Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Quantitative Analysis

<p>This insight provides the output, and an overview of our, machine learning-driven, proprietary GEM screening model, which takes a three-pronged approach to find the best medium-term long ideas within the top100 largest stocks in the MSCI GEM Index. </p>
<p>The model is based on 1) a typical quantitative multifactor screening model, enhanced by two Artificial Intelligence Technology-based approaches using 2) a Deep Neural Network model, and 3) a Recurrent Neural Network model. </p>
<p>This model, which has been developed and tweaked over the past 3 years (and implemented in its current state for 17 months), has a solid real-world performance track record, which I set out in the detail below. </p>
<p>Notable new entrants to the top decile this month include Russian internet company <a href="https://www.smartkarma.com/entities/yandex-nv-a" target="_blank" data-smartkarma-citation="entities:414:1" rel="noopener">Yandex (YNDX US)</a>, Indian IT Services company <a href="https://www.smartkarma.com/entities/hcl-technologies-ltd" target="_blank" data-smartkarma-citation="entities:20025:1" rel="noopener">Hcl Technologies (HCLT IN)</a>, and a return to the top 10 for <a href="https://www.smartkarma.com/entities/taiwan-semiconductor-manufacturing-company" target="_blank" data-smartkarma-citation="entities:11230:1" rel="noopener">TSMC (2330 TT)</a>.</p>
<table class="table table-striped">
<colgroup> <col> <col> <col> <col> <col> </colgroup>
<tbody>
<tr>
<td style="text-align: center; width: 48pt;">rank</td>
<td style="width: 169pt;">Name</td>
<td style="width: 119pt;">Sector</td>
<td style="width: 95pt;">Location</td>
<td style="text-align: center; width: 48pt;">prev.</td>
</tr>
<tr>
<td style="text-align: center;">1</td>
<td>
<a href="https://www.smartkarma.com/entities/lg-household-health-care" target="_blank" data-smartkarma-citation="entities:6501:1" rel="noopener">LG Household &amp; Health Care (051900 KS)</a> </td>
<td>Consumer Staples</td>
<td>Korea (South)</td>
<td style="text-align: center;">12</td>
</tr>
<tr>
<td style="text-align: center;">2</td>
<td>
<a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a> </td>
<td>Communication</td>
<td>China</td>
<td style="text-align: center;">2</td>
</tr>
<tr>
<td style="text-align: center;">3</td>
<td>
<a href="https://www.smartkarma.com/entities/jd-com-inc" target="_blank" data-smartkarma-citation="entities:29043:1" rel="noopener">JD.com Inc. (9618 HK)</a> </td>
<td>Consumer Discretionary</td>
<td>China</td>
<td style="text-align: center;">10</td>
</tr>
<tr>
<td style="text-align: center;">4</td>
<td>
<a href="https://www.smartkarma.com/entities/xiaomi-corp" target="_blank" data-smartkarma-citation="entities:24409:1" rel="noopener">Xiaomi Corp (1810 HK)</a> </td>
<td>Information Technology</td>
<td>China</td>
<td style="text-align: center;">4</td>
</tr>
<tr>
<td style="text-align: center;">5</td>
<td>
<a href="https://www.smartkarma.com/entities/yandex-nv-a" target="_blank" data-smartkarma-citation="entities:414:1" rel="noopener">Yandex (YNDX US)</a> </td>
<td>Communication</td>
<td>Russian Federation</td>
<td style="text-align: center;">49</td>
</tr>
<tr>
<td style="text-align: center;">6</td>
<td>
<a href="https://www.smartkarma.com/entities/new-oriental-education-technology-group" target="_blank" data-smartkarma-citation="entities:32210:1" rel="noopener">New Oriental Education &amp; Technology Group (9901 HK)</a> </td>
<td>Consumer Discretionary</td>
<td>China</td>
<td style="text-align: center;">1</td>
</tr>
<tr>
<td style="text-align: center;">7</td>
<td>
<a href="https://www.smartkarma.com/entities/taiwan-semiconductor-manufacturing-company" target="_blank" data-smartkarma-citation="entities:11230:1" rel="noopener">TSMC (2330 TT)</a> </td>
<td>Information Technology</td>
<td>Taiwan</td>
<td style="text-align: center;">16</td>
</tr>
<tr>
<td style="text-align: center;">8</td>
<td>
<a href="https://www.smartkarma.com/entities/al-rajhi-bank" target="_blank" data-smartkarma-citation="entities:27038:1" rel="noopener">Al Rajhi Bank (RJHI AB)</a> </td>
<td>Financials</td>
<td>Saudi Arabia</td>
<td style="text-align: center;">33</td>
</tr>
<tr>
<td style="text-align: center;">9</td>
<td>
<a href="https://www.smartkarma.com/entities/magazine-luiza-sa" target="_blank" data-smartkarma-citation="entities:27676:1" rel="noopener">Magazine Luiza SA (MGLU3 BZ)</a> </td>
<td>Consumer Discretionary</td>
<td>Brazil</td>
<td style="text-align: center;">15</td>
</tr>
<tr>
<td style="text-align: center;">10</td>
<td>
<a href="https://www.smartkarma.com/entities/hcl-technologies-ltd" target="_blank" data-smartkarma-citation="entities:20025:1" rel="noopener">Hcl Technologies (HCLT IN)</a> </td>
<td>Information Technology</td>
<td>India</td>
<td style="text-align: center;">83</td>
</tr>
<tr>
<td colspan="5" style="text-align: left;">Source: FactSet financial data and analytics, my estimates and calculations, Tensorflow, Keras, Google Colaboratory, pandas</td>
</tr>
</tbody>
</table>
<p><em>As usual, please feel free to reach out for the full output table, any questions, clarifications needed or suggestions.</em></p>

