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

*Troubling Result: J.P. Morgan Chase &amp; Co (JPM.US) [JPM] reported 2Q21 bottom-line results of USD 11.9 bn, declining USD 2.4 bn (16.4%) linked quarter, as four out of five business units posted bottom-line declines pushing overall revenues lower USD 1.6 bn (5.0%). On a core operating basis, JPM’s results declined somewhat less – down USD 2.2 bn or 15.3% over the period. Results were weak almost across the board; and*Credit Quality Reversing Previous Gains: We calculate that net new NPLs linked quarter grew USD 4.9 bn bn or 177.3% on an annualized basis – a far cry from the 22.2% and 0.2% increase at 1Q21 and 4Q20, respectively. While JPM would appear on its face to be well-provided for, provision releases now appear to be coming to an end. If the current uptick in net new NPLs is here to stay, JPM would appear light on reserves in the neighborhood of USD 7.0 bn or 50% of quarterly PBT.

*Troubling Result: J.P. Morgan Chase &amp; Co (JPM.US) [JPM] reported 2Q21 bottom-line results of USD 11.9 bn, declining USD 2.4 bn (16.4%) linked quarter, as four out of five business units posted bottom-line declines pushing overall revenues lower USD 1.6 bn (5.0%). On a core operating basis, JPM’s results declined somewhat less – down USD 2.2 bn or 15.3% over the period. Results were weak almost across the board; and*Credit Quality Reversing Previous Gains: We calculate that net new NPLs linked quarter grew USD 4.9 bn bn or 177.3% on an annualized basis – a far cry from the 22.2% and 0.2% increase at 1Q21 and 4Q20, respectively. While JPM would appear on its face to be well-provided for, provision releases now appear to be coming to an end. If the current uptick in net new NPLs is here to stay, JPM would appear light on reserves in the neighborhood of USD 7.0 bn or 50% of quarterly PBT. 

Thematic (Sector/Industry)

*Document 15: Recently the China Bank and Insurance Regulatory Commission (CBIRC) issued guidance to both banks and insurers on implicit debt of local government financing vehicles (LGFV) via Document 15 – tightening the screws even further;  and*No Let Up In Sight: Coupled with the structural reforms of an increase in risk-based capital minimums for certain state banks, the partial bank Wealth Management Product (WMP) resolution, and the recent reserve requirement ratio (RRR) reduction, these tightening measures should act to contain some of the out of control financial risk within the mainland Chinese financial system.

*Document 15: Recently the China Bank and Insurance Regulatory Commission (CBIRC) issued guidance to both banks and insurers on implicit debt of local government financing vehicles (LGFV) via Document 15 – tightening the screws even further;  and*No Let Up In Sight: Coupled with the structural reforms of an increase in risk-based capital minimums for certain state banks, the partial bank Wealth Management Product (WMP) resolution, and the recent reserve requirement ratio (RRR) reduction, these tightening measures should act to contain some of the out of control financial risk within the mainland Chinese financial system.

Founder of Antler Capital

Stanley Tsai, CFA

In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).
<table class="table table-striped">
<tbody>
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<td style="width: 726.047px;">Exhibit 1: China Financials | Silver Linings Playbook</td>
</tr>
<tr>
<td style="width: 726.047px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/213/768/original/image_768460236451623962508577.png?1623962508" class="editor-image img-responsive" data-smartkarma-image-id="213768"></figure>

Source: Our analysis
</td>
</tr>
</tbody>
</table>
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In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).



