Your Financial Destiny

From: Derek Hillen <>
To: Derek Hillen <>

Date: Wed, 18 May 2011 14:33:03 +0800
Subject: Your financial destiny

 “Oh gold! I still prefer thee unto paper, which makes bank credit like a bark of vapor.”         – Lord Byron

They say no man’s credit is as good as his money and with that in mind we took two senior analysts from Moody’s around to see clients in HK this week and talk about the China banking sector from a credit perspective.

Meetings were well attended as people were interested to hear a different perspective. The Moody’s crew naturally focus on the downside only (and individual temperaments tended to reflect that). The gist of their view is they see huge imbalances in the banking system but are not worried about a “day of reckoning” until 5 – 10 years from now.

Most questions centered around NPLs which they admitted were at an “unsustainably low levels” of 1% and would rise. They saw this happening 2H next year. Total aggregate loans to LGFVs as reported by the CBRC are greater than those reported in aggregate by the banks – some banks are under-reporting.

Moody’s believe this to be about 20% of total loans – double what the banks report. Moody’s says there is more risk to loans made to central and western China, where incomes are lower and cash flow more suspect, than those made in coastal areas. Credit growth in China, unlike everywhere else, is counter-cyclical: Beijing turns the tap on and off and we should expect to see credit growth slow as the economy improves.

However, the outlook for the China banks is one of increased risks:

-          We are approaching a turn in the asset quality cycle

-          NPLs will rise from here

-          A potential change in leadership at the CBRC raises uncertainty


Moody’s also showed us the results of their stress tests of the listed banks in China, again from a credit perspective. They found CCB (939 HK) to be the safest, with ICBC (1398 HK) a close second. At the other end of the scale were China Citic Bank (998 HK) and Shenzhen Development Bank (000001 CH) with the least cushion if anything went wrong.


One more thing that was discussed; how will we know exactly what NPLs are? You won’t. A rose may be a rose by any other name but an NPL looks and smells entirely different. They are what you choose to call them and the banks in China, like we have seen in Korea and Taiwan in the past, may not be as transparent here when faced with a growing pile of these things. Caveat emptor. We remain Underweight the China banks sector.


Much like the crew mentioned above, markets are moody and defensive. Economic data so far this month out of the US has disappointed (Case-Shiller, NY manufacturing index, IP, housing starts, etc.),  unlike earlier in the year which mostly brought good news. Europe has some big issues to deal with from DSK jumping on chambermaids in New York to kicking the can as far down the dirt road in Greece as the gods will allow.

Might it be time to look at some more defensive names? CLP Holdings (2 HK) came out with decent Q1 results and we maintain our Buy rating on the stock. What I like about this story is the chart has been totally flat since October. The stock boasts a 4% dividend yield with the next cash dividend payable in less than a month, HK$0.52 and another forecast for mid-September. Potential catalysts are an IPO of assets in India or Australia.

With gearing nearing 60% analyst, Ricky Ng, believes any other acquisition they make would trigger a spin off of those assets. Trading at 14X PE with 14% earnings growth next year, the stock is not expensive given dividend support and potential catalysts. Note attached.


Is Religion Your Financial Destiny? That contentious question was posed in the New York Times where they looked at levels of affluence around the United States based on religion as opposed to the normal geography or ethnic group. The most affluent of the major religions? Reform Judaism with Hindus coming in a close second. Pentecostals and Jehovah’s Witnesses were at the bottom proving, I guess, that enthusiasm is no substitute for wisdom… Chart below.


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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