Playing China's Financial Reforms

05/27/2014 10:00 am EST

Focus: GLOBAL

Roger Conrad

Founder and Chief Editor, Capitalist Times

Investors should remain cautious when allocating funds to Chinese equities this year. Here are two names for adventurous investors to consider, suggests Roger Conrad in Capitalist Times.

China Construction Bank Corp. (939:HK)

China ’s banking system continues to experience its fair share of hiccups. But few investors are willing to look ahead instead of backwards, and shares of Chinese banks trade at extremely low multiples.

One major reason to consider an investment in Chinese banks: Their revenue structure consists primarily of net interest income, fees, and commissions—much simpler to interpret than the complexities associated with the too-big-to-fail giants of the US financial sector.

China has also instituted Basel III capital requirements, deregulated interest rates, and will implement deposit insurance—all moves in the right direction.

The Chinese banks also fall under Beijing’s directive to restructure SOEs and the low valuations assigned to Chinese banks in the current market may prompt Beijing to pump the breaks on monetizing certain assets.

Foreign investors have expressed an interest in the major banks’ credit card divisions, as the penetration rate of these financial products remains low.

An average annual percentage rate of more than 18% and nonperforming accounts equivalent to 2% of loans sweetens the appeal. China Construction Bank’s credit card unit would be a prime candidate for foreign participation.

Not only did the lender boast about 52 million credit cards at the end of 2013, but the ratio of nonperformers to total loans also stood at 0.66%—the lowest in the industry.

The bank last year raked is more than US$4 billion in credit card fees. With a dividend yield of almost 7%, shares of China Construction Bank Corp rate a buy up to HKD7.50.

China Pacific Insurance Group (2601:HK)

Founded in 1991 and headquartered in Shanghai, China Pacific Insurance Group is China’s third-largest player in life and property and casualty insurance. The company also operates asset management and pension-related businesses.

Although the China Pacific Insurance boasts a nationwide footprint, the company focuses more on rural areas and less-affluent cities than some of its peers.

We expect the insurance industry to benefit from Beijing’s ongoing push for pension reform and investment liberalization, a gradual process that will pay off over the long haul.

In the first quarter, China Pacific Insurance grew its net profits after taxes by 44% on a year-over-year basis, as the restructuring of its life insurance business reduced costs and bolstered profit margins.

China Pacific Insurance‘s in-house investment assets have increased to US$100 billion and should make a solid contribution to the bottom line.

The company’s shares have given up about 10% of their value over the past 12 months and trade at a discount to the competition. China Pacific Insurance Group rates a buy up to HK$35.00 per share for patient investors.

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