|Shares Out. (in M):||152||P/E||0||0|
|Market Cap (in M):||284||P/FCF||0||0|
|Net Debt (in M):||-45||EBIT||0||0|
China Merchants China Direct Investments Limited (133 HK) is a closed-end investment company trading at less than 55% of NAV, while one-third of its portfolios are in publicly traded shares that have NAV carrying values that are less than a 6x P/E, resulting in a look through valuation of less than 3x P/E for a considerable part of its portfolio. In addition, its portfolio of unlisted investments also has compelling look-through investment valuations.
BTW, the current calculation of NAV is most likely a few percentage points overstated, however, given that CMCDI last reported NAV was from 10/31st, while two of its publicly listed holdings rallied 12.0% and 11.2% respectively in November. These two assets (China Merchants Bank and Industrial Bank Company) represent approximately 38% of CMCDI’s net assets and 30% of its total assets. This suggests a couple percentage point improvement from those two holdings alone, not that this dominates the thesis in any way.
Essentially, CMCDI is a way to purchase stakes in two of China’s most dominant commercial banks at a look-through price-to-earnings multiple of less than 3x, while also participating in direct private investments in China that include partnerships or strong relationships with IMAX, the National Basketball Association, Dreamworks, etc. CMCDI has successfully exited investments in cable television and broadband, has gained general partnership interests in some of their investee companies, and in general seems to have a sober and long-term focus toward its investment portfolio.
Here are some key numbers:
$14.42 HKD ($USD=$1.99)
Market cap = US$283.5M, HKD$ 2,197M ($HKD:$USD = 7.75)
Cash & equivalents = $45.2M
Total debt = none
Shares outstanding = 152.3M
NAV = US$3.404 as of 10/31/14 (HK$26.40), 54.6% P/NAV
Here is P/NAV going back ten years:
The fund’s major direct investments as of 6/30/14 (with NAV = US$3.457/share):
Financial services (50.6% of total assets):
China Merchants Bank Co., Ltd (symbol 3968 HK, 600036 CG), 14.2% of assets
Industrial Bank Co., Ltd (symbol 601166 CG), 16.9% of assets
China Credit Trust Co., Ltd (unlisted), 19.4% of assets
Media (26.2% of total assets):
China Media Creative Industry (unlisted), 3.7% of assets
NBA China, LP (unlisted), 2.3% of assets
Guangzhou Digital Media Group (unlisted), 11.6% of assets
Esurfing Media Co. (unlisted), 6.3%
Assorted manufacturing companies total 3.9% of assets, while various other (energy, agriculture, information technology, medical) total 9.8% of assets.
Cash on hand as of 6/30th was $45.2M, representing 7.0% of total assets. In addition, NAV includes $77.7M in deferred tax liabilities, so it appears that NAV fully represents potential unrealized tax liabilities.
Key portfolio holdings:
China Merchants Bank: a US$55 billion market cap company, trading at a trailing and estimated P/E of 5.6x, covered by 34 sell-side analysts. We are all familiar with the stresses in China’s banking system. However, at approximately 55% P/NAV for CMCDI, our look-through P/E multiple for this holding is 3.1x P/E.
CMB is China’s first joint-stock commercial bank, and has been listed on the Shanghai Stock Exchange since 2002 and has had its Hong Kong listing since 2006. It pays a 4.8% dividend. (Symbols 3968 HK, 600036 CG)
Industrial Bank Co: a US$38 billion market cap, trading at a trailing P/E of 4.7x and an estimated P/E of 4.9x. Our look-through adjusted P/E via CMCDI is 2.7x. Again, there is plenty of sell-side coverage on this stock, with Bloomberg listing 21 firms with reports on this stock.
IBC is also a commercial bank, with its headquarters in Fuzhou, Fujian, and has been listed since 2007. It pays a 3.7% dividend.
China Credit Trust Co: principal activities are trust management, fund management, investments and loan financing. CMCDI owns 6.94% of CCT, with a total investment cost of $50.5M. It was paid a $4.99M dividend in July for CCT’s 2013 performance—a dividend yield of 9.9% on a cost basis. This business is looking to transition from its current loan financing business model to equity investments and fund operations.
CCT is probably the most problematic of CMCDI’s holdings, given the headlines and issues with trust management vehicles in China. In July, CCT made a preliminary report with respective to a collective trust scheme that had matured without complete cash realization. This triggers an emergency handling mechanism of the trust scheme. As a result, the trust properties are being liquidated in order to complete the repayment of the remaining trust capital to the beneficiaries.
