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Global stocks Shares

Applied Materials Inc poised for Remarkable Growth in Fiscal 2021

 It has been observed that Applied Materials and its peers have all called for strong growth in 2021, driven by record capital expenditure levels at TSMC (Taiwan Semiconductor Manufacturing Company) and Intel as well as solid memory spending.

Third-quarter sales rose 41% year over year to $6.2 billion, led by a 53% increase in the semiconductor systems group (SSG) revenue. Within SSG, equipment sales to logic and foundry customers grew 75% year over year. This strength has been attributed to investments supporting leading-edge process technologies at the likes of TSMC as well as lagging-edge processes that support end markets such as automotive and Internet of Things. Memory equipment sales also grew 26% year over year. Foundry and logic are expected to be the biggest growth drivers for Applied’s SSG sales in 2021.

Financial Strength:

The last price for Applied Materials Inc. was USD 129.20, whereas its fair value has been estimated to be USD 131. Besides, PE ratio of Applied during 2020 was 14.2, making it undervalued with reference to its sector. This suggests that there is room for growth of the Applied Materials Inc. 

Management expects Applied’s fourth-quarter revenue to be up by 34% year over year at the midpoint, with momentum persisting into 2022. Also, the sales of Applied are expected to be $6.3 billion at the midpoint, with SSG at $4.6 billion, services at $1.3 billion, and display at $400 million.

Quarterly services revenue was nearly $1.3 billion and was up 24% year over year. In recent years, services and part sales from long-term service agreements have grown from 40% to 87% of total service revenue. 

Company Profile:

Applied Materials is one of the world’s largest suppliers of semiconductor manufacturing equipment, providing materials engineering solutions to help make nearly every chip in the world. The firm’s systems are used in nearly every major process step with the exception of lithography. Key tools include those for chemical and physical vapor deposition, etching, chemical mechanical polishing, wafer- and reticle-inspection, critical dimension measurement, and defect-inspection scanning electron microscopes.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Increase in Winnebago Industries’ dividend by 50%

 customized specialty vehicles, and parts and services. Winnebago Industries’ strong brand equity in recreational vehicles and its balance sheet would allow the firm to persevere through economic turmoil. 

The top three motor home manufacturers (Thor, Forest River, and Winnebago) make up about 80% of the North American motor home market. Winnebago has reinvented itself under CEO Mike Happe with the November 2016 acquisition of high-end towable maker Grand Design and sees itself as a leading outdoor lifestyle firm rather than just a maker of RVs. Acquisitions in the $700 billion-plus outdoor activity market also play a role. Over 60% of U.S. households’ camp at least occasionally and 12% camp more than three times a year. Millennial and Gen X campers are 81% of new U.S. campers, and 82% of new campers since the pandemic have children, so Winnebago has plenty of runway with younger consumers if it executes right.

Financial Strength:

The balance sheet lacks the massive legacy costs that burden some other manufacturers because Winnebago’s workforce is not unionized. Winnebago’s untapped $192.5 million credit line coupled with $405.8 million of cash at the end of the third quarter of fiscal 2021 would get the firm through nearly any challenge. 

A 9% increase in the dividend in summer 2020, despite the pandemic at the time, is a good sign of financial health, as is a 50% increase announced in August 2021.Winnebago’s balance sheet had been free of long-term debt since the mid-1990s. Net debt/adjusted EBITDA was 1.7 times at the end of fiscal 2020. Winnebago has no significant pension obligations and stopped paying retiree healthcare in 2017. Revenue was about $2.35 billion in fiscal 2020.

Bulls Say:

The Grand Design acquisition materially raised Winnebago’s operating margin, and Newmar could do

the same.

The company’s strong balance sheet provides financial strength and flexibility to withstand cyclical downturns.

Because RV consumers are relatively affluent, rising gas prices would probably not hinder a consumer’s ability to purchase a motor home. A 2016 study by travel consulting firm PKF Consulting found that for a family of four, gas prices would have to exceed $12 a gallon to make RV travel more expensive than other forms of travel.

