
In today’s briefing:
- Tencent Holdings – FHC Restructure On Its Way
- China Huarong Asset Management – Ratings Agencies Fail Us Again
- Jiangsu Hengrui Medicine (600276.CH) – Insights on Recent Pullback and Future Business Prospects
- Shenzhen Expressway (548 HK): 1Q21 Positive Profit Alert Highly Welcome to Shenzhen Int (152 HK)
- Citigroup – Shifting Winds
- Link REIT – Cash Burning Holes
- Japan Small Cap Growth: TeamSpirit – Better Days Ahead
- Thai Beverage: No Near Term Catalyst as BeerCo IPO Is Deferred. Value Buy or Value Trap?
- Bank of America – Not Exactly A Shining Result
Tencent Holdings – FHC Restructure On Its Way
*One Reorganization Down, One More To Go: Tencent Holdings (700.HK) [Tencent] announced a new round of organizational and employee adjustments in its Platform and Content Group (PCG) – the largest reshuffle since it began in 2018. With Alibaba Holdings (BABA] agreeing to form a financial holding company. Tencent cannot be far behind; and
*Earnings To Decline, Capital Requirements To Increase: For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. At CNY 38.5 bn, FinTech represents a growing 28.8% of revenue – and are key component of Tencent’s current and future results. No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks. Earnings will compress, as capital requirements increase.
China Huarong Asset Management – Ratings Agencies Fail Us Again
*Another Potential Default: Again in mainland China, there have been rumblings of another credit default over the past several days. The CBIRC disclosed that China Huarong Asset Management (2799.HK) [Huarong] is actively working with its auditor to complete its annual report. The issue appears to be Huarong’s legacy exposure associated with the misdeeds of its former Chairman, which still need to be addressed post-removal in 2018; and
*Ratings Agencies Are More Than Culpable: Wouldn’t you know it, the sleepy, fee hungry ratings agencies (Standard & Poors, Moody’s, and Fitch Ratings) finally put Huarong on review for a potential downgrade. C’mon guys, where have you been?
Jiangsu Hengrui Medicine (600276.CH) – Insights on Recent Pullback and Future Business Prospects
Recently, Jiangsu Hengrui Medicine (600276 CH)‘s share price has seen a significant pullback. Since April 9th, 2021, the Company’s stock price had fallen for six consecutive trading days, with a cumulative decline of more than 10%, and its market value dropped by about RMB63 billion. So what happened to Hengrui? And what is the future business prospects of this Company? The following mainly included some important insights that deserve to pay attention to.
Shenzhen Expressway (548 HK): 1Q21 Positive Profit Alert Highly Welcome to Shenzhen Int (152 HK)
Shenzhen Expressway Co H (548 HK) announced a positive profit alert for 1Q21, indicating that its recurring profit will reach about Rmb533m, versus losses of Rmb160m a year ago as the impact of COVID-19 subsided. More importantly, such profit indication is even 10.2% higher than 1Q19, suggesting a full-recovery in traffic and toll revenue momentum.
SZ Exp contributed 44.3% of Shenzhen Intl (152 HK)‘s recurring profit (ex-Shenzhen Airlines) in the last two years. The potential acquisition of Shenzhen Investment Holdings Bay Area Development (737 HK) has received waiver from the SFC for a mandatory general offer and a successful conclusion should beef up SZ Exp’s assets. Lastly, with SZ Exp’s target of an estimated 35% increase in its EBITDA, we believe these factors will support SZ Exp’s contribution to SZ Int’s profit outlook in this year.
