Rehab is a Sobering Experience

Date: Tue, 11 Jan 2011 12:09:56 +0800
Subject: Rehab is a sobering experience


“It’s so weird that I went to rehab. I always said that I would die before I went to rehab. But I thought, ‘I’m going to stay here tonight.’ And I stayed there for a month. It was great.”        - Lindsay Lohan

Unlike Lindsay Lohan, HSBC (5 HK, Buy) is out of (financial) rehab and isn’t going back, John Wadle writes in his latest thought piece. Founded in 1865 near where I am sitting and based on “Scottish banking principles,” HSBC today has the same enterprise value of Citigroup at US$200 bn but represents much greater value. With a much lower risk profile, HSBC is less reliant on wholesale funding and has only $10 bn of debt vs. Citi’s $50 bn. Other reasons we like HSBC is you actually get a dividend, yielding 4.3% now and we see the dividend rising. HSBC is also seeing the following:

  • Margin recovery and fee income rebound
  • Reduced risk from US operations
  • US$15 bn of unrealized gains on China investments, or 8% of current market cap

John has compared HSBC to the top 50 global banks and top 50 emerging market banks and shows the bank trades at 5.9X historical pre-provision income – below the global average of 7X and emerging market average of 9.4X. He believes the market will re-rate the stock to a PE of 11X (from 9X now) as the bank starts to show operational efficiency and incremental growth in PPOP. He raises his target price to $100 based on a detailed SOTP valuation. Note attached.


Consumer stocks were the rage last year but many feel they are expensive: Want Want (151 HK) trades at 32X PE, as does Tingyi (322 HK). But imagine the valuations these companies could reach if they could get their hands on North Korea’s “Mind-Expanding Liquid Brain Juice.” According to the official and ultra secretive N. Korean Central News Agency, this new drink made of 60 types of “microelements” extracted from 30 types of plants “protects skin from wrinkles and black spots and causes brain cells to multiply.” Forget grass jelly drink and hawthorne juice, two old-time favs in China, or Coolpisin Korea (see photo – note: I wouldn’t drink this), Mind-Expanding Liquid Brain Juice could be the next big thing. Unfortunately, there are no details on when NK will release it to the market.


Where goes Europe from here? The FT today is saying a bailout of Portugal is “inevitable,” as sovereign 5 year CDS spreads for Ireland, Greece and Portugal hit records over night. Portugal’s response, “We are not Ireland,” just doesn’t seem enough to me. The Euro is vulnerable until the German taxpayer steps up and writes another check. I can’t wait to see what the cover of national weekly news magazines Der Spiegel or Focus will put on their covers this time. Magazine covers have been, naturally, a good reflection of Germany’s national mood:



You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA
Mirae Asset Securities: Risk is to the Upside

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