Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

<p><strong><em>*Bank Results Decline Linked Quarter: </em></strong>Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, continues to feel the challenges of a slowing mainland Chinese economy. For 2Q21, PAB reported results of CNY 7.5 bn – decreasing CNY 2.7 bn (26.4%) linked quarter. From our vantage point, higher loss provisions and weaker net interest income weighed heavily on results; and</p><p><strong><em>*Negative Credit Delta Could Accelerate Capital Raise: </em></strong>By our analysis, we find that credit remains incredibly challenged as net new NPLs have accelerated 102.2% annualized - up from 53.6% in 1Q21. Assuming the accelerated credit break in the PAB portfolio continues to remain at its current level, we find that PAB’s reserves still remain quite light by CNY 16 bn. This shortfall represents about two quarter of pre-tax earnings.   </p>

*Bank Results Decline Linked Quarter: Ping An Bank (000001.CH) [PAB], the Ping An Insurance (2318.HK) [Ping An] banking subsidiary, continues to feel the challenges of a slowing mainland Chinese economy. For 2Q21, PAB reported results of CNY 7.5 bn – decreasing CNY 2.7 bn (26.4%) linked quarter. From our vantage point, higher loss provisions and weaker net interest income weighed heavily on results; and*Negative Credit Delta Could Accelerate Capital Raise: By our analysis, we find that credit remains incredibly challenged as net new NPLs have accelerated 102.2% annualized - up from 53.6% in 1Q21. Assuming the accelerated credit break in the PAB portfolio continues to remain at its current level, we find that PAB’s reserves still remain quite light by CNY 16 bn. This shortfall represents about two quarter of pre-tax earnings.   

Ping An Insurance – Credit Mixed, But Still Worrisome

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

<div><p>The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 20 August. The constituent changes will be effective after the close of trading on 3 September.</p></div><div>
<p>For the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> there are 3 inclusions - <a href="https://www.smartkarma.com/entities/xinyi-glass-holdings-ltd" target="_blank" data-smartkarma-citation="entities:11940:1" rel="noopener">Xinyi Glass Holdings (868 HK)</a>, <a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">Li Ning Co Ltd (2331 HK)</a> and <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a> and 1 exclusion - <a href="https://www.smartkarma.com/entities/bank-of-communications-co-h" target="_blank" data-smartkarma-citation="entities:659:1" rel="noopener">Bank Of Communications Co H (3328 HK)</a>. This takes the number of index constituents to 60.</p>
<p>Following an increase in the index shares and no change in the capping factor at the July monthly rebalance, <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>'s weight will be capped at 8% leading to outflows from the stock. </p>
<p>One-way turnover is estimated at 6.82% and will result in a one-way trade of HK$13.77bn.</p>
<p>There are only 10 trading days to implementation of the changes. We expect all inclusions to open higher on Monday. <a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">Li Ning Co Ltd (2331 HK)</a> and <a href="https://www.smartkarma.com/entities/china-merchants-bank-co-ltd-3388a037-4214-4997-b45d-520518cfdb57" target="_blank" data-smartkarma-citation="entities:10987:1" rel="noopener">China Merchants Bank H (3968 HK)</a> are surprise inclusions while <a href="https://www.smartkarma.com/entities/bank-of-communications-co-h" target="_blank" data-smartkarma-citation="entities:659:1" rel="noopener">Bank Of Communications Co H (3328 HK)</a> is a surprise deletion. The largest passive impact will be on <a href="https://www.smartkarma.com/entities/bank-of-communications-co-h" target="_blank" data-smartkarma-citation="entities:659:1" rel="noopener">Bank Of Communications Co H (3328 HK)</a> where there will be over 7 days of ADV to sell. <a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">Li Ning Co Ltd (2331 HK)</a>has been announced as an inclusion to the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> as well.</p>
<p>Big Tech is conspicuous by its absence among the inclusions in the review. HSIL seems to have consciously avoided the stocks due to the constantly changing regulatory landscape in China. HSIL is also taking its time in moving towards it goal of reaching 80 index constituents by mid-2022. That leaves 20 stocks to be included at the next 3 index reviews.</p>
</div>

