Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: China Life Insurance Co H, RS PCL, Tokyo Electron, Postal Savings Bank of China and more

In today’s briefing:

  • 5 Charts to Gauge the Progress of China Life’s “Revitalization” Strategy
  • RS: Go Big with New Products
  • Tokyo Electron (8035 JP): Getting Ahead of Itself
  • PSBC: Subpar Trends but Risk May Be Subsiding

5 Charts to Gauge the Progress of China Life’s “Revitalization” Strategy

By Alec Tseung

The article used 5 charts to showcase the progress of the “revitalization” strategy launched by China Life Insurance Co H (2628 HK) in 2019.

These charts indicated that China Life is on the right track of executing its transformation and has seen improving growth profile and margin since then. However, such improvement in its fundamentals has unlikely been priced in yet, as evidenced by the company’s sluggish share price performance since the end of 2019.

Regression analysis using regional peers indicated that the company is currently undervalued and has a potential upside of around 20% if its current P/B is to trade in line with the justifiable P/B. 

RS: Go Big with New Products

By Research Group at Country Group Securities

We downgrade our recommendation to SELL rating, from HOLD, with 2022E target price at Bt24.00, derived from 30x PER. The new products introduction was impressive. However, it seems to be priced in the 62%YTD stock increase.

• RS introduced collagen product under brand “well u” and functional drink under brand “Camu C”. It expected these product to contribute Bt1.0bn revenue in 2021E.
• RS also shared its roadmap on the cannabis products that it is developing 8 product SKUs, focusing on beverage and supplement. The products will launch under brands S.O.M., well u, and Camu C. RS expected cannabis product to contribute Bt2.0bn revenue per year in the future.
We like RS because of its growth potential from new product development ability and marketing skill. However, the stock is trading quite premium at beyond +1SD of its historical average.

Tokyo Electron (8035 JP): Getting Ahead of Itself

By Scott Foster

On January 10, we wrote that demand for semiconductor equipment could exceed SEMI’s growth forecast for 2021, that Tokyo Electron’s guidance for FY Mar-21 was probably conservative, and that Investors in Tokyo Electron (TEL)… should benefit, even if the shares appear to be overbought. (seeTokyo Electron (8035 JP): Semiconductor Shortage Points to Stronger Year Ahead  ).  

Since then, TEL has raised guidance, Intel and TSMC have announced big new capital spending plans, SEMI has raised its forecast of semiconductor equipment demand, and TEL’s share price has risen by 24%. How much more upside is there?

The shares are now selling at 34x management’s EPS guidance for FY Mar-21 and 31x our estimate for FY Mar-22. These multiples are not high compared with those of other first-rate Japanese  precision manufacturing companies, but they are double what they were two or three years ago. 

It is tempting to say that valuations are extended in what remains a cyclical industry, but the greater risk to earnings growth, in our estimation, is high and rising depreciation and R&D expenses as the company expands capacity and develops technology for the 2 nanometer node and beyond (See Screen Holdings (7735 JP): Aiming at 2nm Process Technology ).

PSBC: Subpar Trends but Risk May Be Subsiding

By Paul Hollingworth

Strategic and systemically-important Postal Savings Bank dedicates itself to mainly consumer credit (57% of Loan book), with mortgages commanding a high weighting, but also corporate segments (35% of credit), backed mainly by source of funding from time deposits (64%) but also transaction accounts (36%).

FY20/19 results show subpar fundamental trends. Results can be characterized by light deterioration in general as changes in key variables were not so pronounced. There was a modest reduction in Profitability and in Liquidity. There was also lightweight erosion in headline Asset Quality, in Efficiency, in NIM plus Spread, and in Equity/Assets though not all Capitalization ratios given the capital raise, while robust Provisioning was fortified further. “Core Income” showed stolid growth YoY, supported by above-system credit expansion, and to a lesser extent by a robust increase in fee and commissions, while a surprisingly high increase in LLPs reduced Comprehensive Income growth to 8.3% YoY.

 A FV of 5%, a PBV of 0.76x, a Dividend Yield of 4.4%, an Earnings Yield of 13.3% and a Total Return Ratio of 1.6x are not unappealing, though on the face of it, less optically attractive than other SOE banks. Relative valuation may signal that PSBC is in fact a lower risk than some other SOEs especially after the capital raise last year which cushions against higher requirements, the low Debt/Equity, high LCR and NSFR, the elevated Provisioning, and the low LDR: this may also relate to a consumer-centric profile in contrast to other more corporate-heavy banks. PSBC commands a subpar PH Score™ (3.5) which captures value-quality trends, including a moderately supportive valuation variable. This Score may seem harsh to the bank given the “near misses” in our binary system, a mildly positive picture relative to peers, and given a sufficient Reserving level and the adept control of receding risk. The bank, in contrast to other SOEs, still has ample scope to perform better on Efficiency front. We are prepared to give PSBC the benefit of doubt despite the PH Score™.


Related tickers: China Life Insurance Co H (2628.HK), RS PCL (RS.BK), Tokyo Electron (8035.T), Postal Savings Bank of China (1658.HK)

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