This insight provides the output, and an overview of our, machine learning-driven, proprietary GEM screening model, which takes a three-pronged approach to find the best medium-term long ideas within the top100 largest stocks in the MSCI GEM Index. 
The model is based on 1) a typical quantitative multifactor screening model, enhanced by two Artificial Intelligence Technology-based approaches using 2) a Deep Neural Network model, and 3) a Recurrent Neural Network model. 
This model, which has been developed and tweaked over the past 3 years (and implemented in its current state for 17 months), has a solid real-world performance track record, which I set out in the detail below. 
Notable new entrants to the top decile this month include Russian internet company Yandex (YNDX US), Indian IT Services company Hcl Technologies (HCLT IN), and a return to the top 10 for TSMC (2330 TT).

      


rank
Name
Sector
Location
prev.


1

LG Household &amp; Health Care (051900 KS) 
Consumer Staples
Korea (South)
12


2

NetEase (9999 HK) 
Communication
China
2


3

JD.com Inc. (9618 HK) 
Consumer Discretionary
China
10


4

Xiaomi Corp (1810 HK) 
Information Technology
China
4


5

Yandex (YNDX US) 
Communication
Russian Federation
49


6

New Oriental Education &amp; Technology Group (9901 HK) 
Consumer Discretionary
China
1


7

TSMC (2330 TT) 
Information Technology
Taiwan
16


8

Al Rajhi Bank (RJHI AB) 
Financials
Saudi Arabia
33


9

Magazine Luiza SA (MGLU3 BZ) 
Consumer Discretionary
Brazil
15


10

Hcl Technologies (HCLT IN) 
Information Technology
India
83


Source: FactSet financial data and analytics, my estimates and calculations, Tensorflow, Keras, Google Colaboratory, pandas



As usual, please feel free to reach out for the full output table, any questions, clarifications needed or suggestions.

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

First Abu Dhabi Bank PJSC / Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/qatar-national-bank-qpsc" target="_blank" data-smartkarma-citation="entities:27700:1" rel="noopener">Qatar National Bank QPSC (QNBK QD)</a> , <a href="https://www.smartkarma.com/entities/al-rajhi-bank" target="_blank" data-smartkarma-citation="entities:27038:1" rel="noopener">Al Rajhi Bank (RJHI AB)</a> , and <a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank PJSC (FAB UH)</a>  are the largest banks, by market capitalization,  in the middle east. You pay top dollar for the pleasure of holding these banks. It is as if risks just did not exist. After all, they are self-styled "National Champions". We do not doubt that they may have their merits and advantages but are they so much better than anywhere else? They must share their impregnability or secret sauce with the likes of Jamie Dimon and Brian Moynihan who command much cheaper franchises: franchises that may not be so cheap in the current environment. </p><p><a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank PJSC (FAB UH)</a> does carry risks. In fact, its DSIB-Balance Sheet may not be so well balanced. Almost a fifth of its loan portfolio is dedicated to CRI: the gift that keeps giving. Another third of its credit book (and increasing fast) is focused on the government and public sector. Another 14% of Loans are channeled into the financial sector. Energy makes up another 9%. The Balance Sheet is bloated by cash (21% of Assets) and commands a sizable amount of "investments" at 16% of Assets. For a "National Champion" it is perhaps surprising that  international loans and deposits represent 25% and 21% of Group loans and deposits, respectively. The bank says that it is growing strongly in India and Hong Kong. In Loan Capital Markets, FAB seems to specialise in Chinese and African deals.</p><p>UAE -like anywhere else- carries risks. The economy is dependent on mining and construction as well as restaurants and hotels: even more so Abu Dhabi. The PMI is highly correlated to Brent Crude despite diversification efforts. AA-rated Abu Dhabi, like FAB UH, likes investments too: Sovereign foreign assets account for 185% of GDP. Would these be risk-free too?</p><p>To say that FAB has being growing at a fair clip in recent years is an understatement. Since 2016, Assets have ballooned by 235%. Derivatives have soared by 715%. Securities (including derivatives) have climbed by 461%. Loans, by contrast, have expanded by "just" 160%. While Deposits have risen by 248%, wholesale funding has jumped by 308% over this period. If I have learnt anything in my time as an analyst, it is to be very distrustful of explosive asset growth. It tends to generate distortions, and is difficult to manage in terms of KPIs. FAB suffers not just from unbalanced growth but from "Asset bloat" which does not generate value and can result in share price under performance.</p><div><p><a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank PJSC (FAB UH)</a> commands a subpar PH Score™ of 3.1, an overbought RSI signal, and a FV of 25%: shares thus find themselves in the bottom decile of our VFM rankings.</p></div><div><div><div class="content-highlight">
<p>The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. </p>
<p>With VFM (Valuation, Fundamentals, Momentum), we score banks by PH Score™ , Technicals, and an additional Valuation filter.</p>
</div></div></div><div><div><div class="content-highlight"><p>VFM rankings position <a href="https://www.smartkarma.com/entities/first-abu-dhabi-bank-pjsc" target="_blank" data-smartkarma-citation="entities:28945:1" rel="noopener">First Abu Dhabi Bank PJSC (FAB UH)</a>  in the bottom quintile of opportunity globally. </p></div></div></div><div><div><p>Trading at a 30% premium to BV, with a Franchise Value,  Earnings Yield,  and Total Return Ratio of 25%, 9%, and 1x, respectively, shares do not appear attractive. We recognise that a Dividend Yield of 6.3% for an AA-rated entity might not be the worst investment in the world if there is no cut: there is a bond equivalent or utility argument. However, putting all the pieces of the jigsaw together, we see shares under performing and believe in this case that the PH Score™ can act as a headwind.</p></div></div>