China Media Creative Industry Private Equity: 3.9% of assets. A 10 year fund in the culture and media sector—the first such sector fund approved by the government. CMCDI also has an interest in the general partner. CMCDI has invested 79.3% of its total commitment to the fund. This includes investments in IMAX China and a Shanghai Oriental Dreamworks—yes, China platforms for IMAX and for the distribution of Dreamworks films.
NBA China, LP: holds the exclusive rights to operate the NBA’s business in the greater China region. The original investment by CMCDI in 2008 was $23 million, representing a 1% preferred stake. The fund received a partial return of capital of $17.25 million in January 2013, and still holds a 1% preferred equity stake in NBA China.
Guangzhou Digital Media Group Ltd: Cable television and internet broadband access, with nearly 1.4 million cable TV users and nearly 200,000 broadband access users.
CMCDI invested $30.7 million in August 2009 for a 21% equity interest. Guangzhou Digital recorded an unaudited net profit of $9.1 million for the first half of 2014. Annualized, it appears that CMCDI’s look-through P/E (based on cost) was 8.0x P/E. On August 1st, CMCDI entered into an agreement with a listed company to sell its entire stake for $75 million. That is the value at which CMCDI is carrying this on its books, as the sale was conditional only by approval of the fund’s shareholders.
Esurfing Media: Platform services for mobile and online videos, and is one of the larger mobile video platform enterprises in China. This is a very competitive area, and Esurfing is seeking out new strategic investors to partner with. Despite this, the companies first half profits were $6.5 million, while CMCDI is valuing their original $16.1 million investment at a current carrying value of $41 milllion. This is a 3.1x P/E, or half that if adjusted for CMCDI’s current P/NAV valuation. Esurfing represents 6.3% of the fund’s total assets.
The full list and description of all of CMCDI’s investments are available via their Investor Relations site at http://www.cmcdi.com.hk/eng/ir/reports.htm. The latest Interim Report is for the period ending 6/30/2014.
Clearly, this is a sum-of-the-parts story on a closed-end fund vehicle for China. For investors seeking a China portfolio, CMCDI is a cut above in terms of transparency and disclosure. Furthermore, given the public listings of two of its dominant holdings, sophisticated investors could hedge that one-third of its portfolio represented by these commercial bank holdings, essentially locking in a lower valuation on the remaining portfolio were CMCDI to realize a further exit in these holdings.
This is not meant to be a buy or sell recommendation, and my firm frequently has both long and short positions in many of the securities mentioned.
Continued exits and realizations of investment gains of its portfolio holdings.
Recognition of this investment vehicle's discounted valuation for its already discounted holdings.
|Entry||12/07/2014 12:23 PM|
Since nobody has asked, I will: why on earth would I want exposure to Chinese banks? If this article is right, you'd want to be short them, not long: http://online.barrons.com/articles/anne-stevenson-yang-why-xi-jinpings-troubles-and-chinas-could-get-worse-1417846773
|Subject||Re: Chinese banks|
|Entry||12/07/2014 05:48 PM|
China has an enormous leverage and capital allocation problems and a recurring history of brutal financial crises since liberalization. Most western investors in China seem to be unaware of this, but if you look at the late '90s/early '00s crisis, for example, some of the loan loss/recovery rates would make '80s Florida and Texas S&L bankers blush.
I think this is a structural feature of Chinese finance, and that there is little to suggest that the current cycle will be any different - the capital allocators, at large, are still mostly the same crooked and politically conflicted names from the last crisis, and the majority of investment is still dictated by SOEs which enjoy massive financial, energy, and cash subsidies as well as a permissive legal environment which allows for accounting fraud, violation of international IP law/industrial espionage, and the arbitrage of 1st world environmental regulation. I believe the majority of Chinese enterprise is inefficient and highly levered, and over-indexed to capital intensive, cyclical activities like real estate development, basic materials, manufacturing etc. This is a bad combination.
Banking system liquidity seems to be tight, overall system-wide borrowing is very high, and contingent liabilities are enormous and are pervasive if largely unquantifiable. before you even talk about WMP or trust finance you have enormous webs of mutual credit guarantees which no one comprehends. Last I checked, the Big 4 had undrawn credit commitments of something like 10%+ of GDP. This kind of levereage and financial compleixity in what largely remains 3rd world economy by purchasing power is untenable.
China may not ve hit its upper borrowing limit yet, but it did already bump up against the cieling of global resource constraints. Chinese steel/cement/iron ore/copper global consumption share of 40-50% (i.e. 3x+ GDP share) cannot be maintained without continuous incremental leverage and we've already seen this begin to deflate. China's canny ability to recapitalize its banks by hook and crook over time makes the banks a potentially risky short, but I really do think these assets are not worth owning at any price.