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

*Adding More Complexity In Mainland China: AIA’s hyper-aggressive push into mainland China via acquisition as company fundamentals remain poor. This push unfortunately continues. On June 29, 2020, AIA Group (1299.HK) [AIA] announced that it has agreed to invest USD 1.86 bn (CNY 12 bn) in cash for a 24.99% stake in China Post Life (CPL), a subsidiary of China Post Group via its Hong Kong subsidiary, AIA Company Ltd; *Head Scratching Move: The CPL deal makes little sense financially, gives AIA no managerial or Board control, is limited to an equity investment without other business cooperation;  and directly competes with AIA China – despite management spin on the matter;  and *Suffocating Hong Kong Business: AIA’s core Hong Kong business has been an unmitigated disaster for during COVID-19, as it struggles with mainland Chinese visitors. Further, there is limited clarity on AIA’s legacy agents. It also has to deal with the fledgling Bank of East Asia (23.HK) business that it recently acquired.

*Adding More Complexity In Mainland China: AIA’s hyper-aggressive push into mainland China via acquisition as company fundamentals remain poor. This push unfortunately continues. On June 29, 2020, AIA Group (1299.HK) [AIA] announced that it has agreed to invest USD 1.86 bn (CNY 12 bn) in cash for a 24.99% stake in China Post Life (CPL), a subsidiary of China Post Group via its Hong Kong subsidiary, AIA Company Ltd; *Head Scratching Move: The CPL deal makes little sense financially, gives AIA no managerial or Board control, is limited to an equity investment without other business cooperation;  and directly competes with AIA China – despite management spin on the matter;  and *Suffocating Hong Kong Business: AIA’s core Hong Kong business has been an unmitigated disaster for during COVID-19, as it struggles with mainland Chinese visitors. Further, there is limited clarity on AIA’s legacy agents. It also has to deal with the fledgling Bank of East Asia (23.HK) business that it recently acquired. 

AIA – Now Competing With Itself In China

Thematic (Sector/Industry)

*Mainland China Crackdown: Unsurprisingly, this past week mainland China has continued its steady official crackdown on cryptoccurency, reiterating its ban on providing cryptocurrency services, placing pressure on bitcoin miners, etc; and *Tether Flows: Given the mainland Chinese crackdown, it would appear that investors don't understand Tether’s systemic risks; and/or mainland Chinese-based investors are aggressively moving funds out of the country via this channel prior to it being shut down completely. If  authorities decide the shut the Tether channel over its use for moving large amounts of capital out of mainland China, cryptocurrency market liquidity would essentially dry up as Tether accounts for over 60% of global cryptocurrency daily trading volumes.

*Mainland China Crackdown: Unsurprisingly, this past week mainland China has continued its steady official crackdown on cryptoccurency, reiterating its ban on providing cryptocurrency services, placing pressure on bitcoin miners, etc; and *Tether Flows: Given the mainland Chinese crackdown, it would appear that investors don't understand Tether’s systemic risks; and/or mainland Chinese-based investors are aggressively moving funds out of the country via this channel prior to it being shut down completely. If  authorities decide the shut the Tether channel over its use for moving large amounts of capital out of mainland China, cryptocurrency market liquidity would essentially dry up as Tether accounts for over 60% of global cryptocurrency daily trading volumes. 

*Adding Hubei to the Fold: Until recently AIA Group (1299.HK) [AIA] operated only five mainland Chinese provincial licenses in 30 cities with Beijing being the largest premium contributor for AIA China. With the border between mainland China and Hong Kong completely shutdown from 2020, mainland China became AIA’s largest market, contributing 35% to AIA’s VONB. Hong Kong falling on its face isn’t exactly how anyone envisioned mainland China becoming AIA’s largest business driver. AIA’s latest life insurance license approval from the CBIRC was received for Hubei province, reinforcing mainland China’s strategic importance; and*Suffocating Hong Kong Business: AIA’s core Hong Kong business has been an unmitigated disaster for during COVID-19, as it struggles with mainland Chinese visitors. Further, there is limited clarity on AIA’s legacy agents. It also has to deal with the fledgling Bank of East Asia (23.HK) business that it recently acquired.

*Adding Hubei to the Fold: Until recently AIA Group (1299.HK) [AIA] operated only five mainland Chinese provincial licenses in 30 cities with Beijing being the largest premium contributor for AIA China. With the border between mainland China and Hong Kong completely shutdown from 2020, mainland China became AIA’s largest market, contributing 35% to AIA’s VONB. Hong Kong falling on its face isn’t exactly how anyone envisioned mainland China becoming AIA’s largest business driver. AIA’s latest life insurance license approval from the CBIRC was received for Hubei province, reinforcing mainland China’s strategic importance; and*Suffocating Hong Kong Business: AIA’s core Hong Kong business has been an unmitigated disaster for during COVID-19, as it struggles with mainland Chinese visitors. Further, there is limited clarity on AIA’s legacy agents. It also has to deal with the fledgling Bank of East Asia (23.HK) business that it recently acquired.