Qatar National Bank QPSC (QNBK QD) , Al Rajhi Bank (RJHI AB) , and First Abu Dhabi Bank PJSC (FAB UH)  are the largest banks, by market capitalization,  in the middle east. You pay top dollar for the pleasure of holding these banks. It is as if risks just did not exist. After all, they are self-styled "National Champions". We do not doubt that they may have their merits and advantages but are they so much better than anywhere else? They must share their impregnability or secret sauce with the likes of Jamie Dimon and Brian Moynihan who command much cheaper franchises: franchises that may not be so cheap in the current environment. First Abu Dhabi Bank PJSC (FAB UH) does carry risks. In fact, its DSIB-Balance Sheet may not be so well balanced. Almost a fifth of its loan portfolio is dedicated to CRI: the gift that keeps giving. Another third of its credit book (and increasing fast) is focused on the government and public sector. Another 14% of Loans are channeled into the financial sector. Energy makes up another 9%. The Balance Sheet is bloated by cash (21% of Assets) and commands a sizable amount of "investments" at 16% of Assets. For a "National Champion" it is perhaps surprising that  international loans and deposits represent 25% and 21% of Group loans and deposits, respectively. The bank says that it is growing strongly in India and Hong Kong. In Loan Capital Markets, FAB seems to specialise in Chinese and African deals.UAE -like anywhere else- carries risks. The economy is dependent on mining and construction as well as restaurants and hotels: even more so Abu Dhabi. The PMI is highly correlated to Brent Crude despite diversification efforts. AA-rated Abu Dhabi, like FAB UH, likes investments too: Sovereign foreign assets account for 185% of GDP. Would these be risk-free too?To say that FAB has being growing at a fair clip in recent years is an understatement. Since 2016, Assets have ballooned by 235%. Derivatives have soared by 715%. Securities (including derivatives) have climbed by 461%. Loans, by contrast, have expanded by "just" 160%. While Deposits have risen by 248%, wholesale funding has jumped by 308% over this period. If I have learnt anything in my time as an analyst, it is to be very distrustful of explosive asset growth. It tends to generate distortions, and is difficult to manage in terms of KPIs. FAB suffers not just from unbalanced growth but from "Asset bloat" which does not generate value and can result in share price under performance.First Abu Dhabi Bank PJSC (FAB UH) commands a subpar PH Score™ of 3.1, an overbought RSI signal, and a FV of 25%: shares thus find themselves in the bottom decile of our VFM rankings.
The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 
With VFM (Valuation, Fundamentals, Momentum), we score banks by PH Score™ , Technicals, and an additional Valuation filter.
VFM rankings position First Abu Dhabi Bank PJSC (FAB UH)  in the bottom quintile of opportunity globally. Trading at a 30% premium to BV, with a Franchise Value,  Earnings Yield,  and Total Return Ratio of 25%, 9%, and 1x, respectively, shares do not appear attractive. We recognise that a Dividend Yield of 6.3% for an AA-rated entity might not be the worst investment in the world if there is no cut: there is a bond equivalent or utility argument. However, putting all the pieces of the jigsaw together, we see shares under performing and believe in this case that the PH Score™ can act as a headwind.