Citigroup – Shifting Winds
*Results Materially Supported By Provision Reversals and Principal Transactions: Citigroup (C.US) [Citi] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 3.7 bn (89.0%) linked quarter. Citi reversed provisions of USD 2.1 bn – increasing 43.7x versus 4Q20. In addition to the negative provision, Citi’s results were also supported by a USD 2.0 bn (99.7%) increase in principal transaction gains;
*Credit Weaker But Coverage Strong: Net new NPLs came in about 1/3 of the previous quarter’s result came in at USD 635 mn or increasing 48.0% on an annualized basis – still far worse than JPM for the last three consecutive quarters. Citi’s loan loss reserve declined to 422% of NPLs and 325 bp of total loans – but still pretty darn good for the known and potential risk in the loan portfolio; and
*Puzzling EM Exit: Citi also announced strategic changes in the Global Consumer Bank (GCB), where they are exiting 13 markets, of which ten are in Asia-Pacific. As rationale for the move, new CEO Jane Fraser believe that Citi “does not have the scale” to compete in those markets which account for USD 7 bn in allocated equity and USD 70 bn in loans. We await clarity on the potential restructuring costs and the capital release from these divestitures.
Link REIT – Cash Burning Holes
*Update Confirms Weak Outlook: Negative rental reversion rates persist in Hong Kong, as do negative tenant sales. We continue to await another round of negative revaluation of property due to lower rents and/or higher cap rates; and
*No Serious Capital Management Strategy Exists: Management of Link appears hellbent on destroying shareholder value.As gearing was 19.2% at September 2020, management continues to believe that it has abundant headroom to add debt for acquisition. Instead of weighing a buyback’s return versus new investment ROI, management views share buybacks as a mechanism to defend its shares against short-selling. Maybe a re-re-review of its acquisition strategy will occur by earnings when Link’s new mainland China acquisition strategy truly flops.
Japan Small Cap Growth: TeamSpirit – Better Days Ahead
Q2 Trading update
- TeamSpirit Inc (4397 JP) reported 2Q FY8/21 earnings after the April 9 close. The stock price fell by around 20% following that and a full-year guidance cut.
- The market reacted to the slower than anticpated growth in licences, which is the key revenue driver. Full year sales estimates were cut 8% to ¥2.9b.
- We take a positive view of management reaffirming its growth strategy and stepping up marketing activities for the new enterprise product, TeamSpirit EX.
Thai Beverage: No Near Term Catalyst as BeerCo IPO Is Deferred. Value Buy or Value Trap?
Thai Beverage (THBEV SP) has deferred the earlier proposed listing of BeerCo, it’s subsidiary that holds beer assets in Vietnam and Thailand, citing current uncertain market conditions and volatile outlook, aggravated by the worsening COVID-19 pandemic in Thailand and other countries. This upends our bullish view on the stock ( Thai Beverage: Bouncy 1QFY21 Can Fire up the Stock; 20% Upside on SOTP ) as we see little upside to the stock in the near term with no catalyst to trigger a valuation upside. Recent reports of a third wave of infections in Thailand has led to Government imposing fresh restrictions including a ban on sale of alcohol in restaurants, adding further concerns on a protracted revival in tourism.
In this insight we discuss Thai Beverage (THBEV SP) ‘s valuation to assess what is priced in the stock and discuss investment view on the stock at current levels.
Bank of America – Not Exactly A Shining Result
*Results Better, But Likely Unsustainable: Bank of America (BAC.US) [BAC] reported 1Q21 bottom-line results of USD 7.6 bn, increasing USD 2.4 bn (45.2%) linked quarter. Results were driven by two factors: a) a negative USD 1.9 bn, in contravention to overall credit performance; and b) a USD 2.1 bn (147.3%) increase trading activities, the sustainability of which we call into question; and
*BAC Still Needs To Focus On Credit Quality: Given the USD 774 mn in NCOs (33 bp annualized of total loans), we note that net new NPLs reversed course – increasing a a high 74.8% on an annualized basis. JPM and Citigroup each reported declines. Relative to NPLs, however, reserves – while still significant – declined 67.4% to 3.00x while declining 24 bp to 1.79% against total loans.
Related tickers: Tencent Holdings (0700.HK), China Huarong Asset Management (2799.HK), Jiangsu Hengrui Medicine (600276.SS), Shenzhen Expressway Co H (0548.HK), Citigroup Inc (C.N), Link REIT (0823.HK), Thai Beverage (TBEV.SI), Bank Of America (BAC.N)
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