AIA Group – Hong Kong In Rearview Mirror

*Ooo La La: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] announced the disposal of its French retail banking and the CCF brand to Promontoria MMB SAS (which is controlled by Cerberus Capital Management) for €1. HSBC expects to incur a loss on disposal of USD 2.3 bn, plus a goodwill write down of USD 0.7 bn which appears will be pushed out until 2022. The final peal of losses costing the Group another 15 bp of CET1 capital and pushing tangible equity lower by USD 2.2 bn or 1%;  and *Will HSBC Ever Get Serious About The US Mess: Maybe, just maybe HSBC is actually getting serious about cutting its losses in the US franchise. HSBC North America (HSBCNA) is massively short on total capital, in our view, and reserves need further support. By our numbers, HSBCNA is short upwards of USD 14 bn in capital. To put this into perspective with the HSBC France sale, a potential capital hit of this magnitude would amount to between 95-100 bp of CET1 capital – smack in line with HSBC’s target.

*Ooo La La: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] announced the disposal of its French retail banking and the CCF brand to Promontoria MMB SAS (which is controlled by Cerberus Capital Management) for €1. HSBC expects to incur a loss on disposal of USD 2.3 bn, plus a goodwill write down of USD 0.7 bn which appears will be pushed out until 2022. The final peal of losses costing the Group another 15 bp of CET1 capital and pushing tangible equity lower by USD 2.2 bn or 1%;  and *Will HSBC Ever Get Serious About The US Mess: Maybe, just maybe HSBC is actually getting serious about cutting its losses in the US franchise. HSBC North America (HSBCNA) is massively short on total capital, in our view, and reserves need further support. By our numbers, HSBCNA is short upwards of USD 14 bn in capital. To put this into perspective with the HSBC France sale, a potential capital hit of this magnitude would amount to between 95-100 bp of CET1 capital – smack in line with HSBC’s target.   

*New IPO Disappoints Right Out Of Gate: Waterdrop (WDH.US) [Waterdrop] provides an online insurance marketplace and related medical crowdfunding platform in mainland China. Waterdrop  reported its first set of earnings results since its IPO, coming in at a negative CNY 370.2 bn for 1Q21, declining CNY 249.4 (206.6%) YOY largely given its higher costs from a channel (third party traffic) and product mix shift to long-term insurance. Both factors have caused operating costs to increase CNY 579.1 bn (75.7%) YOY  - far outpacing revenue growth of CNY 229.6 bn (35.1%) over the period; and  *All Is Not Lost…Yet: First year premium (FYP) did increase 42.7% YOY – led by costly third party FYP which increased 51.6%. Long-term critical illness insurance grew 132% off of a low base, but still well exceeding industry average. Anecdotally, management believes that competitive pressures appear to be abating and that increases in customer acquisition costs is now decelerating. In addition, Waterdrop continues to make progress with: Waterdrop Health; Waterdrop Medicine; and with outpatient services.

*New IPO Disappoints Right Out Of Gate: Waterdrop (WDH.US) [Waterdrop] provides an online insurance marketplace and related medical crowdfunding platform in mainland China. Waterdrop  reported its first set of earnings results since its IPO, coming in at a negative CNY 370.2 bn for 1Q21, declining CNY 249.4 (206.6%) YOY largely given its higher costs from a channel (third party traffic) and product mix shift to long-term insurance. Both factors have caused operating costs to increase CNY 579.1 bn (75.7%) YOY  - far outpacing revenue growth of CNY 229.6 bn (35.1%) over the period; and  *All Is Not Lost…Yet: First year premium (FYP) did increase 42.7% YOY – led by costly third party FYP which increased 51.6%. Long-term critical illness insurance grew 132% off of a low base, but still well exceeding industry average. Anecdotally, management believes that competitive pressures appear to be abating and that increases in customer acquisition costs is now decelerating. In addition, Waterdrop continues to make progress with: Waterdrop Health; Waterdrop Medicine; and with outpatient services.

China

iShares FTSE A50 China Index ETF is an exchanged-traded fund established in Hong Kong. The investment objective of the iShares FTSE A50 China Index ETF is to provide investment results that, before fees and expenses, closely correspond to the performance of A50 Index.

iShares FTSE/Xinhua A50 China (2823 HK)

AIA – Now Competing With Itself In China

AIA GROUP: AIA’s aggressive push into China continues with its 25% stake in China Post Life. The deal makes little sense financially, gives AIA no...

Thomas J. Monaco

Tether – Holding On By A String

TETHER: Mainland China is cracking down on crypto. If authorities decide to close Tether, the cryptocurrency market liquidity could essentially dry...

Thomas J. Monaco

AIA Group – Hong Kong In Rearview Mirror

AIA GROUP: In 2020, mainland China became AIA’s largest market. AIA’s received life insurance license approval for Hubei province, reinforcing...

Thomas J. Monaco

HSBC Holdings Plc – Banana Peal

HSBC HOLDINGS: HSBC announced the disposal of French retail bank at a loss of USD 2.3 bn. The HSBC France sale suggests HSBC US disposal could...

Thomas J. Monaco

Waterdrop – Water Fall

WATERDROP: Waterdrop reported its first set of earnings results since its IPO, declining 206.6% YOY largely due to higher costs from a channel and...

Thomas J. Monaco