Sunday, 21 November 2021

Are China Banks Undervalued?

 If one observes the valuation metrics of China largest state banks, they are bordering on very cheap valuations- dividend yields of 7.5% to 8.5%, PB ratio <0.5, PE ratio <5.

If they were to be revalued to that of Singapore banks, one is looking at a 100% upside to current prices. 

So why are China Banks Cheap?

Two reasons, one as I have previously alluded here, people are skeptical of the Chinese Bank's financial reports and that they are fake (frauds). After months of observations, I don't see much evidence that their results are fake. In fact, it follows quite closely to the PBOC reported growth and loan levels, so if the China State Banks are indeed fraudulent, it means the country and the Chinese Communist Party are faking the results of an entire industry. This I find it is too far fetched for such a government to be generating fraud results. If this is true, then the communist party reputation will be in ruins.  

Of course, I am open to views from the online community if they can point out China is faking their financial results.

The second reason is the real estate fallout led by China Evergrande. An oversupply of housing units built, a declining population, new regulations to restrict speculative housing and an anti immigration policy, China is struggling to maintain property prices at its high prices. Developers have been relying on new sales generated in order to recycle repaying debts. Now that sales has slowed down, working capital is tight and property developers lack the cash to repay their debts on time. Empty housing units are at double digit highs.

This is resulting in loan provisions. I think the problem is real and the government have to handle this carefully. If real estate prices plunge, individual China property owners will be hit with the need to service their housing loans for a generation or locals will lose their cash savings in financial notes issued by property developers because of asset impairments by companies. China has too many apartment units now for its 1.4 billion population.

In my view, the communist party will speed up the movement of rural people to the cities as there is spare capacity, the PBOC will lower financing rates and property companies will be forced to deleverage at the expense of their own owner's wealth. This is China we are talking about and President Xi will force the chairmen to be 'personal guarantors' to their company's local issued debts even though it is corporately not possible or legal. This will avert a banking crisis.

My View

I think the issue of China State Bank's financial results being fake has been taken out of the equation and I am confident in building up to 10% in portfolio on them. Besides ICBC and CCB, BOC and ABC are entities I am looking at. BOC has a larger segment in the international markets as compared to the other 3.

I am banking that the China Communist Party are not frauds.

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