Company Profile:

Winnebago Industries manufactures Class A, B, and C motor homes along with towables, customized specialty vehicles, and parts and services. With headquarters in Eden Prairie, Minnesota, Winnebago has been producing recreational vehicles since 1958. Class A motor homes account for 31% of motorized unit sales, Class B about 41%, and Class C the rest.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Walmart’s Second Quarter Suggests Continued Strength Despite Normalization

 to last year’s pandemic-sparked sales surge (5.2% comparable growth for U.S. namesake stores, 14.5% two-year stack). While Walmart beat our expectations, we attribute the outperformance to pandemic-related volatility, so our long-term targets of lowsingle- digit percentage top-line growth and mid-single-digit adjusted operating margins are intact. The top-line outperformance extended across Walmart’s segments (5.2% and 7.7% comparable growth, excluding fuel, at Walmart U.S. and Sam’s Club, versus our respective 2.6% and 4.3% forecasts, and $23.0 billion in international revenue against our $22.3 billion mark). 

Recovery in pandemic-affected categories like auto care and party augmented another strong quarter in grocery, where Walmart gained share domestically on mid-single-digit comparable growth. Cost leverage contributed to a 5.3% adjusted operating margin, up nearly 80 basis points. Management lifted full-year guidance, now calling for $6.20 to $6.35 in adjusted diluted EPS, up from around $6.03 (which was near our prior estimate, which should rise toward the top of the new range).

Walmart’s advertising business (Walmart Connect) was particularly strong, with U.S. sales nearly doubling and the

number of active advertisers up more than 170%. Although e-commerce sales consolidated gains (up 6% in the U.S. for the quarter, and 103% on a two-year stacked basis), we believe Walmart is still in the earlier stages of capitalizing on its ancillary online revenue potential

Company Profile 

America’s largest retailer by sales, Walmart operated over 11,400 stores under 54 banners at the end of fiscal 2021, selling a variety of general merchandise and grocery items. Its home market accounted for 78% of sales in fiscal 2021, with Mexico and Central America (6%) and Canada (4%) its largest external markets. In the United States, around 56% of sales come from grocery, 32% from general merchandise, and 10% from health and wellness items. The company operates several e-commerce properties apart from its eponymous site, including Flipkart and shoes.com (it also owns a roughly 10% stake in Chinese online retailer JD.com). Combined, e-commerce accounted for about 12% of fiscal 2021 sales.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Anthony’s Strong Sales Demand to Unwind as Restrictions Ease

 driven by the competitively advantaged Australian business which benefits from industry tailwinds. ARB provides automotive accessories for four-wheel-drive, or 4WD, vehicles–namely, 4WD utility vehicles, and medium and large sport utility vehicles, or SUVs. The vast majority of earnings are generated in Australia, where sales of 4WD vehicles have grown strongly in recent years. While headline new vehicle sales in Australia have remained stagnant over the five years to fiscal 2019, sales for vehicles in ARB’s niche target market have increased at a CAGR of around 6% over the same time period. 

We estimate this subsegment eclipsed 50% of new vehicles sales in fiscal 2020, up from around 35% of new vehicle sales in fiscal 2014.The firm’s network of store fronts defends ARB’s premium positioning, ensuring end-to-end reliability from manufacturing to fitting. We expect ARB will also need to continue to invest heavily in its brands and its narrow moat by maintaining a high level of expenditure on marketing, research and development. This expenditure is necessary to maintain the firm’s brand equity, and differentiate its products from lower-end competitors, allowing ARB to remain at the forefront of product innovation and quality, improving brand awareness and ensuring a healthy pipeline of new product releases. 

Financial Strength 

ARB’s balance sheet is in pristine condition. At June 30, 2021, the company had no debt and a net cash position of AUD 85 million. This is despite major investment in the Thailand and Victoria warehouses and continued new store rollouts. The firm’s major funding requirements are store rollouts, international expansion, and working capital in line with growing sales. We anticipate the firm will maintain expenditure on marketing and R&D at around 5% for the foreseeable future. We are confident the firm can maintain a dividend payout ratio of around 50% without stretching its balance sheet or compromising its expansion plans.

Profit before tax near-doubled to AUD 150 million as restrictions on international travel and government stimulus increased domestic driving holidays–both in Australia and in overseas markets, boosting demand for ARB products. After falling 14% in fiscal 2020, Australian new car sales have bounced back quickly, up 10% in fiscal 2021. The rebound is more pronounced for 4WD utilities and SUVs (ARB’s primary target market), which grew by 11% in fiscal 2021 after falling just 7% in fiscal 2020. The company declared a final dividend of AUD 39 cents per share, bringing full-year dividends to AUD 68 cents per share, fully franked. ARB maintains a dividend payout ratio of about 50%, and with no debt, we anticipate the firm can maintain this payout ratio without stretching its pristine balance sheet or compromising expansion plans.