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 20 August. The constituent changes will be effective after the close of trading on 3 September.
For the Hong Kong Hang Seng Index (HSI INDEX) there are 3 inclusions - Xinyi Glass Holdings (868 HK), Li Ning Co Ltd (2331 HK) and China Merchants Bank H (3968 HK) and 1 exclusion - Bank Of Communications Co H (3328 HK). This takes the number of index constituents to 60.
Following an increase in the index shares and no change in the capping factor at the July monthly rebalance, Alibaba Group (9988 HK)'s weight will be capped at 8% leading to outflows from the stock. 
One-way turnover is estimated at 6.82% and will result in a one-way trade of HK$13.77bn.
There are only 10 trading days to implementation of the changes. We expect all inclusions to open higher on Monday. Li Ning Co Ltd (2331 HK) and China Merchants Bank H (3968 HK) are surprise inclusions while Bank Of Communications Co H (3328 HK) is a surprise deletion. The largest passive impact will be on Bank Of Communications Co H (3328 HK) where there will be over 7 days of ADV to sell. Li Ning Co Ltd (2331 HK)has been announced as an inclusion to the Hang Seng China Enterprises Index (HSCEI INDEX) as well.
Big Tech is conspicuous by its absence among the inclusions in the review. HSIL seems to have consciously avoided the stocks due to the constantly changing regulatory landscape in China. HSIL is also taking its time in moving towards it goal of reaching 80 index constituents by mid-2022. That leaves 20 stocks to be included at the next 3 index reviews.


HSI Index Rebalance: Big Tech Avoided; Few Changes Now Means More Changes Later

China Merchants Bank H / Equity Bottom-Up

<p><strong><em>*2Q21 Bottom-Line Sees Cracks:</em></strong> China Merchants Bank (3968.HK) [CMB] reported 2Q21 results of CNY 29.1 bn, decreasing CNY 2.9 bn (9.0%) linked quarter, driven by negative operating jaws, a decline net fees and commissions, and higher provisions, tracking weaker credit quality; and </p><p><strong><em>*Credit Wall of Worry Continues To Grow:</em></strong> Net new problem loans continue to accelerate at an Indian bank pace of CNY 20.3 bn or 150.2% annualized versus CNY 18.9 bn or 138.5% at 1Q21. Although CMB’s reserve cover still remains quite robust, the net new NPL ratio trajectory suggests that reserve cover of NPLs will drop to something more in line with a typical mainland Chinese bank.</p>

*2Q21 Bottom-Line Sees Cracks: China Merchants Bank (3968.HK) [CMB] reported 2Q21 results of CNY 29.1 bn, decreasing CNY 2.9 bn (9.0%) linked quarter, driven by negative operating jaws, a decline net fees and commissions, and higher provisions, tracking weaker credit quality; and *Credit Wall of Worry Continues To Grow: Net new problem loans continue to accelerate at an Indian bank pace of CNY 20.3 bn or 150.2% annualized versus CNY 18.9 bn or 138.5% at 1Q21. Although CMB’s reserve cover still remains quite robust, the net new NPL ratio trajectory suggests that reserve cover of NPLs will drop to something more in line with a typical mainland Chinese bank.

China Merchants Bank – Now Negative Operating Jaws

Smartkarma Research Team, Smartkarma

Smartkarma Research

Smartkarma Research Team

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

Thematic (Sector/Industry)

<p>For our next Webinar, we welcome Insight Provider <a href="https://www.smartkarma.com/profiles/stanley-tsai-cfa" target="_blank" data-smartkarma-citation="accounts:1116" rel="noopener">Stanley Tsai, CFA</a>, who will present his views on positioning in China financials for the remainder of 2021 in the face of a slowing economy, renewed concerns over Covid-19, and asset quality challenges.</p><div><div><h3>The webinar will be hosted on Wednesday, 18 August 2021, 17:00 SGT/HKT.</h3></div></div><div><div>
<div class="content-highlight"><h2><a href="https://share.hsforms.com/1H9pFZOB-RF2J00kbvMmxcw2c5gj?zoom_webinar_id=82322164524" target="_blank" rel="noopener">Register for the Webinar here</a></h2></div>
<p>Stanley Tsai has over two decades' experience as a financials specialist across equities and fixed income. He is currently an advisor to a private investment fund and a non-executive director of a US VC fund.</p>
</div></div>

For our next Webinar, we welcome Insight Provider Stanley Tsai, CFA, who will present his views on positioning in China financials for the remainder of 2021 in the face of a slowing economy, renewed concerns over Covid-19, and asset quality challenges.The webinar will be hosted on Wednesday, 18 August 2021, 17:00 SGT/HKT.
Register for the Webinar here
Stanley Tsai has over two decades' experience as a financials specialist across equities and fixed income. He is currently an advisor to a private investment fund and a non-executive director of a US VC fund.