Exhibit 1: China Financials | Silver Linings Playbook





Source: Our analysis




Related Insights
China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 
Glut and Famine: We Might See Snow in China This Summer 
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China Macro: Exports Disappoint, but It's Still Early in the Game 
Glut and Famine: China's Monetary Conditions a Notch Tighter in May 
ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 
BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

China Financials: Silver Linings Playbook

China Huarong Asset Management / Equity Bottom-Up

*Legacy Risks Strangling China Huarong: The issue appears to be China Huarong Asset Management’s (Huarong) legacy exposure associated with the misdeeds of its former Chairman, which still need to be addressed. Since our last note, Huarong still continues to teeter on the edge of insolvency and ongoing silence from Beijing has materially impacted funding costs. Huarong has until August 2021 to finally release its 2020 financial statements; and *Too Big Too Fail:  None of what is occurring should come as a surprise given mainland China's rapidly increasing debt position since the financial crisis - along with the same at its SOEs which are perceived to be too-big-to-fail and wield enormous political clout. A funding backstop from state-owned banks has been ordered by the China Banking and Insurance Regulatory Commission (CBIRC), and the mainland Chinese government is likely to again blink and make good on Huarong's significant debt obligations. Distressed investors should consider picking away at Huarong’s debt; we’ll believe it when see Beijing imposing losses on investors in SOEs.

*Legacy Risks Strangling China Huarong: The issue appears to be China Huarong Asset Management’s (Huarong) legacy exposure associated with the misdeeds of its former Chairman, which still need to be addressed. Since our last note, Huarong still continues to teeter on the edge of insolvency and ongoing silence from Beijing has materially impacted funding costs. Huarong has until August 2021 to finally release its 2020 financial statements; and *Too Big Too Fail:  None of what is occurring should come as a surprise given mainland China's rapidly increasing debt position since the financial crisis - along with the same at its SOEs which are perceived to be too-big-to-fail and wield enormous political clout. A funding backstop from state-owned banks has been ordered by the China Banking and Insurance Regulatory Commission (CBIRC), and the mainland Chinese government is likely to again blink and make good on Huarong's significant debt obligations. Distressed investors should consider picking away at Huarong’s debt; we’ll believe it when see Beijing imposing losses on investors in SOEs.