Bulls Say’s 

  • Online competition is not a significant threat to ARB’s business. Products usually require professional fitting (often in ARB stores), and the often heavy and bulky accessories can make delivery cost prohibitive.
  • The 4WD accessories industry has few barriers to entry, and with products such as bull bars essentially just fabricated steel, ARB’s products are somewhat replicable.
  • ARB’s range of vehicle accessories have established significant brand strength, underpinning its narrow economic moat, allowing the firm to enjoy pricing power and high returns on invested capital.

Company Profile 

ARB Corporation designs, manufactures, and distributes four-wheel-drive and light commercial vehicle accessories. The firm has carved a niche with aftermarket accessories including bull bars, suspension systems, differentials, and lighting. ARB operates manufacturing plants in Australia and Thailand; sales and distribution centres across several countries. The Australian division, which generates the vast majority of group earnings, distributes through the ARB store network, ARB stockists, new vehicle dealers, and fleet operators.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Bendigo & Adelaide Bank (ASX: BEN) Updates

  • Strong franchise model with funding predominately by way of deposits.
  • Expected low levels of impairment charges (especially as a low interest rate environment helps customers and arrears).
  • Continued strong cost discipline, improving efficiency and boosting performance. 
  • Advanced accreditation in progress (which may improve ROE).
  • Potential pressure on net interest margins as competition intensifies, with major banks in a low interest rate environment.
  • Leading in terms of customer satisfaction and net promoter metrics, which are increasingly key in a period where trust is paramount.

Key Risks

  • Intense competition for loan growth, combined with further discounting.
  • Volatility in Home safe earnings.
  • Increase in bad and doubtful debts or increase in provisioning. We continue to monitor the asset quality of Rural Bank and Great Southern portfolios.
  • Funding pressure for deposits and wholesale funding.

FY21 Results Summary

Relative to the PCP: Statutory net profit of $524.0m was up +172%.  Cash earnings after tax of $457.2m, was up +51.5%.  Net interest margin of 2.26%, was down 7 bps. Total income on a cash basis of $1,702.5m, was up +4.5%, with BEN exceeding system lending growth. Bad and doubtful debts were $18.0m, which equates to 2bps of gross loans. 

Excluding the provision release of $19.4m announced on 5 August 2021, bad and doubtful debts equate to 5bps of gross loans. Operating expenses of $1,027.4m were up +0.6% over the PCP, on increased investment in transformation. Excluding transformation, operating costs were -2.5% lower. BEN’s cost to income ratio of 60.3% was down 240bps relative to the PCP, but remains above BEN’s medium target of a sustainable cost to income ratio 50%. CET 1 of 9.57% was up 32 bps, and remains above APRA’s ‘unquestionably strong’ benchmark.  Cash earnings per share were 85.6 cents per share (cps), up +43.4%.

 The Board declared a final dividend of 26.5cps which brings the total fully franked dividend of 50.0 cps for the full year, with DRP discount of 1.5%. The dividend payment equates to 58.4% of cash earnings.  BEN saw growth in market share in lending (up to 2.41% from 2.24% in FY20) and deposits with total lending of $72.2bn, up +10.6%, driven by residential lending (at a rate of 2.8x system or up +14.8%), and total deposits of $78.0bn, up +15.2%, with customer deposits up +14.2%

Company Description

Bendigo and Adelaide Bank Ltd (BEN) offers a variety of banking and other financial services including internet banking, housing finance, retail and business banking, commercial finance, funds management, treasury and foreign exchange services, superannuation and trustee services.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Steadfast Puts a Strong Shareprice to Work; Recommend Passing on This SPP

Insurers putting up rates to improve their own margins provides a nice tailwind for the resilient insurance broking industry. Steadfast will pay AUD 411.5 million for Coverforce, an EBITA multiple of 11 times after cost synergies. While the multiple is higher than the 9-10 times often paid for broker businesses, given Steadfast is funding the purchase with expensive shares, the deal is still attractive. Coverforce is the largest privately owned broker business in the network, overseeing AUD 530 million of GWP in fiscal 2021. Losing this group would not have been a good look for Steadfast.

