Thursday, May 11, 2017

A current AIM International Fund holding: HSBC Holdings (HSBC) by Cathy Gong. "HSBC shares shouldn't be a part of AIM's future"

HSBC Holdings plc (HSBC, $42.68): Ready for the Summer? HSBC Isn’t!
By: Cathy Gong, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

HSBC Holdings plc. (NYSE:HSBC) is a British multinational banking and financial services holding company that operates in Europe, Asia, North America, North Africa, and the Middle East, and is one of the world’s largest banking and financial services organizations.

• Founded in 1865 to finance trade between Asia and the West in Hong Kong, the firm is headquartered in London. 45.2% of their revenue came from the Asia Pacific region in 2016. The firm operates through five segments and the largest business line is retail banking and wealth management, representing 42.4% of their revenue in 2016.

• Following the sale of operations in Brazil, HSBC completed a $2.5bn share buy-back in 2016, and HSBC continues to exit unprofitable countries. Chief Executive Officer Stuart Gulliver has exited almost 100 businesses in 18 countries.

• Contrary to expectations, the long-term growth rate of HSBC is -18.66%, which means that it lacks reasonably steady earnings. Based on trailing 12 month earnings, HSBC’s P/E is 316.80, while the current market P/E is 17.00. While the mean of the market cash flow per share is $1.67, HSBC’s cash flow per share of $0.62 fails to exceed the market mean.

Key points: HSBC is ripe for removal from the AIM International Equity portfolio. HSBC was added to the International Equity portfolio in October 2015 with a price of $49.94 and a price target of $62.06. HSBC is trading at $42.68 as of 5/5/17. The post full-year results release gave HSBC one of its worst days for share price performance in many years (down 6-7%). It has underperformed 52% of the market in the past 6 months. HSBC has ultimately fallen away from the drivers of its original recommendation and is in a position to be trimmed before the AIM class of 2018 leaves for the summer.

HSBC’s reported income before tax amounted to $7.1bn in 2016, 62% lower than the prior year. 2016 was described as a year of uncertainties created by the significant and largely unexpected economic and political changes, and HSBC’s awful Q4 2016 results showed the impact of Brexit and the turbulent time for this London-based bank. HSBC reported a better than expected Q1 profit on Thursday (5/4/17). Trading revenue jumped 29%, exceeding the average 9% rise at nine of the largest global investment banks. Retail banking and wealth management, HSBC’s largest division, drove the revenue in the first quarter of 2017 by 15% amid rising interest rates.

However, pretax profit for Q1 2017 fell to $5 billion, down from $6.1 billion a year ago. The global slowdown has negatively affected its results. Bad-debt charges in personal finance are subsiding. Asia’s growth is slowing and competition is intensifying. HSBC sold the operations in Brazil as the CEO Gulliver continues to exit unprofitable countries. HSBC’s progress in attracting individual customers in China has been slower than expected according to Reuters. Originally, the company was pitched under the projection of growth in emerging markets. Moving forward, the limited growth potential suggests that HSBC is no longer suitable for the AIM International Equity portfolio.

What has the stock done lately?
HSBC shares jumped by 3.56% as the CEO Gulliver halted revenue decline in the first quarter of 2017, with a current price of $42.68 per share. This recent support for the stock becomes a unique exit point as some of the drivers behind the company’s original admission to the AIM portfolio continue to deteriorate.

Past Year Performance: HSBC has increased 35.32% in value over the past year, but the stock is nonetheless on the bargain table: 2-year CAGR of the stock price is -5.95% and 3-year CAGR is -5.92%. After originally being purchased at a price of $49.94, HSBC proceeded to fall by $7.26.

Source: Source: FactSet

My Takeaway
Despite the 1Q 2017 results showing increased market confidence on HSBC its high capital position to accumulate assets in Asia, stock price decreased by 6.53% since we bought it in October 2014. ROE is down to 0.29%, P/E is 316.80, and long term EPS growth rate is -16.88%. The future growth potential of HSBC is uncertain as Brexit unfolds and a continued slowdown in Asia is likely. Therefore, it is recommended that the AIM International Equity Portfolio sell HSBC.

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