by Leslie P. Norton
As risk appetite improved last week, Asian markets advanced; the DJ Asia/Pacific Index rose nearly 4%. Thank the euro’s gains, a bigger-than-expected fall in U.S. unemployment claims, a gain in Australian jobs and progress on European-bank stress tests, which showed banks doing better in both Europe and the U.S. Also, the mainland announced new projects to develop western China.
The mega-IPO of Agricultural Bank of China /zigman2/quotes/200705246/delayed HK:1288 +0.32% (ticker: 1288.Hong Kong) is just one of the factors that has weighed on Chinese equities. That initial public offering is expected to be followed by a capital-raising from giant Industrial & Commercial Bank of China (1398.Hong Kong). ICBC and the other big Chinese banks are selling stocks and bonds to boost capital after breakneck lending in the past year. At last week’s pricing of 2.68 yuan a share (roughly 40 cents) in Shanghai, and a likely price in Hong Kong of HK$3.20, AgBank would fetch around 1.64 times book value. That looks cheap compared with ICBC’s 2-plus times but underscores the potential charms of Bank of China (3988.HongKong) at 1.5 times and Bank of Communications (3328.HongKong) at 1.74 times.
How long does it take to derail a Japanese railroad stock? Not long, apparently. Last year we argued that Kintetsu /zigman2/quotes/207604042/delayed JP:9041 +0.25% (9041.Japan), one of Japan’s largest railway operators, was a bad investment bet (“Rich Valuation Could Lead to Derailed Shares,” April 13, 2009). Its shares were expensive and its businesses heavily cyclical, and it was building one of Japan’s tallest buildings amid a recession in Osaka’s property market. Meanwhile, the core railway business in the long haul is flat at best, because of Japan’s declining population.
Since then, the stock is down 30%, to 287 yen ($3.26) from ¥408. More declines may lie ahead. Profits have slumped this year, owing to lower revenue from railway operations, losses in retail and lower profits from real estate. In addition, there were some accounting irregularities at one Kintetsu unit. In May Kintetsu announced a cost-savings plan and forecast operating profit of ¥60 billion for the year ending March 2015. (It earned ¥35.8 billion in operating profit in the year just ended, versus ¥42.7 billion in the previous year). Still, room for cost cuts is limited, UBS analyst Jun Harada wrote recently.
Instead, Harada thinks operating earnings in five years will come in at ¥45 billion. At the end of March, the operating margin for Kintetsu’s railway business alone was already high at 17%, compared with 14.2% for Tokyu /zigman2/quotes/206253062/delayed JP:9005 +0.64% (9005.Japan), which has four times more traffic, Harada notes; 11% for Keio /zigman2/quotes/206748804/delayed JP:9008 +0.14% (9008.Japan); and 16.5% for Odakyu Electric Railway. “In other words, the company already leads in establishing one of the most efficient major private-railway businesses in Japan,” he says.
Kintetsu trades at 43 times earnings and 2.4 times book value, according to Bloomberg. Compare that with JR East (9020.Japan), which serves the Tokyo area, where the population is growing, rather than declining. JR East trades at 24 times earnings and 1.5 times book; CLSA Asia Pacific Markets writes that its earnings will probably be revised higher. Or consider Central Japan Railway /zigman2/quotes/205638698/delayed JP:9022 +0.66% (9022.Japan), which trades at 16.7 times earnings and 1.4 times book.
Harada of UBS figures that Kintetsu stock is worth ¥200. That’s still another 30% lower than last week’s price.?