The acquisition is straight from the playbook that has served Steadfast well. Owners often look to sell all or part of their broking business to release equity or as part of a succession plan. A share purchase plan to raise an additional AUD 20 million will also be offered. The SPP price will be set at the lower of the institutional placement price or 1% discount to the VWAP of Steadfast shares over the five trading days to September 13, 2021. Around 60% of Steadfast’s EBITA growth was organic, both volume and price increases. The remainder, from acquisitions and increased equity holdings in brokers within its network. The growth strategy reinforces the businesses competitive advantages and strengthens customer switching costs.

With insurers generating poor returns on capital, we expect premium rate increases to continue at around 5% per annum in fiscal 2022, but moderate to 2-3% per annum longer-term. The acquisition of Coverforce lifts Steadfast’s equity ownership in brokers within the network to 37% from 32%, leaving a long tail of investment opportunities over the long-term. Our forecasts assume annual NPAT growth of 14% per annum over the five-years to fiscal 2026.

Steadfast’s Future Outlook 

Our forecast sits above the range, with NPAT of AUD 174 million. We think management guidance is conservative given the price increases insurers are pushing to improve their own returns. We increase our fair value estimate 8% to AUD 4.00 per share as we incorporate the acquisition of Coverforce. We assume a 12% increase in shares on issue to fund the acquisition. We think the acquisition is likely to be a success. We do not recommend participating in the share purchase plan given the issue price is set at a floor of AUD 4.35 per share, a 9% premium to our fair value estimate. Steadfast is a good business, but expensive.

Back on the result, one aspect that missed our expectations was GWP on the Steadfast Client Trading Platform, or SCTP. Premiums on the platform increased 24% in fiscal 2021, but still make up less than 8% of broker GWP. Being more profitable for Steadfast, success here will provide an additional tailwind to earnings. e assume around 40% of GWP is written on the platform by fiscal 2026, down from our prior forecast of 50%, as it is taking longer than expected for insurers to integrate products onto the new platform.

Company Profile 

Steadfast Group is the largest general insurance broker network in Australia and New Zealand, with over 450 brokers and 2,000 offices in Australia, New Zealand, Singapore, and London. Steadfast operates as both a broker and a consolidator via equity interests in insurance broker businesses, generating close to AUD 10 billion of network broker gross written premium annually. Steadfast also co-owns and consolidates underwriting agencies and other complementary businesses.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Charter Hall Retail REIT Looks Defensive; Shares Fairly Valued

But we maintain our long-term assumptions and AUD 3.85 fair value estimate, which sees the stock screen as fairly valued. The REIT announced a final distribution of AUD 12.70 cents per security, taking full year distributions to AUD 23.40 cps. As a result of recent restrictions, the New South Wales and Victorian governments have reimplemented a landlord code of conduct similar to that enforced in 2020. The scheme forces landlords to provide rent waivers and deferrals for small to medium enterprises where turnover has been curtailed due to restrictions. This is likely to push more consumers to online shopping channels, fuelling the ecommerce trend.

While the near-term impact hurts especially with lockdowns potentially lasting late into calendar 2021 in line with the current vaccine rollout pace, the overall impact on Charter Hall Retail should be contained, relative to the impact in 2020. Its portfolio is increasingly dominated by major longleased tenants that are not eligible to defer rents under the government schemes. Also, the REIT has made significant efforts to increase omnichannel capabilities for tenants including click and collect facilities. This should reduce the financial impact on stores and thus reduce the need to waive or defer rent.

Company’s Future Outlook 

We forecast operating earnings per share to increase by 5% to AUD 28.60 per security in fiscal 2022, underpinned by a 2% increase in rental growth. We don’t expect there to be another equity raising, even in an extended lockdown, after one in 2020. Overall Balance sheet gearing looks modest at 33%, which sits at the midpoint of the target range of 30% to 40%. We view 55% of the REIT’s tenants as defensive (unlikely to miss a rent payment), which include the likes of Woolworths, Coles, bp, Wesfarmers, and Aldi. Supermarkets and service stations are also less likely to be impacted by COVID-19 restrictions. The proportion of portfolio income that these major tenants contribute to has steadily increased over the years, with the top five listed above representative of 54% of the portfolio income, up from 51% in fiscal 2020.

