Performance: -10.6%
Hong Kong-listed China Construction Bank (CCB) was one of the eight losers in our portfolio for the four-month period, with a 10.6% loss. The bank is a leading commercial bank in China providing a comprehensive range of commercial banking products and services. CCB is one of the largest banks in the world by market cap and Tier 1 capital. It has subsidiaries in various sectors, including fund management, financial leasing, trust, insurance, futures, pension and investment banking.
The thesis for investing in the company is that it is a sustainable dividend play. Through its dividend policy, its scale as a bank, and history of paying dividends at lucrative yields, this company is a good pick for investors who prioritise dividends. Compared to other major state-owned banks of China, CCB has consistently outperformed in terms of profitability through return on assets (ROA) and return on equity (ROE). This profitability stems from its strong asset yields, fee income contributions and low cost-to-income ratio.
For CCB’s latest earnings announcement, the bank reported stable growth in assets through loans and bond investments, and continued to optimise its liability structure as the proportion of deposits to other liabilities improved. Net interest income, one of the key profitability indicators of banks, has also grown steadily from the previous comparable period. Along with this, ROE and ROA also increased due to double-digit growth in net profits. The bank’s cost structure was also further optimised, as the proportion of fixed costs were reduced while strategic costs improved. Capital management-wise, the bank maintained its capital ratio at adequate levels.
At current prices, the bank’s dividend yield is at a lucrative 7%, much more attractive than the risk-free rate of 2.8%. CCB has consistently paid dividends for over 10 years, with an average dividend pay-out ratio of between 30% and 35% over this period. Further, the bank is an attractive pick-up because relative valuations-wise, the bank trades at a 35% discount for its forward P/E compared to domestic peers, and a 59% discount compared to regional peers.
Sentiments-wise, there are 31 “buy” calls, two “hold” calls and no “sell” calls from analysts. The average target price for the company is around 40% above its current trading price of HK$5.51 ($0.96). As the share price declines, it is strategic to accumulate shares to capitalise on higher dividend yields, and if the yield ceases to be attractive, it would be better off disposed of. Dividend yields are much more attractive, given the fall in share price, and dividend-seeking investors should consider adding CCB into their portfolio.
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Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk.
