Post for: #China Banks (16 Posts)

Estimating the Intrinsic Value, Return on Investment and Margin of Safety of Chongqing Rural Commercial Bank using the Dividend Discount Model

Touzibozhu

Summary

This article looks at the valuation of Chongqing Rural Commercial Bank shares listed on the Stock Exchange of Hong Kong (Ticker: 03618.HK). The Dividend Discount Model is used to estimate the share's Intrinsic Value, Expected Return on Investment, and its Margin of Safety.

Introduction to Chongqing Rural Commercial Bank

Chongqing Rural Commercial Bank Co., Ltd., formerly Chongqing Rural Credit Cooperative, was founded in 1951 and has a 70-year history. Chongqing was selected as one of the first batch of pilot provinces and cities for the nationwide rural credit cooperative reform in 2003.

The rural commercial bank was established in 2008 as a limited liability joint stock company to acquire all assets and liabilities of 38 County (District) Rural Credit Cooperative Unions.

The bank's H-share was successfully listed on the Main Board of the Hong Kong Stock Exchange in 2010, making it the first listed rural commercial bank in China as well as the first listed bank in western China.

The bank successfully listed on the main board of the Shanghai Stock Exchange in 2019, becoming China's first rural commercial bank with A+H dual listing and the first bank with A+H dual listing in western China.

The main businesses of the bank are corporate finance, inclusive finance, retail finance, and financial markets:

  • The corporate finance business primarily offers a wide range of corporate finance products and services to businesses and public institutions, government agencies, and financial institutions, such as corporate loans and deposits, trade financing loans, bills, and guarantees.
  • The primary business of Inclusive Finance is to provide financial services to new agricultural business entities such as small and micro enterprises, farmers, and farmers' professional cooperatives.
  • The retail finance business consists of personal loan and deposit business, bank card business, and intermediary business.
  • The financial market business consists primarily of capital operation, investment banking, and asset custody.

Dividend Discount Model

The Dividend Discount Model is one of several methods for determining stock value. The procedure is similar to the Discounted Cash Flow model, except that dividends are substituted for free cash flow as the cash flowing to the investor. One advantage of this method is that dividend information is easily accessible from the company's financial reports. It is also my preferred method for valuing dividend-paying stocks. Dividends are tangible income for the investor and represent the return of investment and return on investment. Dividend cash allows the investor to reinvest the proceeds in the same stock or in other more appealing stocks, achieving the all-important compounding effect.

This article describes the use of the Dividend Discount Model to determine the Intrinsic Value, Expected Return on Investment, and Margin of Safety of Chongqing Rural Commercial Bank (03618.HK) shares listed on the Stock Exchange of Hong Kong.

Read more →

Purchasing H-shares of China CITIC Bank (0998.HK) for my Dividend Income Portfolio

Touzibozhu

Summary

In this article, I examine the valuation of the H-share of China CITIC Bank (0998.HK) from the view point of a Dividend Investor. The Dividend Discount Model (DDM) is used to determine its Intrinsic Value, Expected Return on Investment, and its Margin of Safety. DDM is a form of Discounted Cash Flow Analysis in which the type of cash flow used in the analysis is the Company’s regular dividend payments, discounted at the appropriate rate of return to determine the Intrinsic Value of the stock.

Introduction

The recent Evergrande debt crisis has resulted in a substantial sell down in the Hong Kong equities market, with the bulk of the price decline hitting China H-shares. A few companies on my watch list experienced price corrections which brought them into value stock territory, at least that is my humble opinion. I have recently published articles on 2 of them, namely Ping-An Insurance, Agricultural Bank of China. In this article, I would like to share my thoughts on another recent addition to my Dividend Income Portfolio, China Citic Bank (0998.HK).

As my investment philosophy evolves over time, I find myself favoring stocks which provide attractive dividends at inexpensive valuations. I used the following set of questions to help determine the Bank's investment worthiness:

  • Does the Bank have a good long-term dividend track record?
  • Does the Bank currently offer an attractive dividend yield (above the average yield of Hang Seng Index constituents)?
  • Is the current payout ratio safe and sustainable?
  • What is the expected return on investment of the share over a 10-year period? Majority of recommendations by financial analysts have a 12 month time horizon. I find the 10-year period to be more suitable for a dividend income stock, especially one which is part of a retirement dividend income portfolio.
  • Does the stock price offer a sufficient margin of safety to its intrinsic value?
  • Are the shares considered attractive when measured against the traditional value investing yardsticks? A good dividend stock with inexpensive valuation will minimize the risk of capital impairment and increase the probability of capital gains.
  • Does the stock have a history of consistent earnings growth?

With the above questions in mind, let us delve into the analysis of the company to find the answers.

Read more →