A Global Bank With Real Value

03/05/2008 12:00 am EST


Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor-in-chief of China Stock Digest, says a major global banking company with Asian roots looks like it will hold up well amid the subprime crisis.

We believe HSBC Holdings (NYSE: HBC) represents exceptional value in the depressed financial sector. HSBC has a price/earnings ration just above 10x compared to an industry standard of more than 16x.

Formerly known as the Hong Kong and Shanghai Banking Corporation, HSBC has become an enterprise spanning the globe with a market capitalization of [around $180 billion]. The bank has an international network of more than 10,000 properties in 82 countries and territories in Europe, Hong Kong, the Asia-Pacific region, the Middle East, Africa, North America, and Latin America.

HSBC Holdings provides financial services to more than 125 million customers. HSBC manages its business through two corporate groups: personal financial services and commercial banking, and through two global businesses: corporate investment banking and markets, and private banking.

HSBC has been actively acquiring banks in emerging markets while shedding some of its holdings in Europe. The company’s chairman, Stephen Green, says HSBC plans to boost pre-tax profits from emerging markets by 50% to 60%. HSBC recently received a boost when the Hong Kong government announced a major tax break for the Special Administrative Zone.

The company’s US-based consumer financial unit and its structured investment vehicles (SIVs) have suffered from the US subprime mortgage mess. HSBC has set aside billions to bail out these entities and there’s no guarantee that there won’t be more pain during 2008. (Editor’s Note: The company reported earnings early this week, and the stock rallied after the news.)

Nevertheless, HSBC has very deep pockets, and it will eventually emerge as one of the world’s strongest financial institutions. As the subprime debacle is cleared from the world’s banking system, we expect this industry leader to regain its 52-week high price and yield a profitable sale for our subscribers at $100 per share.

HSBC, [on which we put a Buy recommendation in mid-February], has already surpassed its limit price twice, [but] there’s likely to be more than one opportunity to purchase this multinational banking giant at our strike price of $73.75 due to the ongoing volatility among shares of financial institutions. (The ADRs fell nearly two points on Tuesday and closed below $77 a share—Editor.)

With its excellent 4.5% dividend yield, we find this stock attractively priced and look forward to taking profits when shares reach $100. We’ve set a Profit Protector stop loss price of $65.

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