<p><a href="https://www.smartkarma.com/entities/27038" target="_blank" data-smartkarma-citation="entities:27038:1">Al Rajhi Bank (RJHI AB)</a> commands a dominant regional Islamic franchise and domestic retail market positioning.<strong> Al Rajhi</strong> accounts for half of the KSA auto loan market, 30% of system consumer lending revenues, a quarter of both mortgages (44% of new home loans) and system demand deposits, a fifth of system net profit, and some 18% of credit card loans. The bank is number one by remittances regionally.</p><p>The bank is retail-centric with &gt;70% of the loan book dedicated to consumer loans and &gt;70% of Revenues derived from retail banking. The population is youthful with purchasing power while more women are participating in the workforce and society, creating opportunity for specialised targeted bank products and services.</p><p>Sheer presence and scale is complemented by positive qualitative trends of late in profitability, operating efficiency, liquidity, asset quality and provisioning. </p><p>Capital adequacy is rock solid with one of the highest Equity/Asset ratios in KSA. The bank is highly liquid, benefiting greatly from source of funding (lowest cost in system) which is virtually totally interest-free. The bank stands out in terms of demand deposits/SH Funds. Widening NIM (best in system) can continue with higher rates, in lockstep with the Fed.  Profitability and efficiency can improve from currently benign levels.  In addition,<strong> Al Rajhi</strong> has the best asset quality (just 9% of system NPLs) and the highest LLR/Loans and NPL coverage, respectively.</p><p>We highlight the latest value-quality signals from <strong>Al Rajhi</strong>’s quintile 1 PH Score™. KSA banks are scoring well at present, following on from FY17 rankings, in what is a promising constituent of the emerging market universe, undergoing gradual but long overdue change with a commodity tailwind.</p><div class="content-highlight"><p>The PH Score™ is a fundamental momentum-quantamental model that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage. Scores lie between 0 and 10, with higher rankings representing more positive signs.</p></div>

Al Rajhi Bank (RJHI AB) commands a dominant regional Islamic franchise and domestic retail market positioning. Al Rajhi accounts for half of the KSA auto loan market, 30% of system consumer lending revenues, a quarter of both mortgages (44% of new home loans) and system demand deposits, a fifth of system net profit, and some 18% of credit card loans. The bank is number one by remittances regionally.The bank is retail-centric with &gt;70% of the loan book dedicated to consumer loans and &gt;70% of Revenues derived from retail banking. The population is youthful with purchasing power while more women are participating in the workforce and society, creating opportunity for specialised targeted bank products and services.Sheer presence and scale is complemented by positive qualitative trends of late in profitability, operating efficiency, liquidity, asset quality and provisioning. Capital adequacy is rock solid with one of the highest Equity/Asset ratios in KSA. The bank is highly liquid, benefiting greatly from source of funding (lowest cost in system) which is virtually totally interest-free. The bank stands out in terms of demand deposits/SH Funds. Widening NIM (best in system) can continue with higher rates, in lockstep with the Fed.  Profitability and efficiency can improve from currently benign levels.  In addition, Al Rajhi has the best asset quality (just 9% of system NPLs) and the highest LLR/Loans and NPL coverage, respectively.We highlight the latest value-quality signals from Al Rajhi’s quintile 1 PH Score™. KSA banks are scoring well at present, following on from FY17 rankings, in what is a promising constituent of the emerging market universe, undergoing gradual but long overdue change with a commodity tailwind.The PH Score™ is a fundamental momentum-quantamental model that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage. Scores lie between 0 and 10, with higher rankings representing more positive signs.

Saudi Arabia

Al Rajhi Bank provides banking services. The Bank offers services such as credit cards, insurance, car finance, loans, online and phone banking, and current accounts. Al Rajhi Bank serves customers in Saudi Arabia.

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Al Rajhi Bank (RJHI AB)

Screening for GEMs: November 2021

This insight provides an overview of our, machine learning-driven, proprietary GEM screening model, based on a Multifactor model, a Deep Neural...

Wium Malan, CFA

First Abu Dhabi Bank: Fab Asset Growth

Qatar National Bank QPSC (QNBK QD) , Al Rajhi Bank (RJHI AB) , and First Abu Dhabi Bank PJSC (FAB UH) are the largest banks, by market...

Paul Hollingworth

Al Rajhi: A Proxy for Change

Al Rajhi Bank (RJHI AB) commands a dominant regional Islamic franchise and domestic retail market positioning. Al Rajhi accounts for half of the...

Paul Hollingworth

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