Brief Hong Kong: China Mobile 4Q18 Trends Improved Slightly. It Remains Most Exposed to 5G Capex Uncertainty. and more

In this briefing:

1. China Mobile 4Q18 Trends Improved Slightly. It Remains Most Exposed to 5G Capex Uncertainty.
2. China Unicom Weak 4Q18 Mobile Results Offset by Strength in Fixed Line Business
3. US Lake Charles LNG Liquefaction Plant Tendering for Contractors: Positive for TechnipFMC
4. Xinyi Energy IPO Preview: Second Time Lucky?
5. Bank of Tianjin: 太好了, 不可能是真的

1. China Mobile 4Q18 Trends Improved Slightly. It Remains Most Exposed to 5G Capex Uncertainty.

Chris Hoare downgraded China Mobile (941 HK) some time ago on rising concerns that 5G capex would be higher than expected. While China Unicom (762 HK) and China Telecom (728 HK) both laid out very modest 2019 5G capex plans, China Mobile did not.  And despite what we saw as reasonable results, earnings guidance was weak and the lack of a rising dividend payout suggests internal concerns over 5G spending.  We had seen China Mobile as a defensive stock, but recent strong performance and rising 5G worries led us to downgrade our recommendation. It remains at Reduce with a HK$75 target. 

2. China Unicom Weak 4Q18 Mobile Results Offset by Strength in Fixed Line Business

China Unicom’s (762 HK) recent 4Q18 results were not great. The overall figures look ok due to strength in the fixed line business which offset weakness in mobile. However, they were the weakest of the three operators and the stock, which has had a strong run, now looks due for a pause. We have turned more cautious on the Chinese telcos on concerns that 5G spending could be higher than expected. Chris Hoare believes a major reason for the Chinese telcos outperforming in the past year has come from declining capex spending expectations. That trend may now start to reverse. While China Unicom has guided for only modest 5G capex in 2019 the focus will turn to 2020 where it is a much bigger issue and while we expect China Unicom to do a joint roll-out with China Telecom (728 HK) we expect the scale of the spending to be larger than an individual build. 

3. US Lake Charles LNG Liquefaction Plant Tendering for Contractors: Positive for TechnipFMC

Energy Transfer LP (ET US) and Royal Dutch Shell (RDSA LN) have signed a Project Framework Agreement to further develop a large-scale LNG export facility in Lake Charles, Louisiana and move toward a potential final investment decision (FID). They have started actively engaging with LNG Engineering, Procurement and Contracting (EPC) companies with a plan to issue an Invitation to Tender (ITT) in the weeks ahead. We look at the potential contract size and winners and also the other US LNG projects that could be negatively impacted. More detail on the LNG project queue for this year in: A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies.

4. Xinyi Energy IPO Preview: Second Time Lucky?

Xinyi Energy Holdings Ltd (1671746D HK) has filed IPO prospectus once again to list its solar generation business that was spun-off from its parent company Xinyi Solar Holding Ltd. Xinyi Energy has 9 operational solar farms with a total capacity of ~950MW.

The company is set to acquire additional solar farms of 540MW capacity from its parent company in a separate transaction post IPO.

Xinyi Energy has not indicated the size and pricing of its offer, however, according to various media reports the company is expected to raise nearly HK$570M (around 12% of the previous offering of HK$4.5B). A significant portion of IPO proceeds is expected to be utilised towards upfront payment of 50% for acquiring solar farms from its parent company and the remainder for working capital and debt repayment. Although we have a positive view of the solar energy sector, the IPO pricing will determine our overall view of the company.

5. Bank of Tianjin: 太好了, 不可能是真的

Bank Of Tianjin (1578 HK) results at first look quite encouraging with firmer profitability, enhanced efficiency, improved capital adequacy, and increased provisioning.

Valuations are optically attractive: p/book of 0.5x, franchise valuation of 7%, earnings yield of 17%, and a total return ratio of 2.5x. These metrics are within the bargain hunter space.

However, optimism fades fast on closer inspection.

“Underlying” Income decreased by 21% YoY as the bank was squeezed by higher funding costs and non-interest expenses. Expenses on wholesale funding increased by 30% YoY. Debt funding now represents 71% of Gross Loans. Debt now stands at 4.3x SH. Funds. This type of funding has exploded by 10x since 2014. At the same time, deposits declined YoY. Deposits have increased by a more sedate 18% since 2014.

PT Profit would have been CNY1.4bn rather than CNY5.2bn but for hefty gains on securities. Loan loss provisions almost tripled YoY.

Regarding the Balance Sheet, Special Mention Loans rose sharply (+25% YoY) and represent 2.8x NPLs. A 127% and 108% YoY increase in “doubtful loans” and “loss loans” puts some perspective on a seemingly respectable NPL ratio of 1.64% and a LLR/NPLs of 250%.

Thus, Bank Of Tianjin (1578 HK) is cheap for a reason. We are reluctant to recommend taking a position at this juncture given the ongoing stresses in source of funding and asset quality.