China Construction Bank - Added
Recently, I went for a seminar and the speaker (Dr Tee) mentioned about 4 type of crisis that we can take advantage on. I found it to be very interesting, hopefully it can help you guys make decision as how it had helped me. The higher the level, the bigger the opportunity but the harder it is to make a decision.
- First Level – Business/ Share Crisis
- Second Level – Industry/ Commodities Crisis
- Third Level – Country Crisis
- Fourth Level – World Crisis
Around the world now, there are a few crisis going on. Like Keppel Corp and Sembcorp Marine, they belonged to the first level of crisis. Oil currently belong to the second level of crisis. Hang Seng Index dropped from 27,000 to about 20,000 within a span of 1 year, and they belonged to the third level of crisis. With this different level of crisis, we are able to sieve out the potential opportunities that is happening around us.
I began to search around, as I am not very experienced with foreign stock market, I decided to look into really big and stable company that might be undervalued. Dr Tee showed us 1 screener and he mentioned about ICBC (Industrial & Commercial Bank of China) as one of the world biggest bank and even Temasek Holdings are having a stake in them. He taught us how to use his own designed strategy to pick out good “Giant” stock that have fallen, he didn’t shared a lot but what he shared was good enough to give me another insight.
I am pretty skeptical about China business, so I paid closed attention to the steps that I took, ensuring that I tread with caution. I decided to start off with ICBC and after researching, I realized that it is indeed the world largest bank in term of capitalization and assets.
As you can see, I got the above picture from Forbes. Next, I went to double confirm if our dear government have a keen interest in them as well.
As what Dr Tee mentioned, they really does have a keen interest in this bank. Diving into some basic financial ratios, I did a comparison with a few other China bank (Which happened to be the top few biggest banks) and our local banks to see how it fared.
Looking at the EPS ( Earnings Per Share ) of these 8 banks for the past 9 years, you can see that the China banks actually fared much better than our local bank. Their trend is more predictable and stable. Ignored BNP Paribas SA, France bank, initially I added it in to do a comparison as well but I realized its financial health wasn’t as good, hence I dropped it out halfway of the competition.
Next up, EPS generally is going uptrend, hence it passed. As you can see that the operating margin are pretty much the same, so I decided to pass all as well. In terms of cash flow, I failed 4 banks because they have negative operating cash flow on certain years and it happened more than once. Its not alarming for this case because the industry is having tough period during those time as well, so if you are looking from a overall industry perceptive, Its still quite normal but however CCB (China Construction Bank) and ICBC impressed me. ICBC only had 1 year of negative operating cash flow while CCB have none! Solid!
ROE, ROA, Financial Leverage Ratio are all within my comfortable zone, so all passed the filter. Looking at the dividend yield, you will realized that the 4 banks from China are giving much higher dividends than our local banks. Some even as high as 8.4% P.A. Digging deeper into it, you will notice that in terms of price to book, the 4 banks that are from china is trading at a discounted price as compared to what they are worth.
It is like buying a $1 for the price of $0.60 or $0.70. PE ratio is of an attractive value as well, trading only at 4 plus. It means that the company is currently undervalued. Of course I understand that these 2 ratio are merely just a gauge to the value of the company, but I thought that it will be interesting to add them in as a comparison as well.
After doing my own calculation, I realized that CCB and ICBC are undervalued. If you also realized, CCB is the world 2nd biggest bank and Temasek holding have a keen interest in them as well.
To be frank, Financial industry is not my circle of competence, so I can only view and research on these companies in a very layman view.
Firstly, banks are generally quite a safe hedge if they are not overly leveraged.
Secondly, Temasek holdings have vested interest in them as well.
Thirdly, these banks are the world largest 2 bank.
Fourthly, because of how these banks work in China, even if there is a major economy crisis, I believed that the government will not and can’t afford for any of them to collapse because of the damages that it will bring along with them, they will bail them out or do whatever it is necessary to keep them floating. By the way, they are state owned as well.
However, with that being said, I believed that there might be a reason why they are trading at a huge discount as well, and I found out that George Soros, one of the legendary investor is also having bearish thoughts about the economy in China.
There are many articles online debating about whether can the biggest bank, ICBC fail when crisis hit. Not forgetting about Lehman brothers that happened a few year back, but from how I see it, unlikely.
Financial leverage is at an healthy level as compared to Lehman Brothers who’s leverage went up to 30 over to 1.
Secondly, these banks are too huge and interconnected with many other businesses and banks all around the world, if they were to crash, the damages that they can bring to the world will be devastating which is why I am still pretty comfortable with the fact that they can sail through any crisis that will be coming along. If I am not mistaken from the research, China Government owns 70% stake in ICBC and 60% in CCB.
Hence, I decided to add CCB into my portfolio due to its EPS is nicer and more uptrend as compared with ICBC.
With all these being said, please tread with care as well. Make sure you are comfortable with what you are investing in before pressing the green button.
All of the above mentioned are just for documenting and doesn’t serve as an indicator to buy. Any profit or loss that you made are entirely your own responsibilities.
