Mechelany Advisors' INVESTMENT IDEAS are the result of our analytical process. We may recommend to BUY or SELL securities or asset class and as always we put our head on the block. We may or may not implement them in our MODEL PORTFOLIO depending on the global risk profile of the portfolio at the time of the recommendation.
Joe BIDEN may hate China and US investors divest from Hong Kong-listed shares..
That is fine…
We actually like that because it provides us with phenomenal opportunities and extremely attractive valuations.
A Strong Economy and Liquidity
Contrary to the USA where Jerome Powell is making a major policy mistake, China’s economy is prudently managed.
The People’ Bank of China is pro-active. despite strong economic numbers for the second quarter of 2021, it just eased monetary policy and added substantial liquidity into the market yesterday, sending the HSCEI Index straight back above 10’000.
The Chinese economy advanced 7.9 percent year-on-year in Q2 of 2021, after a record 18.3 percent growth in Q1 due to the base effect of the 2020 COVID slowdown. The figure was slightly under the consensus of 8 percent as a slowdown in factory activity, higher raw material costs, and new COVID-19 outbreaks in some regions weighed on the recovery.
However, retail sales were up 12.1 % year on year and exports 32 %, way above the consensus expectations of 23 %, testifying of the strength of the momentum.
Despite these strong numbers, the PBOC is taking a pro-active view, adding liquidity to avoid a sharp slowdown in the second half of the year.
It lowered the banks Reserve Requirement Ratio from 12.5 to 12 % freeing about RMB 1 trillion of new lending capacity.
It is the first time the PBOC reduces the RRR since June 2020.
Banks are major beneficiaries
Banks are a call on any economy. In good times, loan demand increases, default rates decrease and banks’ profits rise sharply.
This is particularly true when, as is the case in China, the yield curve is positively sloppy, i.e. when banks borrow cheaply short term to lend more expensively in the long term.
China’s Yield curve is clearly the most positively sloped in the world today.
Chinese banks’ earnings have been consistently kept under pressure by the demanding requirements of the PBOC in terms of Non-Performing Loan provisioning.
Chinese banks provision between 150 and 200 % of their NPL book, whereas their US or British counterparts only provision 70 to 80 % of their NPLs.
The current strong growth of the Chinese economy is a boon for the banking sector.
Chinese Banks are EXTREMELY CHEAP
In fact they are cheaper than we have ever seen them trading at 3.5x earnings, paying 8 % dividends or more on average, with earning yields above 22 %.
US investors may be selling them, but banks are banks and the Chinese economy is the Chinese economy and these valuations are a REAL STEAL.
Where do you get 8 % annual dividends nowadays ? with a State quasi- guarantee and valuations that are so cheap that the downside is extremely limited while the upside considerable ?
Let’s look at some of them in details
BUY Bank of China 3988 HK @ 2.78
Bank of China H-shares are trading BELOW where they traded 14 years ago while its revenue flow has been multiplied by 5x
The bank is trading on 3.4x prospective earnings while paying an 8.65 % divided yield gross. Take 10 % withholding tax and that leaves a net 7.75 % yield to investors
Historically, the PE and Price to book ratios have never been that low
Bank of China generates 200 Billion of Yuan ( US$31 Billion ) of profits per annum. That represents a 23.8% return every year ( earnings yield ) when brought back to the current market capitalisation
BUY Agricultural Bank of China 1288 HK @ 2.68
BUY Bank of Communication 3328 HK @ 4.64
BUY Minsheng Bank 1988 HK @ 3.74
The current valuations open a fantastic opportunity to build. portfolio of high yielding Chinese baks with close to 8 % net annual income and significant upside potential.
We are adding them to our MODEL PORTFOLIO and will issue a leveraged certificate to deliver 15 % annual income to investors.
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