Brief Finance: HSCEI Support Break for New Low and more

In this briefing:

  1. HSCEI Support Break for New Low
  2. Ujjivan Small Finance Bank IPO: An Opportunity to Cherish!
  3. Hachijuni Bank  (8359 JP):  Never Mind the Quality, Feel the Width
  4. Maybank – Doubling Credit Costs
  5. Chugoku Bank  (8382 JP):  Even Monkeys

1. HSCEI Support Break for New Low

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Hang Seng China Enterprises Index (HSCEI INDEX) displays a clear bear setup after the recent bounce and Friday’s break of trendline support.

The rally cycle from August was an a-b-c affair or corrective in nature within a rising wedge structure, after terminating at ideal 10,950 resistance, the bear cycle has resumed. Friday’s break of trendline and price support is a negative. Fresh resistance lies at 10,600-650. A re test on the major lows is in store with risk of a minor new low that would set up a very interesting rally platform for 2020.

Hong Kong’s HSI has been our preferred short vehicle but has yet to break pattern support as the HSCEI has. Recent updates have outlined our ideal short zone that came in at just under 28,000. Fresh sell resistance lies near 27,000 for a test on the August lows.

The a-b-c bounce cycle amid a rising wedge does increase risk of a new low and higher conviction buying opportunity to re test November highs just seen in 2020.

2. Ujjivan Small Finance Bank IPO: An Opportunity to Cherish!

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Ujjivan Small Finance Bank (USFB) is a mass-market focused small finance bank (SFB) providing financial services to un-served and under-served segments of Indian population, led by its commitment towards financial inclusion. Its promoter entity, Ujjivan Financial Services Ltd (UFSL), commenced operation as an NBFC in 2005 with a focus on providing microfinance (MFI) loans (typically group loans with small ticket size at < INR 100,000). MFI loans are typically income generating loans and play a crucial role in upliftment of the bottom strata of the society. Accordingly, they are a key focus area for the RBI and the government. SFBs and NBFC-MFIs (NBFCs registered as Micro-Finance Institutions) are some of the entities that cater extensively to this segment under the supervision of RBI.

USFB’s robust financial performance, despite several crises faced by the sector, coupled with its high quality management, reasonable valuations and strong growth tailwinds for the sector, lends USFB a favorable setup. We recommend participating in the IPO.

USFB’s issue size was of INR 1000cr, of which INR 250cr amount has already been placed via pre-IPO. Remaining 750cr is available for subscription via the IPO. The key objective of the IPO is to fulfill licensing mandate from RBI that requires USFB to list by Jan 31, 2020. There is no Offer for Sale and proceeds from the IPO is stipulated to be used as growth capital.

3. Hachijuni Bank  (8359 JP):  Never Mind the Quality, Feel the Width

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Never Mind the Quality, Feel the Width‘ was a highly successful British TV sitcom starring John Bluthal and Joe Lynch that ran between 1967 and 1971.  The comedy show’s title was a reference to the two main characters: tailors with highly questionable skills when it came to fashioning cloth and who were always quarreling with each other.  The title is brought to mind when one considers the rationale behind foreigner investors owning Hachijuni Bank (8359 JP) stock: while the numbers look good on the surface, the quality of those profits is open to considerable question. There are far better investments in the Japanese banking sector than this. Caveat emptor!  (May the buyer beware!)

4. Maybank – Doubling Credit Costs

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Malayan Banking (MAY MK) reveals dramatic deterioration in two key markets. There are important implications for coming quarters, as conditions are more likely to worsen, rather than improve. Where most view the bank as primarily a large corporate lender in Malaysia, its regional operations are floundering.  The real risk is that over the coming several months, that its core large corporate lending book in Malaysia sees more pressure, given weakening economic growth, which can well overshadow pains seen in its Indonesia and Singapore operations. 

5. Chugoku Bank  (8382 JP):  Even Monkeys

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Chugoku Bank (8382 JP), based in Okayama Prefecture in the Chugoku region of western Japan, is the 10th-largest Japanese regional bank in terms of market capitalisation.  It has a long-standing reputation for solid earnings thanks to conservative management and a strong financial position.  But, as the old Japanese proverb goes, even monkeys fall out of trees sometimes.  At first glance, things look fine: the bank is well-capitalised with a CAR of 13.62%, and interim results beat guidance convincingly.  Yet the bank has lowered its full-year forecast: one of only a handful of regional banks to do so when interim results were announced earlier this month.  Why?  Probably because interim results were still down 11% YoY, core earnings are down 24% YoY, the bank’s key net return on domestic funds deployed is now in negative territory, and credit costs are rising sharply.  Oh dear.  That reputation is looking distinctly undeserved these days.

Make no mistake: not long ago, Chugoku Bank was an exceptionally strong bank. It may again be one some day.  Right now, however, the long-standing premium rating on its stock price (PER of 15.4x against a peer average of 10.9x) is unjustifiable given the deterioration in its core profitability.

Foreign investors in aggregate continue to own just short of 17% of outstanding shares.  With Chugoku Bank’s performance ratios continuing to decline, its reputation for solid earnings in question, and in light of the recent profit warning for FY3/20 earnings from the bank, one wonders how long it will be before more foreign investors in Chugoku Bank head for the exits.  For those considering investing in this bank, perhaps unaware of the worrying deterioration in the bank’s basic domestic business but attracted by the disarmingly tantalising combination of strong capitalisation, high market share in its home prefecture, and a long history of conservative management, our advice is:  Caveat emptor!  (May the buyer beware!)

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