China Banks listed in HK rally with inflow from Mainland funds

China Banks stocks rallied >10% for the past two weeks. Apart from looking for foreign denominated assets, Mainland funds were also attracted by the cheap valuations (P/B 0.8x) and relatively high dividend yields (> 4%) of China banking stocks prior to the rally. Shanghai-HK Stock Link has seen record inflow since commencement in 2014.

Economic data surprises on the upside

Latest data on exports and credit have beaten estimates after growth picked up from last quarter for the first time in 2014. China trade surplus widens with recovering domestic demand while export is turning positive.

Stabilisation in asset quality (slowdown in new NPLs)

Bad debts are stabilising because restructurings among industries suffering from overcapacity have improved credit quality and NPL ratio was stable in the 2nd

and 3rd quarter at 1.76% as of end-Jun 2016 and end-Sep 2016, respectively.

Credit growth remain buoyant

Based on latest data released from PBOC, China’s aggregate financing rose to record a RMB3.74tn (or USD545.0bn) in January and new Yuan loans climbed to the second highest level on record. The data eased concerns over PBoC’s recent decision to tighten liquidity while leaving interest rates unchanged.

China major banks overview

Based on our preliminary observation on, as per data collected on table 1 in the appendix on the four major China banks in the banking sector; namely ABC, BOC, CCB and ICBC;

• Consensus is forecasting the China banks to record a -2.5%/+1.4% NP growth for FY16E/FY17E.

• The average two-year FY15/16 PER and P/B of the major China Banks are 6.0x/0.9x.

• Industry dividend yield averaged out to c.4.3%.

Looking on the surface…

Among the major China banks, BOC is ahead with the strongest consensus Net Profit growth of (-6.5%/+1.4% for FY17E/FY18E) on top of dividend yield of 4.3%. Valuation-wise, ICBC offers a combination of cheap valuation (5.9x Fwd. PER vs. industry average of 6.0x) and improved earnings growth of (-1.2%/ +1.2%) for FY17E/FY18E. Dividend yield-wise, ICBC stands out with a FY17E yield of 4.44% and followed by ABC at 4.36%. P/B of major China banks have corrected from a historical high of >2x in 2011 to <1.0x now. As such, downside risk from here seems limited.

So what can we do?

For investors who may want to ride along the flow of Mainland funds into banking stocks, ICBC appears to be the most attractive with P/B at 0.88x and decent dividend yield of 4.44% while Southbound Shanghai-Hong Kong Stock Connect continues to see inflows as China investors are looking for stable companies with high dividends yield stocks such as banks.

From a technical perspective…

ICBC had formed a ‘Double-Bottom’ chart pattern after it has broken out from its neckline resistance line and is looking to convincingly close above its horizontal resistance line of HKD5.12 and HKD5.20. The underlying outlook of ICBC is positively poised, as ’Golden Crosses’ formed by all its key SMAs reaffirm the positive outlook. Besides, the bullish convergence of MACD line is also hinting further upside potential from here. Upside resistance is capped at HKD5.42 (R1)/HKD5.77 (R2)/HKD6.00 (R3), while support levels are seen at HKD5.00 (S1)/HKD4.81 (S2)/HKD4.62 (S3)

Source: Kenanga Research - 23 Feb 2017