China Banks – Stick with Quality at Attractive Valuations

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Gravity Works As WeWork Doesn't; Now Plan B

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

China Construction Bank H / Equity Bottom-Up

PH Score™   8.9According to our model PH Score™, CCB seems headed in the right direction.  The valuation variable within the model helps the Score but other variables are benign. Adding technical factors and the low valuation, CCB ranks in the top quartile globally of our VFM (Valuation, Fundamentals, Momentum) universe. As with ICBC, the PH Score™ has not been as elevated as this for years. In contrast to say Turkey, where scores can be high, the System does not seem to be grappling with solvency challenges.Elsewhere in China, recent bank results show mixed or subpar fundamental momentum and trends. This is not the case though with the SOEs or Globally Systemic entities, in particular CCB or at ICBC though we recognise NCOs are high and LLPs are arguably too low. It would be strange if this most systemic of banks did not reflect trends elsewhere. And it is with Asset Quality that the bank shows stress with aforementioned NCOs and continuing bad asset migration.Elsewhere, on a LTM basis, the bank's PH Score™ of 8.9 reflects progression in Profitability, in Efficiency, in Capital Adequacy, in Provisioning as well as the positive valuation variable though NIM/Spread compressed, Asset Quality deteriorated somewhat, and Liquidity eroded. Having said that, the LDR is at a "sweet spot" level. Profitability though may be flattered by low Asset Writedowns.<div class="content-highlight">A FV of 5% and a PBV of 0.51x are not unattractive. These are below thresholds of 10% and 1x, respectively. An Earnings Yield of 23.4% and a Dividend Yield of 6.7% underpin the valuation thesis.  </div>Results continue to unsurprise and have a very familiar look. Disclosure is sufficient for such a globally systemic entity. For those who want to lend money to China, the Dividend Yield alone may provide sufficient compensation for systemic risks. As with ICBC, the picture seems to be solid though FX needs to be hedged. But high Dividend Yields (and these are very high) do not normally equate to higher stock price appreciation. They equate to higher risk: we see this in Asset Quality data. A high PH Score™ though can equate to stock price appreciation. That’s the dilemma. Maybe they just neutralise each other.

PH Score™   8.9According to our model PH Score™, CCB seems headed in the right direction.  The valuation variable within the model helps the Score but other variables are benign. Adding technical factors and the low valuation, CCB ranks in the top quartile globally of our VFM (Valuation, Fundamentals, Momentum) universe. As with ICBC, the PH Score™ has not been as elevated as this for years. In contrast to say Turkey, where scores can be high, the System does not seem to be grappling with solvency challenges.Elsewhere in China, recent bank results show mixed or subpar fundamental momentum and trends. This is not the case though with the SOEs or Globally Systemic entities, in particular CCB or at ICBC though we recognise NCOs are high and LLPs are arguably too low. It would be strange if this most systemic of banks did not reflect trends elsewhere. And it is with Asset Quality that the bank shows stress with aforementioned NCOs and continuing bad asset migration.Elsewhere, on a LTM basis, the bank's PH Score™ of 8.9 reflects progression in Profitability, in Efficiency, in Capital Adequacy, in Provisioning as well as the positive valuation variable though NIM/Spread compressed, Asset Quality deteriorated somewhat, and Liquidity eroded. Having said that, the LDR is at a "sweet spot" level. Profitability though may be flattered by low Asset Writedowns.A FV of 5% and a PBV of 0.51x are not unattractive. These are below thresholds of 10% and 1x, respectively. An Earnings Yield of 23.4% and a Dividend Yield of 6.7% underpin the valuation thesis.  Results continue to unsurprise and have a very familiar look. Disclosure is sufficient for such a globally systemic entity. For those who want to lend money to China, the Dividend Yield alone may provide sufficient compensation for systemic risks. As with ICBC, the picture seems to be solid though FX needs to be hedged. But high Dividend Yields (and these are very high) do not normally equate to higher stock price appreciation. They equate to higher risk: we see this in Asset Quality data. A high PH Score™ though can equate to stock price appreciation. That’s the dilemma. Maybe they just neutralise each other.

CCB: Familiar Results - Do You Follow the Dividend Yield or the PH Score™?