Cachet's Insight 07/07/2020

Updated: Jul 8

Market Outlook: Shimao Group spins off property management

Shimao Group (0813.HK) is one of the top 10 Chinese real estate companies in sales in the first half of 2020. It is one of the constituent stocks of the Hang Seng China Enterprises Index. Its market value exceeds HK$100 billion. Foreign-owned American Capital Group holds 5% equity. In early May, Shimao Service, a property management company under Shimao Group, introduced strategic investors Sequoia Capital China Fund and Tencent Holdings. The two invested US$130 million and US$114 million, respectively, to prepare for final financing before the spin-off, and the end of June , Shimao Service officially submitted a listing application to the main board of the Stock Exchange, with a pre-IPO valuation of 20 billion Hong Kong dollars.



Cachet’s View

Shimao Group is one of the few Chinese real estate companies with a PE ratio of more than 10 times, indicating that the market has given Shimao Group a higher valuation and is confident of the group's growth. Shimao's stock price performance is also relatively stable in the real estate sector, steadily rising, suitable for long-term investors to hold. As the semi-annual performance report of the property management sector is approaching, we still believed that with the growth of the parent company's sales growth, the property management company will still release the good news on earnings. In recent years, due to the market's preference for property management companies, Shimao Services will enhance Shimao Group's overall valuation, investors can take Shimao Group's as a core holding in the portfolio.


Market Outlook: Federal Reserve Board releases results of stress tests for 2020

The Federal Reserve on Thursday released the initial results of its annual bank stress tests, in which it puts bank holding companies through various adverse economic scenarios to see if their regulatory capital can withstand severe hypothetical downturns. The Fed tested 33 banks, each with more than $100 billion in assets. The results showed that while most banks are reasonably well capitalized, some came uncomfortably close to their required minimum capital threshold in the most severe scenarios.


As expected, Wells Fargo will cut its 3Q dividend. It will announce the new dividend along with 2Q earnings, and by our estimates, Wells Fargo needs to cut its dividend by much more than 25% to be comfortable that it will not trip over the Fed’s dividend limits in future quarters. Thus far, all of other banks have confirmed 3Q dividends, but banks now face three different dividend payout hurdles. One hurdle relates to the Fed’s stress test re-do later this year – if the economic outlook worsens sharply and any banks are stretched, they could be forced to cut dividends at that time. Hence, dividends were mostly maintained for 3Q, but some clouds remain around dividends later in the year due to uncertainty about the economic outlook.


Cachet’s View

The banking industry has undergone 10 years of quantitative easing and strict supervision after the 2008 financial tsunami. The capital adequacy ratio is healthy enough to cope with major economic crises, including the economic downturn caused by the 2019 COVID epidemic. Although the banking industry's healthy finances have reassured the market, investors have still been careful to give bank stocks a higher valuation. The main reason is that the rise of online Fintech in recent years has challenged traditional financial institutions with its asset-light business model and eroded its market share. If investors use financial institutions as investment targets, they should pay more attention to Fintech companies such as Square (SQ.US), PayPal (PYPL.US), ZhongAn Online (6060.HK), and Ping An (2318.HK).


Market Outlook: Dollar trend

With the pandemic still raging and posing uncertainty to the global economy, haven currencies such as the franc and yen will be in demand. Add the USD to this list as well. Back in March, when fears over Covid-19 were at their highest, the dollar soared. On a trade-weighted basis, the currency has pulled back about 5% from that high as risk sentiment improved and the demand for havens ebbed. This is especially true against the euro and the pound. For EUR/USD, rising trade and diplomatic tensions between Brussels and Washington will adversely impact the European economy in a disproportionate way, leading to USD out-performance versus the shared currency.


Cachet’s View

The fly in the ointment could be if the U.S. economy suffers more than the euro-area and/or U.K. In that case the USD may suffer, especially if the Fed is forced to ease more aggressively than the ECB or BOE. Failing this, however, expect the USD to have a strong showing in the second half of this year.


Product: Bonus Enhanced Note

This product is linked to Alibaba (9988.HK), Tencent (0700.HK), Meituan Dianping (3690.HK) and is denominated in Hong Kong dollars. The coupon rate is 13.33% and 25.19% respectively, for a period of 3 months and 6 months, and the settlement date is T+14.


Issuer: Investment grade rated issuer


Benefits

  • Receive a bonus coupon with no cap, in the event the underlying stock prices are flat or move up

  • Change to buy shares of the underlying stocks at Strike Prices (95%)

Risks

  • BENS are not principal protected

  • Gains are limited to the gains of worst performer, if above Strike Prices (95%)

  • Investors are exposed to credit risk of the issuer and the market movement of the underlying stocks

*Please be noted that product prices are indicative only subject to refresh before trade, the prices change subject to market conditions.

Cachet Group

28/F YF Life Tower,
33 Lockhart Road, Wanchai,

Hong Kong

T(HK): (852) 3579 2090

T(CN): (86) 150 1251 8130

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