Spring is Sprung

Date: Tue, 26 Apr 2011 15:20:37 +0800
Subject: Spring is sprung


“Da grass is riz

I wonder where da boidy iz”   - Anonymous (thankfully)

I like Singapore. I know it is very rule bound, particularly about public bathroom etiquette, and I can’t quite shake the feeling I am being watched – but everyone is so nice.

I spent a couple of days there last week with our banks team marketing our views on the China banks sector: neutral now and turning negative. Aside from appreciating what a nice place Singapore is – after coughing once I was startled by the taxi driver asking me if I wanted a “coughing sweet.”

Clients in general seem underweight the sector but concerned valuations are compelling and maybe they should buy more. Our view is that Q1 results will be strong but you want to be selling the rally. Margins are artificial with deposit rates unsustainably low and provisions are not real either due to off-balance sheet loans. This was the area of most interest.

Chinese banks grew off-B/S risks by RMB 1.9 tn over the past 2 years to RMB 5.5 tn; equal to 19% of all loans. China Citic Bank (998 HK) has the highest exposure at 49% of loans followed by China Minsheng Bank (1988 HK) with 38%. Chonqing Rural (3618 HK) and ICBC (1398 HK) had the least exposure. These loans are generally LCs, letters of guarantees (like mono-line insurance) and bankers acceptances. They require a client deposit which boosts LDRs artificially and fee income as well.

The other area of danger is the flood of paper about to hit the market. John Wadle figures China banks have to raise about US$30 bn within the next year. That is a lot of banking fees which one might be cynical in wondering if this would keep investment banks from over emphasizing this threat to sector share price performance.


I find your lack of faith disturbing…

Speaking of investment banking, we have a modest effort up in Korea who have been responsible for some fantastic deals this year: Hyundai Wia (011210 KS), up 136% and Iljin Materials (020150 KS), up 116%. Today analyst Hak-Moo Lee initiates research coverage on Iljin Materials with a Buy recommendation and target price of KRW 45,000.

Positioned nicely in the rechargeable battery material sector (elecfoil), the company is expanding capacity massively and is set to become the largest elecfoil maker in the world, surpassing main competitor Furukawa which is losing market share after the devastating Japan earthquake. Hak-Moo is forecasting the market to grow 50-fold by 2020 and for Iljin to post 44% EPS CAGR over the next 5-years. Now at 21X on our numbers, he believes the stock should trade to 25X, or the same PE as Furukawa. Report attached.


Future Kiwi Hunter

One common complaint amongst Singaporeans on our trip was how much holiday we get in HK, “You get 14 days and we get 10.” Everyone seems to have memorized this for some reason. My response, “We need it.” Anyway, weather on Easter Sunday here was stunning – perfect for foraging around cobra-infested hedges looking for Easter eggs. Where the heck did that idea originally come from? Germany. The fertility of rabbits is well known and females can get be pregnant with two litters at once; so they breed like bunnies, I guess.

Birds lay eggs in the spring and all this has to do with renewal. Add in a few warehouses full of unwanted chocolate when some guy had a bright idea of disposing it. That is all well and fine in the N. Hemisphere where the weather is getting better but not down south in New Zealand where they are staring straight at winter coming.

Never to be cowed by peer pressure (last year the national carrier, Air NZ, actually ran an advertising campaign emphasizing cheap travel with the catchy phrase, “FARES LOWER THAN YOUR GRANNY’S BOOBS!”) Each year instead of an Easter egg hunt kiwis hold an “Easter bunny hunt,” heading into the hills with powerful firearms, dynamite and lots of beer. While some of us were risking snakebite looking for chocolate eggs New Zealanders blew away 23,000 bunnies. Book your tickets ahead of time as the hunt only lasts 24 hours!


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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