China Huarong Asset Management – Silence Is Golden

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<div>The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.</div><div>Hong Kong saw shorts rise on <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>, <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a><a href="https://www.smartkarma.com/entities/beijing-kuaishou-technology-co-ltd" target="_blank" data-smartkarma-citation="entities:29725:1" rel="noopener">Kuaishou Technology (1024 HK)</a>, <a href="https://www.smartkarma.com/entities/country-garden-services-holdings-company-limited" target="_blank" data-smartkarma-citation="entities:27343:1" rel="noopener">Country Garden Services Holdings (6098 HK)</a> and <a href="https://www.smartkarma.com/entities/chow-tai-fook-jewellery-group" target="_blank" data-smartkarma-citation="entities:549:1" rel="noopener">Chow Tai Fook Jewellery (1929 HK)</a> while there was short covering on <a href="https://www.smartkarma.com/entities/ind-comm-bk-of-china-h" target="_blank" data-smartkarma-citation="entities:1119:1" rel="noopener">ICBC (H) (1398 HK)</a>, <a href="https://www.smartkarma.com/entities/asm-pacific-technology-ltd" target="_blank" data-smartkarma-citation="entities:15061:1" rel="noopener">ASM Pacific Technology (522 HK)</a>, <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>, <a href="https://www.smartkarma.com/entities/pccw-ltd" target="_blank" data-smartkarma-citation="entities:873:1" rel="noopener">PCCW Ltd (8 HK)</a> and <a href="https://www.smartkarma.com/entities/sunny-optical-tech" target="_blank" data-smartkarma-citation="entities:13363:1" rel="noopener">Sunny Optical (2382 HK)</a>. Shorts increased in the Consumer Discretionary and Industrials sectors, while decreasing in Financials, Information Technology, Energy and Real Estate.</div><div>In Japan, stocks increased on <a href="https://www.smartkarma.com/entities/pharma-foods-international" target="_blank" data-smartkarma-citation="entities:10530:1" rel="noopener">Pharma Foods International (2929 JP)</a>, <a href="https://www.smartkarma.com/entities/cyberagent-inc" target="_blank" data-smartkarma-citation="entities:8197:1" rel="noopener">CyberAgent Inc (4751 JP)</a>, <a href="https://www.smartkarma.com/entities/nippon-yusen-kk" target="_blank" data-smartkarma-citation="entities:12285:1" rel="noopener">Nippon Yusen Kk (9101 JP)</a>, <a href="https://www.smartkarma.com/entities/ebara-corp" target="_blank" data-smartkarma-citation="entities:4728:1" rel="noopener">Ebara Corp (6361 JP)</a> and <a href="https://www.smartkarma.com/entities/skylark-co-ltd" target="_blank" data-smartkarma-citation="entities:474:1" rel="noopener">Skylark Co Ltd (3197 JP)</a> while there was short covering on <a href="https://www.smartkarma.com/entities/kyushu-railway-company" target="_blank" data-smartkarma-citation="entities:23609:1" rel="noopener">Kyushu Railway Company (9142 JP)</a>, <a href="https://www.smartkarma.com/entities/marui-group-co-ltd" target="_blank" data-smartkarma-citation="entities:13604:1" rel="noopener">Marui Group (8252 JP)</a>, <a href="https://www.smartkarma.com/entities/chugoku-electric-power-co" target="_blank" data-smartkarma-citation="entities:16243:1" rel="noopener">Chugoku Electric Power Co (9504 JP)</a>, <a href="https://www.smartkarma.com/entities/keihan-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:6120:1" rel="noopener">Keihan Holdings Co., Ltd. (9045 JP)</a> and <a href="https://www.smartkarma.com/entities/canon-inc" target="_blank" data-smartkarma-citation="entities:1:1" rel="noopener">Canon Inc (7751 JP)</a>. Shorts decreased in almost all sectors led by Industrials, Materials, Consumer Discretionary, Financials and Consumer Staples.</div><div>In Korea, shorts increased on <a href="https://www.smartkarma.com/entities/hmm-co-ltd" target="_blank" data-smartkarma-citation="entities:13494:1" rel="noopener">HMM Co., Ltd. (011200 KS)</a>, <a href="https://www.smartkarma.com/entities/doosan-heavy-industries-construction" target="_blank" data-smartkarma-citation="entities:7389:1" rel="noopener">Doosan Heavy Industries &amp; Construction (034020 KS)</a>, <a href="https://www.smartkarma.com/entities/lg-chem-ltd" target="_blank" data-smartkarma-citation="entities:3583:1" rel="noopener">LG Chem Ltd (051910 KS)</a> and <a href="https://www.smartkarma.com/entities/posco-chemical-co-ltd" target="_blank" data-smartkarma-citation="entities:12421:1" rel="noopener">Posco Chemical Co Ltd (003670 KS)</a> while shorts were covered on <a href="https://www.smartkarma.com/entities/hyundai-motor-co" target="_blank" data-smartkarma-citation="entities:155:1" rel="noopener">Hyundai Motor Co (005380 KS)</a>, <a href="https://www.smartkarma.com/entities/samsung-electronics-co-ltd" target="_blank" data-smartkarma-citation="entities:191:1" rel="noopener">Samsung Electronics (005930 KS)</a>, <a href="https://www.smartkarma.com/entities/sk-hynix-inc" target="_blank" data-smartkarma-citation="entities:16955:1" rel="noopener">SK Hynix (000660 KS)</a> and <a href="https://www.smartkarma.com/entities/naver-corp" target="_blank" data-smartkarma-citation="entities:16029:1" rel="noopener">Naver Corp (035420 KS)</a>.</div><div>In Taiwan, shorts increased on <a href="https://www.smartkarma.com/entities/au-optronics-corp" target="_blank" data-smartkarma-citation="entities:6704:1" rel="noopener">AU Optronics (2409 TT)</a>, <a href="https://www.smartkarma.com/entities/yageo-corporation" target="_blank" data-smartkarma-citation="entities:13212:1" rel="noopener">Yageo Corporation (2327 TT)</a>, <a href="https://www.smartkarma.com/entities/innolux-corp" target="_blank" data-smartkarma-citation="entities:4509:1" rel="noopener">Innolux Corp (3481 TT)</a>, <a href="https://www.smartkarma.com/entities/yang-ming-marine-transport" target="_blank" data-smartkarma-citation="entities:8502:1" rel="noopener">Yang Ming Marine Transport (2609 TT)</a> and <a href="https://www.smartkarma.com/entities/hannstar-display-corp" target="_blank" data-smartkarma-citation="entities:13922:1" rel="noopener">Hannstar Display (6116 TT)</a> while shorts covered on <a href="https://www.smartkarma.com/entities/chicony-electronics-co-ltd" target="_blank" data-smartkarma-citation="entities:13085:1" rel="noopener">Chicony Electronics (2385 TT)</a>, <a href="https://www.smartkarma.com/entities/chunghwa-telecom-co-ltd" target="_blank" data-smartkarma-citation="entities:9181:1" rel="noopener">Chunghwa Telecom (2412 TT)</a>, <a href="https://www.smartkarma.com/entities/highwealth-construction-corp" target="_blank" data-smartkarma-citation="entities:6739:1" rel="noopener">Highwealth Construction (2542 TT)</a>, <a href="https://www.smartkarma.com/entities/mediatek-inc" target="_blank" data-smartkarma-citation="entities:772:1" rel="noopener">Mediatek Inc (2454 TT)</a> and <a href="https://www.smartkarma.com/entities/quanta-computer-inc" target="_blank" data-smartkarma-citation="entities:2754:1" rel="noopener">Quanta Computer (2382 TT)</a>.</div>

