Description
Turnover on TWSE has declined, while earnings and stock price of the largest broker havent reflected this new reality. the last year has seen very elevated volumes due to heavy retail speculation on some pretty fragile businesses should covid normalize in Asia (steelcos, airlines, shippers), and heavy margin has been taken out on these v speculative names. Even without asset quality issues emerging, putting the stock on 10x earnings based on current turnover levels the stock has at least 20% downside.
Background
• Largest market share in the main brokerage products, with market share of 13% in brokerage revenues, 16% in margin extended and 20% of prime brokerage revenues. 2nd player is KGI securities (listed under 2883 TT) and the third is Fubon (listed under 2881 TT, JV with Jefferies, will become no.2 after integrating Jih Sun) – Yuanta is the only real broker listed, KGI and Fubon are both vastly outshadowed by the lifer in the group structure. Taiwan brokerage is primarily driven by brokerage fees, which are in turn driven by retail.
• Borrow is ~GC at scale
• There are two other businesses; a bank and an insurer, but they are barely DD% of any SOTP and very boring businesses that typically trade at lower multiples than brokerages.
Why does this opportunity exist?
its punted by locals who are well aware of the elevated liquidity of the shippers/steelcos/airlines and the margin behind it. One “positional edge” is that as foreigners we have no pressure to stay invested in Taiwan – financials tend to get very over-owned when tech goes down due to the relative defensiveness.
Chart 1 – turnover has already come off
Chart 2 – earnings have barely been cut
Chart 3 – turnover is heavily skewed towards retail favourites (but to an unusual degree – e.g. shippers trading more than TSMC)
Valuation
• Yuanta is trading on 10x earnings which is inline with its 5 year average, its currently on 1x p/b vs the last 5 year average of 0.9x. Jih Sun securities (no.7) was recently acquired by Fubon at 1x p/b (20x p/e, was under-earning). It's probably worth ~10x normalized earnings (at least 20% downside).
Risks
• Dividend yield is at 5.5%, 5 year average is at 5% and it probably looks attractive to institutional investors (life insurers). It has traded as low as 7% yield but only when distressed. EPS should decline YoY and consensus has DPS declining too (I estimate DPS needs to be revised down from 1.25 à 1), so this might allow it to trade cheaper than the 5% div yield average.
• Yuanta doesn’t have a sizeable bank, and CTBC doesn’t have a sizeable broker and both markets need to consolidate, the relative sizes are large, and both are in a “strong” position – so a merger is possible (but personally I think CTBC’s M&A ambitions are abroad, and Yuanta can afford to buy a small bank) and these types of mergers usually lead to a pretty savage spike in Taiwan (borrow gets called in immediately).
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
• TWSE volume leading to earnings downgrades from brokerage fees. See first chart below.
• Asset quality issues emerge due to the unusual mix of margin loans outstanding – I don’t really have this in my numbers (if this emerges before the stock hits NTD 18, I would need to recalibrate my cover price). See third chart below.