Hello Voornaam,
Welcome to another Ingham Analytics weekly research summary, highlighting pertinent local and international financial newsflow, recent notes that we have published and what has been among some of the most read notes in the past few weeks or months.
More new subscribers became part of our community this past week, we welcome you all. We recently introduced an introductory special offer of either R105 monthly or R1100 per annum, both including VAT.
There were two stock exchange holidays this week. On Friday 3 July, all US markets were shut in celebration of 4th of July independence from Britain whilst on Wednesday, 1 July the Hong Kong markets were closed for Special Administrative Region.
Establishment Day, effectively commemorating independence from...Britain.
Speaking of Hong Kong, we though it appropriate to add an Asia-Pacific flavour to out weekly analysis. For investors looking for opportunity beyond the goldfish bowl of the JSE we believe that Asia-Pacific should be on the radar. Prosus reported results this week and, through Hong Kong listed Tencent, business focused on China is the revenue, earnings and valuation driver.
Hong Kong has a thriving financial services sector. Keeping it that way is important - for Hong Kong and China. Hong Kong has become increasingly reliant on China - in 1997, Hong Kong generated 18% of China's GDP, in 2019 it was 3% which speaks to the burgeoning industrial and technological power of China.
Interestingly, in initial public offerings more money was raised in Hong Kong than in New York last year, largely through mainland Chinese firms. The JD.com secondary offering this past month, raising $4bn, was facilitated through Chinese finance houses - worth noting is that UBS is now the only western bank in the top ten, all the others are Chinese. Chinese firms made up twelve of the top twenty bookrunners for Chinese dollar bond deals so far last year, up from three ten years ago. They arranged 60% of the funds raised last year, ahead of international firms. The buyers of the deals are increasingly wealthy investors in China and the Asia Pacific region.
The transfer of sovereignty of Hong Kong to mainland China twenty-three years ago has largely left the territory much as it was during British rule, with a degree of autonomy and freedom unheard of on the mainland. Protests this past year has left the Chinese authorities uneasy, resulting in China's legislature approved this week a sweeping new law aimed at quashing threats to national security in Hong Kong. The Basic law written up by the British and agreed with the Chinese requires a national security law to be enacted by the Hong Kong legislature, but one has never been drafted nor enacted. The issue is contentious. Big business and tycoons in Hong Kong are largely in favour in the interests of stability.
Despite the new security legislation, the Basic Law is unaltered and remains in place for twenty-seven more years.
The post COVID-19 world may even reinforce the attraction of Asia-Pacific - which would include not just Hong Kong but also Singapore, Taiwan and even Australia and New Zealand which are heavily intertwined with other Asian countries. Stocks such as Baidu, Alibaba, JD.com and iQIYI can be bought on a US exchange and all report results in US GAAP to the SEC.
Whilst we are on record as being wary of the big four JSE listed bank stocks we nonetheless believe that Australian banking stocks listed on the ASX-200 in Sydney are worth a look at. All have fallen in price since the beginning of March. Whilst profitability is negatively affected because of government responses to COVID-19, we see valuations, rebased to reflect the new reality, starting to look appealing for new money. Commonwealth Bank has the strongest metrics. We expect elevated impairment charges this year off a very low level, but all the banks remain profitable and have the balance sheet capacity to withstand the fallout.
We think both Australia and New Zealand will come out of the COVID-19 downturn in better shape than some countries. Australia will be shielded somewhat by buoyant demand out of China for its minerals, not least iron ore. Our recent mining notes allude to this theme. Similarly, New Zealand farmers and milk processors experience ongoing demand for their produce in China. Both countries went into the crisis with minimal national debt and have the capacity to lean against the economic headwinds.
On Thursday, despite media anguish over the security law, investors in Hong Kong voted with their wallets, sending the Hang Seng index up 2.85% on Thursday and a further 1% on Friday.
All this relates to confidence. Confidence is hard won and easily lost. Capitec is an example of a management team that continues to build and reinforce confidence in their business - all the more important in these fragile economic times. The basis of a banking system is confidence.
Our note entitled "Tito's shocker less of a shocker for Capitec" explained why we think Capitec stands out from the big four banks in the context of Finance Minister Tito Mboweni's supplementary budget. On Friday, Capitec issued a trading statement together with up-to-date banking data for 31 May. Their systems are such that the business could almost report in real time. The timeliness and quality of disclosure that Capitec is known for is key to depositor, borrower and shareholder confidence.
The key features of what Capitec disclosed are as follows with metrics on 31 May compared where relevant to 29 February:
- Tier 1 capital adequacy ratio 28.5% (29.5%) - this is double that of the big four- Qualifying regulatory capital of R24.5bn is 2.8x (2.6x) the required Basel regulatory minimum- Net stable funding ratio 211.1% (195.6%) - double that of the 100% regulatory minimum- Basel 3 liquidity coverage ratio 1790% (1690%) - minimum 100% (before Prudential Authority relaxation)- Provision for credit impairments R17 026m (R13 740m) - a 24% or R3 286m increase- Credit impairment charge R6bn - this compares with our estimate of R2.5bn for the interim- Net loans and advances R56 531m (R62 043m) - a 9% reduction due to a lower gross and higher impairments- Shareholders' equity R25.0bn (R25.5bn) - passing of the final dividend will have saved R1.5bn- Net loans and advances 2.3x shareholders equity (2.4x)- Expected credit loss in retail 26.2% (20.5%) - calculated in terms of IFRS 9, which has a forward-looking element- Average deposit balance is higher - we estimate that deposits from customers reflected under total liabilities will have exceeded R100bn
We have been hesitant to go public with earnings estimates for any of the banks as it is somewhat of a moving target and a function of the effectiveness of provisioning, customer behaviour, defaults, and volume of business.
However, given what Capitec as just disclosed we now think that a 50% reduction in earnings is possible for the year ended February 2021, reducing annual EPS from 5428 cents per share to 2702 cents per share. This would imply 483 cents per share in EPS for the first six months (down 81%) and 2219 cents per share in EPS for the second half (down 23%).
F2022 and F2023 earnings are at best a guesstimate for now. Our provision modelling indicates 4748 cents per share and 4962 cents per share, respectively. If that is the scenario then it means earnings in F2023 will be lower than F2020 by about 10%.
No final dividend was declared for the year ended February and we also think it possible that no interim dividend will be declared by Capitec for the six months ended August.
This week we issued three notes, "iQIYI - a s(c) or (t)reaming deal for Tencent?", an updated note on Anglo American entitled "Cold on coal", and "Is the Reserve Bank Father Christmas?"
Thank you all for visiting us.
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| Latest research notes published this week |
| Financial plumbing is one the Ingham Analytics core competencies and this latest note on the South African Reserve Bank, entitled Is the Reserve Bank Father Christmas?... |
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| | Ingham Analytics has issued an updated note on Anglo American entitled Cold on coal which as the name suggest takes a look at the coal assets... |
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| In the curiously entitled Trader iQIYI - a s(c) or (t)reaming deal for Tencent? Ingham Analytics say speculation that Tencent is in talks with Baidu to... |
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| | Of the listed JSE banks, which would you regard as having a lower risk profile, ABSA or Capitec? The first of the two is one of... |
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| In Ingham Analytics latest note entitled BA900 isnt a British Airways service to Joburg the latest South African Reserve Bank statistics are succinctly analysed. If you... |
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