China Bank Rally Takes A Breather

After a series of moves and reviews, the big 5 Chinese banks blasted upwards in February, outpacing the rocketing Hang Seng.  Over the past couple of days, however, they’ve retrenched.   If Morgan Stanley and Short trading interest are to be believed, this is a temporary reversal.

The banks include:

Name	Acronym	HK symbol
Industrial & Commercial Bank of China	ICBC	1398
China Construction Bank	CCB	939
Agricultural Bank of China	ABC	1288
Bank of China	BOC	3988
Bank of Communications	BOCOM	3328

Despite rising Non performing loans, shrinking net interest margins and capital requirements, these banks have surpassed the rising Hang Seng thanks to interest rate rises, increased lending, China stimulus and PPI rises.

Timeline of positive factors:

1/24/2017 – Interest rates raised on medium term rates on loans.

2/03/2017 – Interest rates raised on short-term debt, reportedly in the interests of liquidity due to perceived resulting from the Chinese New Year.

2/14/2017 – Morgan Stanley published a bullish report on China Banks. Banks.

2/15/2017 – Bloomberg reported that options trading reacted positively to the bullish stance of Morgan Stanley on the big 4 banks, (all of banks listed above excluding BOCOM, which isn’t included in the  big 4).

None of these banks have reported annual earnings.  While earnings seasons has just about ended in the US, annual earnings reports for Hong Kong listed stocks are trickling in.  Regardless of the annual earnings, they won’t reflect the February 2017 change in interest rates and producer price inflation which Morgan Stanley reports.

Given the significant decline in short-term selling ratios for all but BOC, 3988 HK, the recent drop could signify a temporary drop versus a long-term decline.  At least for the short-term.

 

 

 

 

Index Changes HSI and HSCEI: In with the New, Out with the Old

Old Timers Li & Fung, 494 HK and Tsingtao Brewery, 168 HK  will be booted out of Hong Kong Indexes due to poor performance and or international dealings.  They’ll be replaced by home-grown Geely, 175 HK,  and infant IPO Postal Savings Bank, 1658 HK, favoring made in China and SOE investments, respectively.  The stock performance and market caps give a clue to the underlying reason but don’t explain it all.

Data Source: Bloomberg

The mature, 50-member Hang Seng Index, HSI, loses Li & Fung, a member since 2000, as its profits and core earnings continue to drop.  It’s last reported interim statement showed a gross revenue drop of 6.4% and a core profit drop of 14.2%.  Li and Fung, a Wal-Mart and Marks and Spencer supplier, most recently reported getting 62% of its sales coming from the US.  It’s being replaced by Made In China and Sold in China: Geely Auto.  As Li and Fung’s stock has dropped, Geely has shot upwards, helping it achieve a market cap 3 times the size of veteran Li and Fung.  Geely’s sales climbed 50% in 2016, fueled by a 50% drop in the sales tax on cars with less than 1.6 liter engines.  While Geely’s annual sales climbed 50%, it reported on January 6, 2017 a preliminary profit climb of over 100%.

Geely has apparently kept the pedal to the metal with January year on year sales reported at an   annual increase of 71% although down 5.15% from December.  This increase is astounding, with the Lunar New Year starting in 2017 on Jan. 28 vs. 2016 in Feb. and Ford and GM both reporting yoy China drops of 24% and 32%, respectively, from HK filings.

As Home town Geely replaces exporter Li and Fung; Tsingtao Brewery, the first China incorporated  H-listed stock in history, is being removed from the younger Hang Seng China Enterprises Index, HSCEI; to be replaced by recent IPO Postal Savings Bank.  Tsingtao has faced declining sales; its last reported revenue drop of 5.3%.  However, perhaps more importantly, it has also been hit by rumors that Asahi Breweries of Japan is hoping to dump its 19.99% ownership interest. (The majority-holder of Tsingtao is Qingdao SASAC).  An index removal could reflect the  dissatisfaction of the effects of outside interests on Chinese companies.

The possible rationale for replacing Tsingtao  with Postal Savings Bank is more difficult  to explain than Geely replacing Li and Fung.  While Geely has been climbing, Postal Savings Bank has actually declined in price since its September IPO.  It’s first half report for 2016 was uninspiring, with loans increasing but net interest margin dropping significantly and a low core ratio.  It’s non-performing loan ratio of .78 is difficult to believe as world behemoth China’s Industrial and Commercial Bank,  1398 HK, ICBC, reported a npl ratio of 1.55 for the first ½ of 2016.  In the first half, ICBC had a capital adequacy ratio of 13.11 vs.  Postal Savings Bank’s first half CAR of 10.04% .

Postal Savings Bank had a less than spectacular IPO, heavily dependent upon its mostly majority state-owned cornerstone investors, which purchased over 75% of the offering.

 

 

Source: HK filings

*Acquisition Loans “may be” financed by SOE China Banks: China Construction Bank, 939 hk, Bank of Communications, 3328 hk, and Agricultural Bank of China, 1288 HK.
**One of 4 asset management firms set up in the 1990’s to deal with bad debt, related to the big 4 banks.  China Great Wall was linked with Agricultural Bank of China.

Rather than a strictly index-related move, the inclusion of Postal Bank could be more to the aid of those cornerstone investors,  which would face an expiration of their 6-month lock-up period close to the time of the index inclusion.  Whether this will give Postal the boost it needs remains to be seen.