Company Profile 

Charter Hall Retail REIT, or CQR, owns and manages a portfolio of convenience focused retail properties, including neighbourhood and subregional shopping centres, service stations, and some retail logistics properties. The REIT is managed by Charter Hall, a listed, diversified fund manager and developer, which owns a minority stake in CQR, and frequently partners with it on acquisitions and developments. More than half of rental income comes from major tenants Woolworths, Coles, Wesfarmers, Aldi and BP (the latter occupies service station assets). The portfolio is more seasoned than some convenience rivals, with approximately two thirds of supermarket tenants at or near thresholds for paying turnover-linked rent.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Netwealth remains overvalued yet well positioned

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

The company charges for its software based on the value of funds under management on its platform, comprising over 95% of group revenue, in addition to providing Netwealth-branded investment products, which are managed by third-party investment managers.

Netwealth has exploited the bureaucracy and lethargy of the relatively small number of large and dominant Australian financial services firms to develop a superior investment administration platform that has quickly increased funds under administration (FUA). The company has benefited from regulatory change such as the Future of Financial Advice (FOFA) reforms, which require financial advisors to act in their clients’ best interests. It also got the advantage of banning of trail commission fees previously paid by investment administration platforms and investment advisors for recommending their products. Despite being the largest of the independent investment platforms, Netwealth has a number of independent platform competitors such as Hub 24 and Praemium.

Financial Strength:

The service-based and capital-light business model of Netwealth has minimum requirement for debt or equity capital, which keeps it in good financial health. The company expenses, rather than capitalises, research and development costs, which results in strong cash conversion. This means that most operating cash flow is available for dividend payments.

Funds under management and administration (FUMA) increased by 52% in fiscal 2021, the fee rate, or revenue divided by FUMA, fell by 23% due to pricing pressure, resulting in revenue growth of 17%. The PE ratio of Netwealth, in 2021, is as high as 78.0, which makes it overvalued.

From a balance sheet perspective, Netwealth remains in excellent shape, with net cash balance of AUD 81 million at the end of fiscal year 2021 and a consistent net cash balance since listing on the ASX in 2017.

Bulls Say:

Netwealth has only a small proportion of the investment administration market, at around 4%, but has won market share quickly, and significant growth potential remains.

Netwealth has a low fixed-cost base which means operating leverage is high and further strong revenue growth should be amplified at the EPS level. A high single digit CAGR increase in investment administration platform industry is expected which would provide a strong underlying tailwind for Netwealth.

Company Profile:

Netwealth provides cloud-based investment administration software as a service, or SaaS, in Australia via its proprietary platform. Netwealth’s platform provides portfolio administration, investment management tools, and investment and managed account services to financial intermediaries and directly to clients. The company charges SaaS fees based on funds under management on its platform. Netwealth also offers Netwealth-branded investment products on its platform which are managed by third-party investment managers.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Berkshire’s Equities in Q2; Apple Remains Top Stock

selling some $2.1 billion worth of stock while also acquiring a little over $1 billion of equities. Based on the insurer’s recent 13- F filing, Berkshire trimmed positions in US Bancorp and Chevron, and sold off more than 10% of the investment portfolio’s stakes in Abbvie (selling 2.3 million shares or 10.2% of its holdings), General Motors (7.0 million shares or 10.4% of its holdings), Bristol-Myers Squibb (4.7 million shares or 15.3% of its holdings), and Marsh & McLennan (1.1 million shares or 20.6% of its holdings). Berkshire also disposed of meaningful amounts of Merck (8.7 million shares, or 48.8% of its holdings) and Liberty Global Cl C shares (5.5 million shares, or 74.5% of its holdings), while completely eliminating the firm’s holdings in Liberty Global Cl A, Biogen, and Axalta Coating Systems.

As for the purchases, almost all of them involved existing holdings as Berkshire added to stakes in Kroger (picking up 10.7 million shares and increasing its position by 21.0%), Aon (around 300,000 shares and increasing its position by 7.3%), and Restoration Hardware (35,500 shares for a 2.0% increase in the company’s holdings). Berkshire had originated stakes in the pharmaceuticals–AbbVie, Biogen, Bristol Myers Squibb and Merck–as well as the insurance brokers—Marsh & McLennan and Aon–in just the past year and a half, but many of these stocks have seen marked gains in just the past few quarters, allowing the insurer’s main managers of many of these smaller holdings (relative to the portfolio overall)–CEO Warren Buffett’s two lieutenants Todd Combs and Ted Weschler–to take some profit off the table. Even so, the firm ended the second quarter with $293.0 billion of reportable equity holdings.

