Thursday, May 17, 2007

A Review of My Previous Prediction on Chinese Banks Performance

On 6 Feb 2007 I’ve written an article “Chinese Banks: A Non-Traditional Approach to Predicting Their Performance” in which I described how I rate 3 Chinese banks' future performance based on their historical non performing loan (NPL) problems and my argument is simply “bad habit dies hard” especially in China where management appointment is more based on relationship (though it's changing).

At that moment while all analysts were promoting ICBC (saying ICBC is the largest bank in China, ecomomies of scales, with the most advanced IT system, etc) and BOC (saying BOC is the only Chinese bank with international presence), I analyzed them using a totally non-traditional approach and rated China Construction Bank (939.HK) as the best performer versus ICBC (1398.HK) and Bank of China (3988.HK)

Today I’ve revisited their relative performance both from the date of my article and also their recovery capability after the Feb market correction.

The following charts will speak for themselves

From the date of my article on 6 Feb (click for a clearer image)


From the early March market correction (click for a clearer image)


In my last article I said:

“..We also noticed that CCB was also the first state owned bank listed overseas. This is by no means a coincident. The Chinese leaders have to ensure the success of the first listed so as to set a stage for the others, as such it is reasonable to assume that the leaders should have selected the best bank to be the pioneer. Who else would have better insider information than the Chinese leaders? It would be your decision to bet with the Chinese leaders' choice or analysts' DCF models…”

In general I do not believe in DCF models, I think even the CEOs CFOs themselves are unable to tell you what are their firms' grow rates for initial years/terminal growth rates, nor could anyone predict the interest rates for next 10 years (or whatever horizon in the model), while DCF analysis is very sensitive to those assumptions how valuable is this time-value based modelling of a firm's fair price? I would rather use P/E comparables if I want to have a gut feel of a firm's value.

In my analysis of the Chinese banks, my approach is totally unscientific. While it's a common belief that historical data cannot predict future performance, that may not be completely true for China and I would continue to give my vote of confidence to our great Chinese leaders than forecasts based on DCF models!

Here is my previous story again in case you are interested.


Disclosure: I own CCB (0939.HK) at the time of writing this article.

6 Comments:

Paul Ho Kang Sang said...

Hi, your blog provides a lot of insights into China and in general Economics.

I have linked my blog www.paulhokangsang.blogspot.com to yours

If you have any objection, please let me know, I will remove the link. Meanwhile if you would like to link your blog to mine, I will be very honoured.

William said...

What do you think about Lenovo? Cheers

Zhong Siwei 鍾思維 said...

I am not convinced that Lenovo can win the US market and make it a meaningful contributor. For corporate market, they have a very steep uphill battle to fight with Dell and HP, for home market, I don't think its design is attractive enough to win user's mindset.

I foresee it will be another TCL story.

Anonymous said...

Your blog is excellent, the best I have seen concerning China stocks. Thank you for the information!

I have the impression that there are no China banks listed as ADR. If this is true, is this because the banks are afraid of US financial reporting requirements? If so, should that make me nervous, because I own a lot of FXI, and FXI is currently about 40% in the financial sector?

Thanks,

Michael K.

Zhong Siwei 鍾思維 said...

China Life was the last SOE (state owned enterprise) listed in US after it ran into a class action for a disclosure issue right after listing.

disclosure, transparency, management, fraud are all built into the risk premium for investing in Chinese stocks, there is no free lunch after all.

However, if you can understand the amount of effort the Chinese government has spent in last few years in taking those banks public with astronomical amount of cash injection, removal of significant amount of bad debts from its book and parked into stated owned asset management company who in turn sold the package to people like Morgan Stanley and Goldman for (unoffcial) exchange of underwriting rights of Chinese IPOs, etc etc.. the road is one way and there is definitely no point of return.

The system is far from perfect and is still evolving, but there is the Chinese government (together with 1000b US$ reserve)backing those listed firms, I would say the risk is not that high.

In any capital market development, the path must be equity, debt, securitization of debt.

China is still at step one (equity), the huge market for corporate debt is still at a very early stage of development which is an essential 2nd step for firms to have a more balanced sources of funding. So Chinese government will do whatever it takes to ensure a health equity market.

Michael K. said...

Siwei,

Thank you for your response. Since there are numerous non-bank SOE's listed in the US, I suppose there are special problems associated with the financial sector that make it difficult for China bank SOEs to list.

As you know, Western bloggers tend to be negative on China banks and some predict a collapse of the banking system. But I tend to agree with you that the Chinese govt should be able to pull the banks through with a combination of better practices and additional financial support if needed.