 

 

 

 

 

Hang Seng and Shanghai Comp Rise in Tandem

Despite disappointing retail sales numbers released over the weekend, the Hang Seng and China Comp managed to rise, following a weekly decline for both.

This could be blamed either on a short-term correction after falls over 10% from recent highs, or the usual stimulus hopes after weakening retail and credit numbers.

The HSI had positive moves in the majority of sectors.  For the HSCEI, however, the 10 decliners were dominated by banks.

Source: AA stocks

 

While China banks are under pressure with net interest income declining and, npl’s growing, the latest move could be due to rumors that Chinese regulators will be examining non-performing loan data.  Despite economic weakness in China, NPL’S have stayed relatively low.  While NPL’S have grown, criticism has come from outside regarding the drop in allowances to NPLS, now below the 150% guideline for 2 of the major 4 banks. From the last quarterly reports for China’s big-4 SOE banks:

Whatever the reason for the rise in stock values, the quick rise in one company, based on recent and historical performance, is unwarranted.  Belle International, hk 1880, has risen over 14% since May 11.

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Belle is a footwear and sportswear apparel retailer with 20,375 stores in Mainland China, Hong Kong and Macao.  Belle has felt the brunt of the Chinese economy slowdown with same store sales declining, particularly in their bigger footwear segment, where they have the most outlets and get the biggest net profit.

Source Data: HKEX filings

While they have yet to issue their annual report, the decline in same store sales has seriously hit the bottom line as a profit warning was issued on 3/29/2016,  stating the company expected a decline in annual net profit of 35% to 45%.  Without giving specific details, the company claimed it was due to declining same store sales, declining gross profit margins and goodwill impairment. This would represent a major decline in performance based on both the last semi-annual report and the last annual.

Source Data: HKEX filings

As shown above, the company is confronting 2 problems.  Thanks to declining sales in its original footwear core, it has been shifting more into sportswear apparel, which has continued to see same store increases although these are shrinking.  Unfortunately, the margins in sportswear apparel, where they sell mostly licensed goods versus proprietary goods as in footwear, are much lower than footwear.

Based on these trends and the recent profit warning, it is doubtful the company will meet the current projections for about a 20% decline in eps. The company is expecting to publish its annual report by the end of this month.

 

 

China Big4 Banks Surge on Rumoured Support

The Big 4 SOE banks of the PRC surged in Shanghai on reports of government intervention to prop up prices before this weekend’s annual policy meeting.  While the Shanghai Composite rose a mere .5%, the Shanghai 50, dominated by financials and energy,  increased by 3.36%.  The outsize volume for the Big 4 Banks reinforces the support comments made by anonymous sources.

The gains in Shanghai, from over 2% to over 4%, were more robust than those in Hong Kong, none of which exceeded 2%. Still, with the bearish movements in Shanghai and Hong Kong, the stocks are generally well below the start of the year with the exception of Agricultural Bank of China, on the Shanghai exchange.

Despite today’s changes and the rally from the 52-week lows, these shares have tumbled hard from their 52-week highs.  These 4 banks are among the top 10 in the world in terms of assets.  Even after today’s Shanghai shoot, the p/e’s of a couple of their peers in the top 10, BNP Paribas, p/e of 8.86; JP Morgan Chase, p/e 9.9 demonstrate the continued market skepticism toward these Banks and a China stimulus save.

The 3rd quarter’s growth in NPL’s and flat to negative growth in net earnings reinforce this skepticism.

None of these banks have yet to report annual earnings.  Based on history, the banks will be reporting in late April.

Bank                                                  Last Annual Release

Agricultural Bank of China                           4/28/2015

China Construction Bank                              4/29/2015

Bank of China                                                    4/30/2015

Industrial & Commercial Bank                    5/5/2015

 

Shanghai/Hong Kong Bank Shares Diverge Again

As the PRC lowered down-payments for 1st and 2nd homes in China, the big 4 banks got different investor reactions based on their exchange.  Agricultural Bank of China, ABC, Bank of China, BOC, China Construction Bank, CCB and Industrial and Commercial Bank, ICBC, all rose moderately in Shanghai on Tuesday, maintaining their over 20% premiums to their Hong Kong listings.  Hong Kong declines in all four reflected a disbelief in the positive impact of this change, with drops from 1% fo 2.25%. Despite the Shanghai rise, the volumes were generally half the recent average. Hong Kong volume was just as thin with the exception of world banking behemoth, ICBC, with volume higher than the average.  Volume for all four on both exchanges has trickled compared to the peak in 2015 when volumes were in the billions.

 

There have been no earnings updates for these four state-owned enterprises, with annual results generally coming around mid-April.  Last quarter reports, albeit with limited disclosure, were lackluster.  Increases in revenues were wiped out by increasing reported non-performing loans, npls, which were still reported at less than 2% with the exception of ABC which showed about 2.02%. Skeptics abound as to the truth in these percentages.

Trailing p/e’s in Hong Kong, significantly below Shanghai, would point to bargains if it weren’t for:

1. flat to slightly negative earnings after profit in the 9 months ending in September
2. Reported NPLs continuing to shoot upwards
3. Domestic economic contraction as shown by the sequential PMI data.

To name just a few reasons, assuming you accept the bank npl’s and the government data.

Currently, in terms of asset size, ICBC, CCB and ABC are the largest banks in the world, in descending order.  Including BOC, these four banks combined employ 1.6 billion, about equal to the 2013 population of Idaho. While US banks are infamous for layoffs in lean times, these SOE’s have made no layoff announcements in their filings or to the public.