The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.Hong Kong saw shorts rise on Alibaba Group (9988 HK), Ping An Insurance (H) (2318 HK)Kuaishou Technology (1024 HK), Country Garden Services Holdings (6098 HK) and Chow Tai Fook Jewellery (1929 HK) while there was short covering on ICBC (H) (1398 HK), ASM Pacific Technology (522 HK), Tencent (700 HK), PCCW Ltd (8 HK) and Sunny Optical (2382 HK). Shorts increased in the Consumer Discretionary and Industrials sectors, while decreasing in Financials, Information Technology, Energy and Real Estate.In Japan, stocks increased on Pharma Foods International (2929 JP), CyberAgent Inc (4751 JP), Nippon Yusen Kk (9101 JP), Ebara Corp (6361 JP) and Skylark Co Ltd (3197 JP) while there was short covering on Kyushu Railway Company (9142 JP), Marui Group (8252 JP), Chugoku Electric Power Co (9504 JP), Keihan Holdings Co., Ltd. (9045 JP) and Canon Inc (7751 JP). Shorts decreased in almost all sectors led by Industrials, Materials, Consumer Discretionary, Financials and Consumer Staples.In Korea, shorts increased on HMM Co., Ltd. (011200 KS), Doosan Heavy Industries &amp; Construction (034020 KS), LG Chem Ltd (051910 KS) and Posco Chemical Co Ltd (003670 KS) while shorts were covered on Hyundai Motor Co (005380 KS), Samsung Electronics (005930 KS), SK Hynix (000660 KS) and Naver Corp (035420 KS).In Taiwan, shorts increased on AU Optronics (2409 TT), Yageo Corporation (2327 TT), Innolux Corp (3481 TT), Yang Ming Marine Transport (2609 TT) and Hannstar Display (6116 TT) while shorts covered on Chicony Electronics (2385 TT), Chunghwa Telecom (2412 TT), Highwealth Construction (2542 TT), Mediatek Inc (2454 TT) and Quanta Computer (2382 TT).

Asia Shorts: CGS, CTF, ASM Pac, PCCW, KyushuRail, Marui, HMM, Doosan, LG Chem, HMC, Yang Ming

China

Industrial and Commercial Bank of China Ltd provides a broad range of personal and corporate commercial banking services all over China.  The Bank's businesses include deposit, loan, credit card, fund underwriting and trust, and foreign currency settlement and trading.

Price Gauge
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Ind & Comm Bk Of China (A) (601398 CH)

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Brian Freitas

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