In this briefing:
- HSCEI Dividends – Better Results Increase Expected Fair Value
- China Everbright: Dynamic for China but Why Is Provisioning Falling?
Since we published our earlier Insight, the HSCEI dividends futures expiring in December 2020 have moved up 1.9% mainly driven by strong Q3 results led by Chinese insurers, a slightly stronger CNY and a marginally higher HSCEI. Open Interest in the 2020 dividend futures contract has continued to increase as prices push higher.
In this Insight, we look at the Q3 results of companies that announced quarterly results and estimate nine month EPS for non-reporting companies based on their half yearly results and operational statistics/data for the July to September period where provided.
We find that the 2020 dividend futures are trading below our bottom up fair value and provide a 3.7% upside from current prices.
At Q319,China Everbright Bank Co A (601818 CH) reported a PH Score™ of 8.3 revealing benign trends in Profitability (partly), in Efficiency, in Capitalisation, in headline Asset Quality, in Margin, and in Liquidity given exuberant Deposit expansion though there was some notable Provisioning slippage. In contrast to most Chinese banks, the top-line continues to exhibit dynamism with robust growth in both Net Interest Income and Fee Income. Overall, the trend profile is relatively positive, supported by lower Funding Costs (as at Ping An) in contrast to the SOEs plus moderate credit growth as well as excellent “Core Jaws” though underlying Asset Quality stresses present a risk. High LLPs, evidence of Asset Quality issues not captured by a lower NPL ratio, exerted a highly negative impact on the bottom-line though the pace of asset write down growth moderated versus Q219. The drop in Provisioning is a concern.
China Everbright Bank trades at a P/Book, FV, Dividend and Earnings Yield of 0.76x, 8%, 3.6%, and 14.6%, respectively. These are quite attractive metrics. In China, a good dividend is a necessary compensation for systemic risks. The bank has an average Financial Strength profile as measured by indicators such as Debt/Equity with a high Liquidity Coverage Ratio though overall Provisioning levels (declining) are low and the LDR (though decreasing) is on the high side. Our main concern is with the easing in Provisioning and the heated growth of LLPs which reflect asset toxicity migration with rising “Substandard Loans” and “Doubtful Loans” buckets being the epicentre of risk.
Shares have performed well since our recommendation. On balance, we are inclined to lock in the profits but run a reduced remaining stake. We are mindful that the “true” asset quality is certainly worse than meets the eye. We are thus uncomfortable with the Provisioning decrease. This may be rectified further down the line. However, P&L dynamics are strong despite the forceful increase in LLPs. Keeping Funding costs lower has helped. Differences in this item across the system do raise questions. We like the growth underway and are somewhat reassured by the moderate pace of loan growth given that a gung-ho expansion would be most inappropriate while Deposits are expanding at a faster clip. We will scrutinise the lay of the land at FY19.