In this briefing:
- Shanghai/Shenzhen Connect Ideas: Moutai Inflows Were Back, Tsingtao Too (2019-06-14)
- HK Connect Ideas: Five Weeks of Inflows, Dalian Port Outflows (2019-06-14)
- Bank of China – An SOE Bank that Is Not Immune
- Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric
In our weekly Shanghai/Shenzhen Connect Ideas series, we aim to help our investors understand the flow of northbound trades via the Shanghai and Shenzhen Connect, as analyzed by our proprietary data engine and highlight interesting trade ideas.
We split the stocks eligible for the Shanghai/Shenzhen Connect trade into two groups: stocks with a market capitalization above USD 5 billion, as well as between USD 1 billion and USD 5 billion.
In this insight, we will highlight the consecutive two weeks of inflow into the A-share market. We highlight the inflow reversal into Kweichow Moutai Co Ltd A (600519 CH), a leading premium hard liquor manufacturer, as well as Tsingtao Brewery Co Ltd A (600600 CH).
In our weekly HK Connect Snippet series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine, and highlight interesting observations.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this insight, we will highlight the five weeks’ consecutive inflow into HK Stocks via the southbound trade, led by Financials sector. Inflows into Tencent have been consistently positive. We also highlight strong outflows from Dalian Port. In the mid-cap space, we highlight Man Wah, a furniture exporter.
Rural banks come to mind. Medium-sized banks as well. But it is not one of the large four SOE banks that we to feel will have some of the highest impairment cost growth. Yet, Bank Of China (601988 CH) ranks second of the largest 10 listed China banks for impairment cost growth in 1Q19 YoY at a staggering 76%. And this can continue through 2Q19 and through 2019. The reason is simple: BOC’s impairment costs remain far lower than large peer banks. With the profit warning from Bank Of East Asia (23 HK; BEA) due to worsening China credit metrics, worsening industrial output data (just out) and the full effects of US-China trade war yet to hit, BOC may have to play catch-up with peers. This is also apparent with its HK subsidiary, where credit costs are lower than most all peer banks at just 10bps of loans in 2018; BEA was 2.4x higher. See valuation, fundamental and momentum (VFM) research done by our Smartkarma colleague Paul Hollingworth on BOC and BEA in the past.
My previous insight Top Consumer Themes in Vietnam noted some of the top consumer themes in Vietnam and how Phu Nhuan Jewelry Jsc (PNJ VN) and Mobile World Investment (MWG VN) stood out. MWG is a stand out in the consumer space because of the following: 1) strong initiatives from management to seek new sources of growth, 2 ) historical favorable financial performance and 3) its current discount to consumer stocks and even the VN Index ( ex. premium for buying shares). MWG”s financial growth has been outpacing many of its consumer peers in recent years, while other consumer stocks have begun to see single digit growth rates.
Consistent Financial Performance: MWG was able to surpass its growth target for 2018 and this marked the fifth consecutive year that MWG achieved its annual target. Its 2018 revenue rose by 30.4%, which was driven by the strong growth of its consumer electronics products. MWG is positioned to continue delivering favorable growth ( above 20%) in the coming years and to improve margins as Baxhoaxanh’s operations become more mature.
Finding new sources of growth: The company is positioned to withstand the relative slowdown of the consumer electronics segment through company specific developments, while the favorable macro picture in Vietnam is also supportive of strong financial growth. As traditional sources of growth begin to become exhausted, MWG can find new growth driven by the expansion of its Dien May Xanh stores and its new grocery stores ( Bax Hoa Xanh).
Moats are lame: MWG has been seeking new sources of growth rather than relying merely on its favorable market share and the high growth rates of various sectors in Vietnam. Several consumer stocks that were less aggressive in this manner have seen single digit top-line growth in recent years. Stocks in Vietnam are likely to face increasingly saturated markets in the future and innovation will be the key for companies to outperform during the 2020s-2030s ( not to mention the fact that Vietnam’s circa 30% discount to emerging Asia no longer exists).
It is imperative to note that MWG trades at a notable discount to other consumer stocks in Vietnam despite the company’s consistent financial performance and management’s initiative to identify new sources of growth. The market appears to be undervaluing this unique initiative/ability from management and focusing more on the short term transitions taking place.