con-
fronting China —RMB10trn in trust products; RMB17.5trn in local government financing vehi-
cles; and RMB10trn-12trn in wealth management products (WMPs) suggests that the banks
will be forced to take a hit of some magnitude, and until the scale of that is clearer there is little
prospect of a re-rating for the banks.
DIARY NOTES FOR THIS WEEK
Jan 27 Industrial Profits YoY [Previously:
13.2%]
Jan 28 HSBC/Markit Manufacturing PMI
[Previously: 50.5]
Jan 31 Manufacturing PMI [Previously: 51.0]
Source: Bloomberg
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Total Loans NPL Ratio Provision Coverage Ratio Amount of Provision Net Growth of Provision Impact on net profit 2013E net profit
2012 2013E RMBbn % % RMBbn RMBbn RMBbn RMBbn
Industrial and Commercial Bank of China 238.69 267.33 9,644.52 0.91 268.87 482.23 246.25 (192.08) 75.26
China Construction Bank 193.60 216.83 8,377.21 0.98 267.88 418.86 198.94 (155.17) 61.66
Bank of China 145.52 162.98 7,535.37 0.96 232.90 376.77 208.29 (162.47) 0.52
Agricultural Bank of China 145.13 162.55 7,107.87 1.24 347.64 355.39 48.99 (38.21) 124.33
Bank of Communications 58.48 65.49 3,217.77 1.01 217.49 160.89 90.21 (70.36) (4.87)
China Merchants Bank 45.28 50.71 2,173.21 0.79 280.99 108.66 60.42 (47.13) 3.58
China Minsheng Banking 38.31 42.90 1,533.92 0.78 292.90 76.70 41.65 (32.49) 10.42
Total Loans NPL Ratio Provision Coverage Ratio NPLs (If npl ratio = 5%) Effect on net profit 2013E net profit based on assumption
2012 2013E RMBbn % % RMBbn RMBbn RMBbn
Industrial and Commercial Bank of China 238.69 267.33 9,644.52 0.91 268.87 482.23 (827.26) (559.92)
China Construction Bank 193.60 216.83 8,377.21 0.98 267.88 418.86 (703.66) (486.82)
Bank of China 145.52 162.98 7,535.37 0.96 232.90 376.77 (553.03) (390.05)
Agricultural Bank of China 145.13 162.55 7,107.87 1.24 347.64 355.39 (724.69) (562.14)
Bank of Communications 58.48 65.49 3,217.77 1.01 217.49 160.89 (217.80) (152.31)
China Merchants Bank 45.28 50.71 2,173.21 0.79 280.99 108.66 (200.52) (149.81)
China Minsheng Banking 38.31 42.90 1,533.92 0.78 292.90 76.70 (147.89) (104.98)
Source: Company, CGIHK Research
Assuming npl ratio = 5% and provision ratio maintainedAs at the end of 2013 Q3
Net Profit
Net Profit
Assuming Provision Coverage Ratio = 5%As at the end of 2013 Q3
Most A– and H-share
banks now below 1x
book value…
...range of price falls
5% to 29%...
...not yet at re-entry
point.
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Strategy
January 28, 2014
Wong Chi Man—Senior Analyst
(852) 3698-6317
John Mulcahy—Head of Research
(852) 3698-6889
H-Shares: Cash is King China Credit Trust default avoided... A settlement of the RMB3bn trust product issued by Chi-
na Credit Trust was achieved at the last minute yesterday and “unidentified buyers” will acquire
the rights in the trust product from investors at a price equal to the value of the principal invest-
ed, according to press reports. Meanwhile, SHIBOR is expected to come down after the Lunar
New Year holidays. As such, we will not be surprised to see a relief rally in the near term.
...but the first default still looks inevitable within this year. According to the China Trustee
Association, trust companies managed trust assets of about RMB10trn at end-Sep 2013.
29.49% of the total was invested in commercial and industrial sectors while 25.97% was invest-
ed in the public sector. As the central government is keen to eliminate overcapacity in certain
industrial sectors, some of these investments are likely to encounter cash flow problems (e.g. the
RMB3bn trust product issued by China Credit Trust is related to a coal mine in Shanxi).
Financing costs to remain high in the near term. The market yield of short-term commercial
paper, a common domestic financial instrument used by reputable China-based companies, has
jumped by >200bps from May 2013. Although we may see some improvement after the Lunar
New Year holidays, it’s likely to stay at least 100bps above the May 2013 level. The situation of
medium-term notes is largely the same (see charts on next page).
