Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: China Communications Construction, Pinduoduo, China Construction Bank H, Credit Suisse Group AG and more

In today’s briefing:

  • China Comm Const (1800 HK): Key Takeaways from Post-FY20 Result Call
  • Smartkarma Webinar | Pinduoduo (PDD US): Know When to Fold
  • CCB: So-So Trends but Not Dear
  • Credit Suisse Group – Capital Raise Likely Coming

China Comm Const (1800 HK): Key Takeaways from Post-FY20 Result Call

By Osbert Tang, CFA

Management is generally optimistic towards FY21 outlook, with a target of 10% growth in new contract and revenue. In the post-result call, China Communications Construction (1800 HK) (CCCC) highlights its focus on strategy refinement, cost control and overseas expansion as some of its major initiatives. We take the management’s guidance positively; and trading at outrageously cheap multiples of 3.1x PER and 0.2x P/B, we think the market is too negative towards CCCC. 

As for FY20 result, we do not agree that CCCC’s profit is unexciting. While profit was down 17.6% YoY, there is a 98.6% HoH improvement in 2H20. Excluding factors like foreign exchange loss on Rmb appreciation and higher credit impairment (mainly on Australia project), CCCC has a flat YoY. This is even before taking into account the loss of toll revenue amounting to Rmb1.4bn in 1H20 due to the pandemic. That said, we see good room for a double-digit recovery in FY21 as some of these factors are removed.

Smartkarma Webinar | Pinduoduo (PDD US): Know When to Fold

By Smartkarma Research

For our next Webinar, we welcome Insight Provider Mitchell Kim to go over his view on Pinduoduo (PDD US). The share price dropped 18% in March and Mitchell has flagged that, despite the appeal of ultra-growth, the risk-return favours the downside on both operating momentum and valuations. Join us to hear more.

The webinar will be hosted on Wednesday, 7 April 2021, 11:00 SGT/HKT.

Mitchell Kim is a fundamental equity research analyst with 20+ years of both hedge fund and a bulge bracket sell-side experience. He has a reputation for rigorous analysis, focusing on stock price drivers and providing differentiated or contrarian ideas.

CCB: So-So Trends but Not Dear

By Paul Hollingworth

Chinese SOE, CCB, dedicates itself to mainly corporate credit (50% of Loan book) but also consumer segments (43% of credit), with mortgages commanding a high weighting, backed by a balance of time deposits (43%) and transaction accounts (53%).

FY20/19 results show middling fundamental trends. Results can be characterized by light deterioration in general as changes in key variables were not so pronounced. Asset Quality is where the greatest erosion took place with impaired Loans, net of Reserves, and the “substandard loan” “doubtful loan”, and “loan loss” buckets all showing outsized growth, indicating symmetric toxic asset migration. Elsewhere, there was a modest reduction in Profitability and in Liquidity. There was also lightweight erosion in NIM plus Spread and in Equity/Assets in alignment with other Capitalization ratios, though Provisioning (in part) and Efficiency showed some improvement. “Core Income” showed robust growth YoY, supported by low double-digit Balance Sheet expansion, and a stolid increase in fee and commissions, while a non-extreme increase in LLPs still exerted a negative impact on Comprehensive Income which eased by 9.2% YoY.

A FV of 7%, a PBV of 0.61x, a Dividend Yield of 5.9%, an Earnings Yield of 19.3% and a Total Return Ratio of 2.6x are far from unappealing. The bank commands a so-so PH Score™ (5.2) which captures value-quality trends, including a supportive valuation variable. This Score may seem harsh to the bank given the at best a flattish picture, though the underlying Balance Sheet dynamics of Asset Quality deterioration, as elsewhere in system, a limited LLP rise, and intensification of charge-off growth, and what looks like soft Reserving are not ideal.

Credit Suisse Group – Capital Raise Likely Coming

By Thomas J. Monaco

*Outclassed By US Counterparts:Goldman Sachs & Co. (GS.US) [Goldman], in typically fashion, always to seems to have the best information at the earliest possible instance, and as a result were able to act early and decisively – coming through the Archegos liquidations thus far relatively unscathed.  Other prime brokers, including Credit Suisse Group (CSGN.VX) [Credit Suisse] which didn’t have close to the full Archegos Capital Management picture, were caught with their pants down in what was supposed to be an orderly unwind descended into chaos; and  

*Capital Implications Are Significant At Credit Suisse:The problem for Credit Suisse is the potential peak level of losses that likely will cause it to breach regulatory triggers. Several factors must still be adjusted from consensus forecasts: CHF 2.0 bn from Greensill (not including Sanjeev Gupta/GFG’ Liberty Commodities insolvency filing); CHF 2.0 bn Mozambique debt scandal; and the potential CHF 7.0 bn Archegos exposure.  In addition, operational risk weightings/capital requirements are likely to increase. In aggregate, we find that Credit Suisse’s CET1 would decline to 10.8% against the likely increased CET1 target and intimates a potential capital raise, dividend cut, and share buyback suspension.

Related tickers: China Communications Construction (1800.HK), Pinduoduo (PDD.O), China Construction Bank H (0939.HK), Credit Suisse Group AG (CSGN.S)

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