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

*Negative Operating Remain Troubling: DBS Group Holdings (DBS.SP) [DBS] reported 4Q20 results of SGD 1.0 bn, declining SGD 285 mn (22.0%) on a linked quarter basis. Results remain troubling across the board, as this is the second consecutive quarter that DBS reported negative operating jaws whilst the decline in loss provisions reversed course on weaker credit;*Credit Risk Challenges Management: We remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs, as this improvement would appear to be in contravention to the stress being experienced regionally. By our calculation, we find that net new NPLs continue to increase – up SGD 631 mn or increasing 41.7% on an annualized basis – more than doubling the figures of SGD 272 mn or 18.9% on an annualized basis for 3Q20. We feel that reserves should be shored up in the neighborhood of SGD 2.8bn – amounting now to three plus full quarters of results, comparing very unfavorably to the SGD 1.3 bn calculated (one quarter of results) just a quarter earlier and suggest that Lakshmi Vilas Bank’s (LVB) risk is not under the control; and *India Deal Poses Significant Challenges: : By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent to the tune of INR 39 bn – nearly 56% greater than the DBS Bank India capital infusion. LVB loses money on an operating basis prior to loss provisions, as revenues (no clarity on what is recurring) of INR 15.4 bn are less than operating expenses of INR 16.0 bn – or by 3.7% at FY 2Q21; et al.  DBS expects DBS India to return to profitability and that the LVB deal will be ROE accretive over the next 12-24 months. We’d like some of what management is smoking.

*Negative Operating Remain Troubling: DBS Group Holdings (DBS.SP) [DBS] reported 4Q20 results of SGD 1.0 bn, declining SGD 285 mn (22.0%) on a linked quarter basis. Results remain troubling across the board, as this is the second consecutive quarter that DBS reported negative operating jaws whilst the decline in loss provisions reversed course on weaker credit;*Credit Risk Challenges Management: We remain unconvinced that the moratorium exits are anything more than additional reliance on government schemes and relief programs, as this improvement would appear to be in contravention to the stress being experienced regionally. By our calculation, we find that net new NPLs continue to increase – up SGD 631 mn or increasing 41.7% on an annualized basis – more than doubling the figures of SGD 272 mn or 18.9% on an annualized basis for 3Q20. We feel that reserves should be shored up in the neighborhood of SGD 2.8bn – amounting now to three plus full quarters of results, comparing very unfavorably to the SGD 1.3 bn calculated (one quarter of results) just a quarter earlier and suggest that Lakshmi Vilas Bank’s (LVB) risk is not under the control; and *India Deal Poses Significant Challenges: : By our calculation and based on LVB’s FY 2Q21 results, the company would appear to be insolvent to the tune of INR 39 bn – nearly 56% greater than the DBS Bank India capital infusion. LVB loses money on an operating basis prior to loss provisions, as revenues (no clarity on what is recurring) of INR 15.4 bn are less than operating expenses of INR 16.0 bn – or by 3.7% at FY 2Q21; et al.  DBS expects DBS India to return to profitability and that the LVB deal will be ROE accretive over the next 12-24 months. We’d like some of what management is smoking. 

DBS Group Holdings – COVID & India Not A Good Combo

*New CEO: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] announced that it has appointed Mr. Nicolas Aguzin as its next CEO - effective May 24, 2021.This is an interesting hire, as Mr. Aguzin has virtually no exchange experience and is seemingly not a Mandarin speaker; and*Focus, Focus, Focus:  Let’s just hope and pray that the new CEO doesn’t come from a  swashbuckling deal team.  To be clear, we believe that HKEx has enormous potential provided that it can avoid franchise transforming deals every half decade.

*New CEO: Hong Kong Exchanges &amp; Clearing (388.HK) [HKEX] announced that it has appointed Mr. Nicolas Aguzin as its next CEO - effective May 24, 2021.This is an interesting hire, as Mr. Aguzin has virtually no exchange experience and is seemingly not a Mandarin speaker; and*Focus, Focus, Focus:  Let’s just hope and pray that the new CEO doesn’t come from a  swashbuckling deal team.  To be clear, we believe that HKEx has enormous potential provided that it can avoid franchise transforming deals every half decade. 

Hong Kong Exchanges & Clearing – No Experience Necessary

*PAL Improves, But Fundamentals Weak: Ping An Insurance (2318.HK)[Ping An] reported a 1H20 operating profit of CNY 74.3 bn, increasing just 1% YOY and 5% below consensus. As a recovery appears underway with Ping An Life (PAL), Ping An results appeared to be well-supported by a HOH improvement of CNY 13.2 bn bn (40.4%) in net profits  - although its value of new business (VONB) declined CNY 3.9 bn (11.9%); *P&amp;C Remains A Challenge: Auto combined ratio reversed course and increased by 250 bp to 100.6%, and certainly warrants watching a driving returns to normal in mainland China. Auto insurance reform will remain a challenge for profitability going forward, and pricing has yet to stabilize. The credit insurance segment remains challenged, due to defaults on underlying loans.*Awful Bank Result: For 4Q20, PAB reported results of CNY 6.5 bn – declining CNY 2.2 bn (25.1%) on a linked quarter basis. In this environment, credit troubles no doubt are a foregone conclusion. However, this was not necessarily PAB’s biggest issue in its most results announcement, where the bulk of the earnings decline was attributed to a CNY 1.9 bn (17.1%) linked quarter increase in costs.

