Brief Value Investing: Toyota: Hitting the Hybrid Accelerator and Towing Suzuki and Mazda in Its Wake and more

In this briefing:

1. Toyota: Hitting the Hybrid Accelerator and Towing Suzuki and Mazda in Its Wake
2. RHT Health Trust – 40.7% Net Returns Since Jan. Is There Any Upside Left?
3. Japanese Banks:  Beyond the Ides of March
4. Huishang Bank: Subpar Earnings and Asset Quality Indicate Caution
5. China Construction Bank: Not Strategically Dear

1. Toyota: Hitting the Hybrid Accelerator and Towing Suzuki and Mazda in Its Wake

The Nikkei announced this morning that Toyota Motor (7203 JP) was considering opening up its portfolio of hybrid patents for outside use, possibly for free.

We recently visited Toyota at its Toyota city headquarters and spent some time discussing this very topic. We believe this move is being made with an eye towards China in particular and to an extent the US. We would also highlight the continuing development of Toyota’s relationship with Suzuki. As the automakers move slowly towards what is likely to be an eventual union, the sharing of hybrid technology with Suzuki could have a significant impact on the medium-term prospects of both automakers.

2. RHT Health Trust – 40.7% Net Returns Since Jan. Is There Any Upside Left?

Since my last insight on RHT Health Trust (RHT SP) on 29^th Jan 2019 – RHT Health Trust – Cash on Sale , investors who bought into RHT Health Trust at S$0.029 per unit would have netted a return on investment of 40.7% if they sell out today, including the cash distribution that they have received in 1^st March.

Since last insight in January, RHT reported major changes to its Board of Directors and Management. The strong background of the new BOD and CEO in investment banking and REIT management will be valuable to RHT as it progresses to transform itself and acquire new business/assets to inject into the Trust.

Key investment thesis remains unchanged. RHT Health Trust is an event-driven play and the catalyst will be the announcement of an RTO deal to inject new assets/business into the Trust. This will be the key driver to further upside in RHT. 

Proposed investment strategy at this stage is to hold on to the investment in RHT and look for opportunities to add if RHT trades lower. Target entry price is S$0.016 per unit, which translates to a NAV discount of 27.3%.

3. Japanese Banks:  Beyond the Ides of March

“Beware the Ides of March”: the soothsayer’s repeated warning to ancient Rome’s most famous emperor in William Shakespeare’s play ‘Julius Caesar’.  Caesar ignores the warning and is assassinated later that day by his colleagues on the steps of the Senate.  We have been warning investors in Japanese bank stocks for the last few years to “beware the Ides of March”, advising them to be very underweight in the sector (or preferably out of the sector entirely) by 15 March each year to avoid the risk of incurring a similar fate at the hands of their investment colleagues as befell Julius Caesar on 15 March 44BC.  We are now well past the Ides of March and, true to form, the sector has already peaked and lost momentum after a brief post-Santa rally.  ‘Caveat emptor! (May the buyer beware!)’ remains our Caesarean soothsayer warning to would-be investors in Japanese bank stocks in 2019.

4. Huishang Bank: Subpar Earnings and Asset Quality Indicate Caution

Huishang Bank Corp Ltd H (3698 HK) looks interesting at first. Some trends are moving in the right direction and the valuation is hardly stretched.

So it seems. Closer inspection reveals subpar earnings quality and pressure on the top line from an elevated growth in funding costs and a double-digit reduction in income from non-credit earning assets. Impairments weighed heavily on the bottom line. Underlying “jaws” were extremely negative, putting the decrease in the Cost-Income ratio into perspective.

An improving NPL ratio of 0.95% (or 1.04% depending on which one you use) does not tell the whole story at all. Asset quality issues, of course, come through in the income statement with writedowns and loan loss provisions consuming a huge (and increasing) chunk of pre-impairment profit. The Balance Sheet exhibits strains and stresses from an explosion of doubtful loans, rising substandard loans, and arguably an unhealthy expansion of special mention loans. At least “unimpaired past-due” loans have moderated though they stand at 45% of headline NPLs. Some key capitalisation metrics are deteriorating while liquidity erodes given the 23% growth in credit which flatters the problem loan picture.

5. China Construction Bank: Not Strategically Dear

China Construction Bank (601939 CH) FY18 results reflected stability and some encouraging signs of positive fundamental momentum. The highlights were a positive “underlying jaws” of 220bps, fortified Capital Adequacy, enhanced Provisioning, and firmer net interest spread and margin. Liquidity remains prudent with credit and deposit growth both expanding by mid-single digits. In addition, the top-line exhibited solid growth with funding expense growth (an issue elsewhere) only mildly in excess of interest income growth. Sharply higher asset loan loss provisions reflected the ongoing battle with troubling systemic asset quality challenges.

CCB is committed to becoming a core comprehensive service provider for smart city development, in alignment with government strategic targets. In terms of technology, AI robots (in wealth management, for example), Intelligent Risk Management Platforms, Biometric verification plus a public and private “cloud ecosphere” are evolving. Big data is developing with data warehouse integrating internal and external data; with enterprise data management and application architecture; and via working platforms. CCB is wedded to IoT, blockchain as well as big data in industry chain finance, via internet-based “e Xin Tong”, “e Xin Tong” and “e Qi Tong”. The bank has a strategy of Mobile First, provision of internet-based smart financial services, booming WeChat banking, and integration of online banking services that combines transactions, sales, and customer service.

Automation and “intelligence” is the bedrock of risk management: the key area today of what is a highly leveraged system. Here, CCB is integrating corporate and retail early warning systems and unifying the monitoring of different exposures. Management launched a “new generation” retail customer scorecard model, elevating the level of automation and “intelligence” of risk metrics. In addition, the bank is attaining greater recognition and control of fraud. Regarding the remote monitoring system, CCB is adapting to the fast development of information, network and big data technology, by building a monitoring system with unified plans, standards, software and hardware.