Smartkarma Webinar | China Banks: Silver Linings Playbook

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Cross Asset Strategy

<p>China A-Shares represent the 6th largest country holding among active EM investors, if taken as a separate allocation from their non A-Share peers.  Average holding weights of 4.74% puts them sandwiched between Russia and Brazil, and inline with the benchmark iShares MSCI Emerging Markets ETF weight.</p><p>Industrials and Consumer Discretionary are the most widely held sectors, as well as being the largest allocations and biggest overweights in active EM portfolios.  Financials are the key underweight holding.</p><p>The most widely held stocks are <a href="https://www.smartkarma.com/entities/kweichow-moutai-co-ltd-a" target="_blank" data-smartkarma-citation="entities:1553:1" rel="noopener">Kweichow Moutai (600519 CH)</a> and <a href="https://www.smartkarma.com/entities/midea-group-co-ltd-a" target="_blank" data-smartkarma-citation="entities:16185:1" rel="noopener">Midea Group Co Ltd A (000333 CH)</a>, both held by 23% of the funds in our analysis.  There is a reasonable gap to the 2nd tier, with <a href="https://www.smartkarma.com/entities/gree-electric-appliances-inc-of-zhuhai" target="_blank" data-smartkarma-citation="entities:7622:1" rel="noopener">Gree Electric Appliances (000651 CH)</a>, <a href="https://www.smartkarma.com/entities/sany-heavy-industry-co-ltd" target="_blank" data-smartkarma-citation="entities:20183:1" rel="noopener">Sany Heavy Industry (600031 CH)</a> and <a href="https://www.smartkarma.com/entities/contemporary-amperex-techn-a" target="_blank" data-smartkarma-citation="entities:24404:1" rel="noopener">CATL (A) (300750 CH)</a> held by 14% of funds at much lower average weights.</p><p>Over the last 6-months, <a href="https://www.smartkarma.com/entities/sungrow-power-supply-co-ltd" target="_blank" data-smartkarma-citation="entities:4255:1" rel="noopener">Sungrow Power Supply (300274 CH)</a> saw the largest increase in the percentage of EM Funds invested (+6.3%), followed by <a href="https://www.smartkarma.com/entities/contemporary-amperex-techn-a" target="_blank" data-smartkarma-citation="entities:24404:1" rel="noopener">CATL (A) (300750 CH)</a> and <a href="https://www.smartkarma.com/entities/longi-green-energy-technology-co-ltd" target="_blank" data-smartkarma-citation="entities:12703:1" rel="noopener">LONGi Green Energy Technology (601012 CH)</a>.</p>

China A-Shares represent the 6th largest country holding among active EM investors, if taken as a separate allocation from their non A-Share peers.  Average holding weights of 4.74% puts them sandwiched between Russia and Brazil, and inline with the benchmark iShares MSCI Emerging Markets ETF weight.Industrials and Consumer Discretionary are the most widely held sectors, as well as being the largest allocations and biggest overweights in active EM portfolios.  Financials are the key underweight holding.The most widely held stocks are Kweichow Moutai (600519 CH) and Midea Group Co Ltd A (000333 CH), both held by 23% of the funds in our analysis.  There is a reasonable gap to the 2nd tier, with Gree Electric Appliances (000651 CH), Sany Heavy Industry (600031 CH) and CATL (A) (300750 CH) held by 14% of funds at much lower average weights.Over the last 6-months, Sungrow Power Supply (300274 CH) saw the largest increase in the percentage of EM Funds invested (+6.3%), followed by CATL (A) (300750 CH) and LONGi Green Energy Technology (601012 CH).

China

China Merchants Bank Co., Ltd. operates as a commercial bank. The Company provides deposits, loans, wealth management, asset custody, finance leasing, investment banking, and other banking services. China Merchants Bank conducts businesses domestically and internationally.

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China Merchants Bank H (3968 HK)

Ping An Insurance – Credit Mixed, But Still Worrisome

PING AN INSURANCE: Ping An Bank reported a 26.4% QOQ results decline for 2Q21 reflecting higher provisions. Credit is challenged as net new NPLs...

Thomas J. Monaco

HSI Index Rebalance: Big Tech Avoided; Few Changes Now Means More Changes Later

Hang Seng Indexes has avoided adding Big Tech and included Li Ning, Xinyi Glass and CM Bank while deleting BoComm. Tencent will be capped higher,...

Brian Freitas

China Merchants Bank – Now Negative Operating Jaws

CHINA MERCHANTS BANK: CMB reported QOQ 2Q21 results decline of 9.0% driven by negative operating jaws, a decline net fees and commissions, and...

Thomas J. Monaco

Smartkarma Webinar | China Banks: Silver Linings Playbook

Join us on 18 August, 5pm SGT, as we welcome Stanley Tsai, CFA, who will present his views on positioning in China financials in the face of a...

Smartkarma Research

China A-Shares - EM Fund Ownership Guide

China A-Shares represent the 6th largest country holding among active EM investors. In this analysis, we analyse the current set up of A-Shares in...

Steven Holden

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