While researching the Postal Savings Bank of China (HKSE:01658, Financial)(SHSE:601658, Financial), I came across the following note in the 2021 semi-annual report:
"Note (6): According to the interests disclosure forms submitted by Li Lu (Trades, Portfolio), LL Group, LLC, Himalaya Capital Investors, L.P. and Himalaya Capital Management LLC, Li Lu (Trades, Portfolio) indirectly holds a total of 1,274,411,000 H shares (long position) held by Himalaya Capital Investors, L.P. as a beneficiary owner through its controlled corporation LL Group, LLC. According to the SFO, Li Lu (Trades, Portfolio) and LL Group, LLC are therefore deemed to be interested in a total of 1,274,411,000 H shares held by Himalaya Capital Investors, L.P., and Himalaya Capital Management LLC is interested in the 1,274,411,000 H shares as investment manager."
Li Lu (Trades, Portfolio) is well-known guru in value investing circles and has been frequently written about on GuruFocus. At the 2019 annual meeting of the Daily Journal Corporation (DJCO, Financial), a Los Angeles publishing and technology company that Charlie Munger (Trades, Portfolio) chairs, Munger shared that there is one other person besides his Berkshire partner, Warren Buffett (Trades, Portfolio), that he entrusts with his personal wealth, and that's Li Lu (Trades, Portfolio).
“I’m 95 years old. I’ve given Munger money to some outsider to run once in 95 years,” Munger said. “That’s Li Lu (Trades, Portfolio).” Munger explained why this investor has appealed to him in a way no others have in nearly a century. “He’s partly a Chinese Warren Buffett (Trades, Portfolio). That really helps,” he said. “Partly he’s fishing in China. Not in this over-searched, over-populated, highly competitive American market.”
Li's style of investing is similar to that of Buffett and Munger. He takes concentrated positions in businesses with a large margin of safety and holds for the long term. Therefore, the fact that Li has about $1 billion invested in the Postal Savings Bank of China caught my attention.
This bank provides various banking products and services for retail and corporate customers in the People’s Republic of China. As of Dec. 31, 2020, it had 39,631 outlets, including 8,568 directly operated outlets and 31,763 agency outlets. It serves about 600 million customers - that's a couple hundred million more than the entire population of the U.S. These are eye-popping numbers and illustrate one of the potential reasons for Li Lu (Trades, Portfolio)'s interest in the bank.
The postal savings business in China can be traced back to its start in 1919 with a history of over one hundred years. In March 2007, based on the reform of the previous postal savings management system, Postal Savings Bank of China was established. In January 2012, the bank was transformed into a joint stock limited liability company. In September 2016, it went public and was listed on the Hong Kong Stock Exchange, and in December 2019, it was listed on the Shanghai Stock Exchange. It is a Chinese state-controlled enterprise with controlling shares in the hands of China Post Corporation. Li Ka Shing, a Hong Kong-based billionaire, and his family control about 3.3 billion shares, even more than Li Lu (Trades, Portfolio).
The bank has a market cap equivalent to 475.01 billion Chinese Yuan ($64.21 billion), a price-earnings ratio of 6.26 and a price-book ratio of 0.61. GuruFocus' summary of valuation metrics indicate the stock is significantly undervalued. The GF Value chart also indicates undervaluation.
The following table from GuruFocus compares the bank with various peers in Hong Kong, Canada and the U.S. Particularly noteworthy is high the return on equity adjusted to book value of 15.73% and the low price-to-Graham-number value of 0.42. (Graham Number =Square Root of (22.5) x (TTM EPS) x (Tangible Book Value per Share)). The Graham number is the maximum price Benjamin Graham recommended conservative investors should pay for a stock. I think the Graham value remains relevant for banks, and the Graham value here indicates a wide margin of safety. One potential red flag is the relatively low return on assets of 0.64%.
| Exchange | Symbol | Company | Market Cap ($M) | PE Ratio without NRI | PB Ratio | PS Ratio | Equity-to-Asset | ROA % | ROE % | `ROE % Adjusted to Book Value` | Return on Tangible Equity | Price-to-Graham-Number |
| NYSE | USB | U.S. Bancorp | $84,757 | 11.48 | 1.77 | 3.76 | 0.1 | 1.41 | 14.1 | 7.97 | 18.75 | 1.12 |
| TSX | CM | Canadian Imperial Bank of Commerce | $50,361 | 10.15 | 1.54 | 3.19 | 0.05 | 0.81 | 14.57 | 9.46 | 17.41 | 0.92 |
| SHSE | 601658 | Postal Savings Bank Of China Co Ltd | $76,004 | 6.31 | 0.63 | 1.96 | 0.06 | 0.64 | 9.91 | 15.73 | 9.97 | 0.42 |
| HKSE | 02388 | BOC Hong Kong Holdings Ltd | $33,764 | 11.01 | 0.81 | 3.58 | 0.08 | 0.73 | 7.63 | 9.42 | 7.66 | 0.64 |
| HKSE | 00011 | Hang Seng Bank Ltd | $35,210 | 17.5 | 1.5 | 5.23 | 0.1 | 0.92 | 9.01 | 6.01 | 10.44 | 1.16 |
| NYSE | TFC | Truist Financial Corp | $79,773 | 14.08 | 1.28 | 3.61 | 0.13 | 1.2 | 8.3 | 6.48 | 14.46 | 1.25 |
| NYSE | PNC | PNC Financial Services Group Inc | $85,519 | 15.47 | 1.52 | 4.75 | 0.1 | 1.16 | 10.22 | 6.72 | 12.95 | 1.16 |
The following chart shows book and tangible book value per share compared to the share price in Hong Kong dollars. The gap between share price and book value has widened, showing increasing value. Book value and tangible book value have been growing at about a 14% annual rate over the last five years with notable acceleration over the last two years.
The Postal Savings Bank of China's non-performing loan ratio is 0.83%, its core tier 1 capital adequacy ratio is 9.74%, its tier 1 capital adequacy ratio is 12.35 and its total equity to total asset ratio is 6.14%. These are all good numbers, so it's no wonder that S&P Global (SPGI, Financial) and Moody's (MCO, Financial) rate the bank as A and A1 for credit quality, respectively.
Dividend
The bank has been paying a growing annual dividend since 2016 and is currently at a yield of 4.4%. The payout ratio is comfortable at 0.3, with room for continued growth.
Conclusion
Postal Savings Bank of China looks to be a solid and very undervalued investment, in my opinion. The presence of Li Lu (Trades, Portfolio) as a major investor gives the investment credibility. However, currently China's financial system may be under stress given the implosion of real estate related investments. Also, inflation has been spiking due to power shortages. I'd rather watch and see if these risks get worse or better before taking a position in this scrip.
