Investment Opportunities in China Construction Bank, China Merchants Bank, China Tourism Group Duty Free, and Kingmed Diagnostics
China Construction Bank (HKEX: 0939): Strong Trading Income Mitigates Earnings Decline
Recommendation: BUY
- Target Price: HK$6.00
- Date of Recommendation: September 3, 2024
- Broker Company: UOB Kay Hian
Investment Thesis:
China Construction Bank (CCB), one of China’s leading state-owned banks, has shown resilience despite a challenging economic environment. The bank’s Q2 2024 earnings declined by 1.4% year-on-year, but the impact was mitigated by robust trading income. While net interest margins (NIM) continue to be under pressure, CCB’s strong asset quality and the strategic reduction of deposit rates provide a buffer against further earnings erosion.
Key factors driving this investment opportunity include:
- Trading Income Surge: CCB’s trading income jumped by 133.7% year-on-year, significantly offsetting declines in net interest income and fee income. This surge was driven by favorable movements in the bond market, positioning CCB well in a volatile environment.
- NIM Compression Eases: Although CCB experienced a 6 basis point contraction in NIM to 1.51%, management’s strategic deposit rate cuts are expected to ease downward pressure in the second half of 2024. This move should stabilize earnings and support future growth.
- Stable Asset Quality: The bank maintained a stable non-performing loan (NPL) ratio of 1.35%, with improvements in corporate NPLs offsetting pressures in the retail segment. The provision coverage ratio increased to 238.75%, reflecting CCB’s conservative approach to risk management.
Valuation and Catalysts:
The target price of HK$6.00, based on a price-to-book (P/B) ratio of 0.44x for 2024, reflects the bank’s strong capital position and its ability to navigate challenging market conditions. CCB’s robust trading income and strategic management of interest margins provide a solid foundation for long-term growth.
China Merchants Bank (HKEX: 3968): Awaiting a Stronger Recovery
Recommendation: BUY
- Target Price: HK$42.00
- Date of Recommendation: September 3, 2024
- Broker Company: UOB Kay Hian
Investment Thesis:
China Merchants Bank (CMB) reported a modest 0.7% year-on-year decline in net profit for Q2 2024, which was largely in line with expectations. The bank’s performance was weighed down by net interest margin (NIM) compression and sluggish fee income, partially offset by strong trading income. Despite the challenges, CMB’s robust asset quality and capital position make it a solid investment opportunity as the Chinese economy stabilizes.
Key factors driving this investment opportunity include:
- Resilient Retail Segment: CMB’s retail loans, particularly in microfinance and consumption loans, showed resilience with growth rates of 6.5% year-on-year and 1.2% quarter-on-quarter. This segment’s strength provides a buffer against broader economic challenges.
- Trading Income as a Bright Spot: Like CCB, CMB benefitted from a significant boost in trading income, which grew by 31.8% year-on-year, helping to offset weaknesses in other income streams.
- Stable Capital Adequacy: The bank’s capital adequacy ratio improved due to slower growth in risk-weighted assets, and its provision coverage remains robust at 434.4%, underscoring CMB’s strong financial health.
Valuation and Catalysts:
The target price of HK$42.00 is based on a price-to-book (P/B) ratio of 0.8x for 2024. CMB’s ability to maintain strong capital ratios and its strategic focus on growing high-yield retail loans positions the bank for recovery as macroeconomic conditions improve.
China Tourism Group Duty Free (SHSE: 601888): Hainan Sales Under Pressure, but Recovery in Sight
Recommendation: BUY
- Target Price: RMB83.40
- Date of Recommendation: September 3, 2024
- Broker Company: UOB Kay Hian
Investment Thesis:
China Tourism Group Duty Free (CTGDF), the largest duty-free operator in China, faces near-term challenges with a 30% year-on-year decline in Hainan duty-free sales in the first seven months of 2024. Despite this, the company is well-positioned for a recovery as airport traffic improves and international travel resumes.
Key factors driving this investment opportunity include:
- Market Leadership in Hainan: Despite the overall sales decline, CTGDF managed to increase its market share in Hainan by 1.8 percentage points to 83.9% in 1H24, highlighting its competitive advantage in this key market.
- Recovery in Airport Business: CTGDF’s airport duty-free business, particularly at Sunrise Shanghai, is showing signs of recovery, with revenue up by 4% year-on-year in 1H24. This segment is expected to continue improving as international flights increase.
- Long-Term Growth Potential: Management remains optimistic about the continuation of duty-free policies post-2025, which would allow CTGDF to maintain its pricing advantages and drive long-term growth.
Valuation and Catalysts:
The target price of RMB83.40 reflects the company’s leadership position in the duty-free market and its potential for recovery as travel demand rebounds. CTGDF’s strategic initiatives to diversify product offerings and enhance the shopping experience position it well for long-term growth.
Kingmed Diagnostics (SHSE: 603882): Focused on Service Enhancement Amid Weak Economic Conditions
Recommendation: BUY
- Target Price: RMB35.00
- Date of Recommendation: September 3, 2024
- Broker Company: UOB Kay Hian
Investment Thesis:
Kingmed Diagnostics, a leader in China’s independent clinical laboratory (ICL) market, reported a significant quarter-on-quarter improvement in Q2 2024, although overall 1H24 results were below expectations. The company is focusing on enhancing its service capabilities to navigate a challenging economic environment and is expected to regain growth momentum from 2025 onwards.
Key factors driving this investment opportunity include:
- Service Capability Enhancement: Kingmed is prioritizing the enhancement of its service capabilities, particularly in esoteric testing services, which are expected to drive growth as the company recovers from the impact of COVID-19.
- Strategic Positioning: Despite the current challenges, Kingmed’s strong market position and focus on high-margin services position it well for long-term growth, particularly as the economic environment stabilizes.
- Recovery Potential: With COVID-19-related accounts receivable largely collected, Kingmed is expected to see a return to growth from 2025, driven by an optimized service mix and a focus on high-value testing services.
Valuation and Catalysts:
The target price of RMB35.00 reflects Kingmed’s potential to recover and grow as the market stabilizes. The company’s strategic focus on service enhancement and its leadership in the ICL market make it a compelling investment opportunity.
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