China Bank, Real-Estate Shares `Attractive' Values, Says Henderson Global
Chinese bank and real-estate shares are looking “attractive” to Henderson Global Investors following a slump in valuations this year and as China moves to make its currency more flexible.
The fund manager, with $94 billion of assets globally, has purchased the Hong Kong-listed shares of Chinese banks such as Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. in the past six months and is looking to start accumulating shares of property developers, Andrew Beal, Henderson’s London- based fund manager for Asian equities excluding Japan, said in an interview.
Henderson’s bets come as the Chinese government takes steps to curb the nation’s property prices, which climbed at the second-fastest pace on record in May. Property-price gains have spurred concerns that a record 9.59 trillion yuan ($1.4 trillion) of loans extended last year to combat the effects of the global financial crisis may be causing asset bubbles.
“We don’t call what’s happening in China a bubble,” Beal said in a June 17 interview in Singapore. “We don’t think it’s going to end up in the sort of subprime-type bust that some people are talking about. There’s a massive pent-up demand for modern housing in China.”
He confirmed his comments on June 21, two days after China’s central bank announced it will end the currency peg. China’s policy shift will remove an impediment to Chinese equities, Beal said.
The Shanghai Composite Index declined 21 percent this year, making it Asia’s worst performer in that period, amid concern the government’s measures to rein in housing prices and Europe’s sovereign debt crisis will crimp economic growth. The Hang Seng China Enterprises Index of Chinese companies’ so-called H-shares dropped 5.7 percent.
The government has tried to rein in loans for purchases of multiple homes, increased mortgage rates and raised down payment requirements. The central bank also ordered lenders to increase their reserve ratios three times this year.
“We’ve probably passed the most aggressive phase in terms of policy tightening,” Beal said. “If China is allowing the yuan to appreciate, then interest rates may peak at lower levels than the market previously feared.”
A more flexible currency would help to curb consumer-price gains, asset bubbles and dependence on exports for growth, the People’s Bank of China said in a statement announcing its yuan action on June 19.
Henderson owns Hong Kong-listed shares of Industrial & Commercial Bank, which is valued at 13 times reported profit and Bank of China, which trades at 10.3 times. Financial-services companies in the MSCI Asia Pacific excluding Japan Index trade at an average 16.9 times.
Profit at ICBC, the nation’s biggest lender, climbed 18 percent in the first quarter, while earnings at Bank of China, the country’s No. 3 lender, grew 41 percent.
“The banking sector is trading at about 10 times estimated earnings and should be able to deliver earnings growth of 15-20 percent a year over the next few years,” Beal said. “We fail to see where this hysteria about Chinese banks is coming from.”
China’s banking regulator said on June 15 it sees growing credit risks in the nation’s real-estate industry and warned of increasing pressure from non-performing loans. Risks associated with home mortgages are rising, the China Banking Regulatory Commission said in its annual report on June 15.
While there is a risk bad debts will surge should China’s economic growth slow, Beal said provisions at Chinese banks are more than adequate to cover any problem loans. Industrial & Commercial Bank had a capital adequacy ratio of 11.98 percent as of March 31, while Bank of China’s stood at 11.09 percent. That compares with the banking regulator’s mandatory minimum capital ratio of 11.5 percent.
Agile Property Holdings Ltd., a Hong Kong-based developer with projects in 20 Chinese cities and districts; Hang Lung Properties Ltd., a Hong Kong-based developer that received 56 percent of sales in the last fiscal year; and Guangzhou R&F Properties Co., the biggest real estate company in the southern Chinese city, are among Henderson’s top holdings, Beal said.
Agile Property is valued at 15.2 times reported profit, compared with 6.4 times for Hang Lung and 10.9 times for Guangzhou R&F. Property stocks on Hong Kong’s benchmark Hang Seng Index trade at an average 11.7 times.