Potential spill-over effect to bank loans. From discussions with some corporates, they agree
that it’s unrealistic to expect interest rates for domestic bank loans to stay at the same level of
last year during roll over. In particular, banks need to protect their net interest margin amid the
deposit competition from internet finance.
Net cash H-share companies with decent earnings growth to offer better prospects. Given
that domestic interest rates are unlikely to come down significantly in the near term as it takes
time to untangle the deep-rooted problems caused by shadow banking, we believe H-share com-
panies with a net cash position and decent profit growth are likely perform better in the unfavour-
able interest rate environment.
Selection criteria. We review the key financial indicators of 185 H-share companies and high-
light seven stocks with solid financial position for investors’ reference: (1) market cap > HK$2bn;
(2) net cash at end-2012; (3) 2014E PER < 10x; and (4) EPS growth no less than 10% in 2014E
based on consensus forecasts.
Seven H-share companies meet the criteria. (1) Dongfeng Motor (0489.HK); (2) China Ma-
chinery Engineering (1829.HK); (3) China Communication Services (0552.HK); (4) Sinopec Engi-
neering (2386.HK); (5) Great Wall Motor (2333.HK); (6) Guangzhou Auto (2238.HK); and (7)
Qingling Motors (1122.HK). We have a BUY rating on Great Wall Motor.
Ticker Company name Price (HK$)
Market cap
(HK$m) 2013E PER (x) 2014E PER (x)
2014E EPS
growth
Historical
dividend yield (%)PBR (x)
Net debt (net
cash)/equity
489 HK Equity Dongfeng Motor Group Co Ltd 11.42 98,396 7.9 7.1 11.2% 1.66 1.4 -27.2%
1829 HK Equity China Machinery Engineering Corp 5.78 23,847 9.3 7.3 27.2% 3.58 1.8 -183.8%
552 HK Equity China Communications Services Corp Ltd 4.16 28,812 8.8 7.6 16.1% 4.23 1.1 -28.5%
2386 HK Equity Sinopec Engineering Group Co Ltd 10.18 45,077 8.5 7.8 10.0% n.a. 1.8 -65.9%
2333 HK Equity Great Wall Motor Co Ltd 34.55 128,299 10.0 8.1 22.6% 2.08 3.4 -9.0%
2238 HK Equity Guangzhou Automobile Group Co Ltd 7.91 58,535 13.3 9.3 43.5% 1.28 1.2 -10.9%
1122 HK Equity Qingling Motors Co Ltd 2.18 5,411 10.6 9.6 10.6% 5.81 0.6 -51.0%
Sources: Bloomberg, CGIHK Research
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DISCLAIMER
For private perusal only. This report (including any information attached) is issued by China Galaxy Internation-
al Securities (Hong Kong) Co., Limited, one of the subsidiaries of the China Galaxy International Financial
Holdings Limited, to individual addressee whether they are professional, institutional client or otherwise, in
good faith from sources believed to be reliable but no representation or warranty (expressly or implied) is made
as to their accuracy, correctness and/or completeness. Where any part of the information, opinions or esti-
mates contained herein reflects the personal views and opinions of the analysts who prepared this report, such
views and opinions may not correspond to the published view of China Galaxy International Financial Holdings
Limited and any of its subsidiaries. This report shall not be construed as an offer, invitation or solicitation to buy
or sell any securities of the company or companies referred to herein. All opinions and estimates reflect the
judgment of the analyst on the date of this report and are subject to change without notice.
Please take note that member companies of China Galaxy International Financial Holdings Limited (including
but not limited to China Galaxy International Securities (Hong Kong) Co., Ltd) and/or their directors, officers,
agents and employees (“the Relevant Parties”) may have an interest in securities of the company or companies
referred to in this report. The Relevant Parties hereby disclaim any of their liabilities arising from the inaccura-
cy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in
reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer.
COPYRIGHT RESERVED
China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459, Room 3501-3507, 35/F,
Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Sheung Wan, Hong Kong. General line:
3698-6888.
John Mulcahy [email protected]
Wong Chi Man, CFA [email protected]
Frank Miao, CFA [email protected]
Wayne Fung, CFA [email protected]
Angela Han Lee [email protected]
Vicky Lai [email protected]
CONTACT US
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