*PAL Improves, But Fundamentals Weak: Ping An Insurance (2318.HK)[Ping An] reported a 1H20 operating profit of CNY 74.3 bn, increasing just 1% YOY and 5% below consensus. As a recovery appears underway with Ping An Life (PAL), Ping An results appeared to be well-supported by a HOH improvement of CNY 13.2 bn bn (40.4%) in net profits  - although its value of new business (VONB) declined CNY 3.9 bn (11.9%); *P&amp;C Remains A Challenge: Auto combined ratio reversed course and increased by 250 bp to 100.6%, and certainly warrants watching a driving returns to normal in mainland China. Auto insurance reform will remain a challenge for profitability going forward, and pricing has yet to stabilize. The credit insurance segment remains challenged, due to defaults on underlying loans.*Awful Bank Result: For 4Q20, PAB reported results of CNY 6.5 bn – declining CNY 2.2 bn (25.1%) on a linked quarter basis. In this environment, credit troubles no doubt are a foregone conclusion. However, this was not necessarily PAB’s biggest issue in its most results announcement, where the bulk of the earnings decline was attributed to a CNY 1.9 bn (17.1%) linked quarter increase in costs.

Ping An Insurance – Hope Is Not A Strategy

*Bankrupt: On February 5, 2021, Luckin filed for Chapter 15 bankruptcy protection - less than a year after Luckin’s admission that its former COO, Jian Liu, “had engaged in certain misconduct, including fabricating certain transactions" beginning in 2019 amounting to about USD 310 mn ahead of its IPO; and*Will CAR Crash Next?: In addition to the common ownership of Luckin Coffee and CAR, Inc. (699.HK), and common former senior company officer problem, we also note that Ernst &amp; Young in mainland China audits both Luckin Coffee and CAR, Inc. That in and of itself does not suggest there is a problem, but the commonality does raise eyebrows. While we are not suggesting that there is a problem with CAR Inc., there are areas where we see where the investment community could challenge CAR Inc. and seek a re-audit for CAR between 2008-18.

*Bankrupt: On February 5, 2021, Luckin filed for Chapter 15 bankruptcy protection - less than a year after Luckin’s admission that its former COO, Jian Liu, “had engaged in certain misconduct, including fabricating certain transactions" beginning in 2019 amounting to about USD 310 mn ahead of its IPO; and*Will CAR Crash Next?: In addition to the common ownership of Luckin Coffee and CAR, Inc. (699.HK), and common former senior company officer problem, we also note that Ernst &amp; Young in mainland China audits both Luckin Coffee and CAR, Inc. That in and of itself does not suggest there is a problem, but the commonality does raise eyebrows. While we are not suggesting that there is a problem with CAR Inc., there are areas where we see where the investment community could challenge CAR Inc. and seek a re-audit for CAR between 2008-18. 

*UK BNPL Review Should Add Structure: Tencent Holding’s (700.HK) [Tencent] Afterpay Touch (APT.AU) [Afterpay] British business and the entire Buy-Now, Pay-Later (BNPL) segment is to be reviewed by the Financial Conduct Authority (FCA) – not dis-similar to those reviews conducted in Australia. We believe that the outcome will also be similar in that some form national structure and regulation will be put into place, and we remain encouraged by the Crown’s acknowledgement that the BNPL segment adds value; and*Tencent’s Midas Touch: Tencent continues to hit it out of the park with its Afterpay stake. In addition to its superb return on investment of nearly 550% over the past eight months since the stake announcement, this alliance with Australia’s premier financial technology Buy Now Pay Later (BNPL) company is paying dividends to Tencent in numerous other ways.

*UK BNPL Review Should Add Structure: Tencent Holding’s (700.HK) [Tencent] Afterpay Touch (APT.AU) [Afterpay] British business and the entire Buy-Now, Pay-Later (BNPL) segment is to be reviewed by the Financial Conduct Authority (FCA) – not dis-similar to those reviews conducted in Australia. We believe that the outcome will also be similar in that some form national structure and regulation will be put into place, and we remain encouraged by the Crown’s acknowledgement that the BNPL segment adds value; and*Tencent’s Midas Touch: Tencent continues to hit it out of the park with its Afterpay stake. In addition to its superb return on investment of nearly 550% over the past eight months since the stake announcement, this alliance with Australia’s premier financial technology Buy Now Pay Later (BNPL) company is paying dividends to Tencent in numerous other ways.

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)

DBS Group Holdings – COVID & India Not A Good Combo

DBS GROUP HOLDINGS: DBS reported a 4Q20 results decline of 22.0% linked quarter. Results remain troubling across the board. India deal poses...

Thomas J. Monaco

Hong Kong Exchanges & Clearing – No Experience Necessary

HONG KONG EXCHANGES & CLEARING: HKEX appointed Mr. Nicolas Aguzin as CEO. This is an interesting hire, as Mr. Aguzin has no exchange experience. We...

Thomas J. Monaco

Ping An Insurance – Hope Is Not A Strategy

PING AN INSURANCE: Ping An reported 2H20 an operating profit decline of 12.2% HOH. Despite bottom-line improvement in Life, results are truly...

Thomas J. Monaco

Luckin Coffee – Chapter 15

LUCKIN COFFEE: On February 5, 2021, Luckin filed for Chapter 15 bankruptcy protection after COO engaged in misconduct. Luckin and CAR have common...

Thomas J. Monaco

Tencent Holdings - UK Speed Bump

TENCENT HOLDINGS: Tencent's Afterpay British business and BNPL segment being reviewed by FCA – not dis-similar to Australia. Review should lead to...

Thomas J. Monaco