Berkshire’s top 5 positions of Apple (41.5%), Bank of America (14.2%), American Express (8.6%),Coca-Cola (7.4%), and Kraft Heinz (4.5%), accounted for 76.2% of the insurer’s 13-F equity portfolio, and its top 10 holdings, which included Moody’s (3.1%), Verizon Communications (3.0%), US Bancorp (2.5%), DaVita (1.5%), and Charter Communications (1.3%), accounted for 87.5%. Given the changes in Berkshire’s 13-F portfolio during the second quarter, the financial services sector now accounts for 28.7% of the portfolio (up from 28.5% at the end of March 2021), with technology stocks at 43.2% (up from 41.8%), and consumer defensive names decreasing to 12.8% (from 13.3%).

Company Profile 

Berkshire Hathaway is a holding company with a wide array of subsidiaries engaged in diverse activities. The firm’s core business segment is insurance, run primarily through Geico, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group. Berkshire has used the excess cash thrown off from these and its other operations over the years to acquire Burlington Northern Santa Fe (railroad), Berkshire Hathaway Energy (utilities and energy distributors), and the firms that make up its manufacturing, service, and retailing operations (which include five of Berkshire’s largest noninsurance pretax earnings generators: Precision Castparts, Lubrizol, Clayton Homes, Marmon and IMC/ISCAR). The conglomerate is unique in that it is run on a completely decentralized basis. 

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

China Merchants Bank’s First-Half Results Posted Strong Growth in Fee Income

China Merchants Bank stands out thanks to its leading position in retail banking business and enviable funding costs advantage, which delivers one of the strongest returns on assets among peers. We believe strong returns and competitive advantages endow it with a narrow economic moat.

CMB’s long time focus on customer-oriented strategy rewards the bank a premium customer base and a strong brand reputation as a wealth manager. The bank is progressing well with its digital customer acquisition strategy via the online channel that is seeing strong growth in the number of customers in the upper-middle class and their assets under management, or AUM. The bank enjoys one of the highest user penetration rates in the industry. CMB mobile application contributed 98% of total wealth management customers and 84% of transactions in the first half of 2021.

China Merchants Bank’s or CMB’s first-half results reported strong year-on-year growth in both total revenue and net profit at 14% and 23%, respectively. Positives include stable cost/income ratio and lower-than-expected credit costs in the second quarter, along with strong revenue growth and continuous improvement in credit quality as well as substantial customer base and strength in fee-based business. Fee income growth further expanded to 24% year on year, led by 40% and 17% growth in agency sales of financial products and of custody services. These two categories accounted for over 55% of total fee income. Credit card-related and credit business related fee income remained weak at zero and 5% growth, but this is reflective of weak service consumptions due to COVID-19 prevention and control measures.

Financial Strength

The bank boasts stable funding, as customer deposits represent 74% of total liabilities. CMB has improved its capital strength over the past three years: The equity/assets ratio increased to 8.7% by 2020, thanks to improving capital efficiency. Its core Tier 1 capital ratio and capital adequacy ratio reached 12.3% and 16.5%, respectively, by 2020. CMB has recorded a healthy capital position and strong returns, as evidenced by an average of over 16% return on equity over the past five years.

Bulls Say

  • CMB expects to add 15 million, or 10% of its 160 million customer pool, over the next three years. We expect this to support its industry-leading fee income growth and funding costs in the future.
  • With monthly active users reaching over 105 million, CMB’s two mobile applications were among the most popular banking app in China.
  • CMB’s retail banking business boasts the largest retail AUM per customer, which is more than two times that of its closest competitors in China.

Company Profile

With headquarters in Shenzhen, China Merchants Bank was founded in 1987. The bank is China’s seventh-largest listed bank by assets, with the largest distribution network among China’s joint-stock banks. CMB’s network is expanding rapidly. Its outlets are located mainly in China’s more developed areas, such as the Pearl River and Yangtze River deltas. The firm has 18% and 82% of its shares listed on the Hong Kong and Shanghai exchanges, respectively. It has no foreign strategic investors. China Merchants Group is its largest shareholder, with a 30% stake. Retail banking, corporate banking and wholesale banking accounted for 52%, 45%, and 3% of total profit before tax, respectively, and 54%, 42%, and 4% of total revenue in 20220.

 (Source: Morning Star)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.