American Express (NYSE: AXP) could begin processing online and offline payments in China within six months.
The People’s Bank of China (PBOC) issued Express (Hangzhou) Technology Services, a network clearing license on 13 June 2020, Bloomberg reports. To elaborate Express (Hangzhou) Technology Services is Amex’s Chinese joint venture. The PBOC is China’s central bank.
A network clearing license allows Express (Hangzhou) Technology Services to operate a payment-processing network in China. Thus, the license could enable the use of American Express, or Amex, cards in China.
The Express (Hangzhou) Technology Services bank-card clearing network could work with leading Chinese mobile wallet providers such as Alipay and WeChat Pay, Bloomberg claims.
Will American Express (NYSE: AXP) make money in China?
China’s financial services market is enormous. Bloomberg estimates Chinese financial services market will grow to $45 trillion this year.
China’s mobile transactions market alone was $27 trillion (190 trillion yuan) in 2018, Bloomberg claims. One Chinese mobile payment app; Tencent Holdings’ WeChat Pay had 1.203 billion users in first quarter 2020, Statista estimates. That number rose from 1.117 billion in 1st quarter 2019.
In contrast, Ant Financial’s Alipay had 846 million users in 1st quarter 2020, Statista estimates. Interestingly, Alipay had 507 million users in first quarter 2017.
American Express is entering a growing market in the world’s second largest economy. Investopedia estimates China’s nominal Gross Domestic Product (GDP) was $14.4 trillion in March 2020.
The Enormous Chinese Market
Conversely, Investopedia estimates China’s Personal Purchasing Parity (PPP) GDP at $27.31 trillion in March 2020. Furthermore, Investopedia calculates China’s PPP GDP could grow $36.99 trillion in 2023.
Finally, China’s credit and debit car market is enormous. Bloomberg estimates there were 8.5 billion bank cards in China in September 2019. In detail, I calculate 7.65 billion or 90% of those banks cards were debit cards and 850 million; 10%, of those cards were credit cards. Thus, Bloomberg estimates there were 850 million potential customers for Amex’s cards in China in September 2020.
Why American Express needs China
Frighteningly, American Express (NYSE: AXP) needs China to survive.
Bloomberg claims Amex card spending in May 2020 was 30% lower than in May 2019. Moreover, American Express card spending fell by 45% in March 2020.
Additionally, American Express’s quarterly revenues fell from $12.166 billion on 31 December 2019 to $11.026 billion on 31 March 2020. Plus, Amex’s quarterly gross profit fell from $11.365 billion to $10.31 billion in the same period.
Frighteningly, American Express’s quarterly operating income fell from $1.986 billion on 31 December 2019 to $452 million on 31 March 2020. Dramatically, Amex’s quarterly common net income fell from $1.661 billion to $333 million in the first three months of 2020.
Consequently, Stockrow estimates American Express’s revenue growth shrank by 2.07% in the quarter ending on 31 March 2020. Therefore, American Express’s business is shrinking.
How Much Cash is American Express Generating?
I think American Express is still an impressive company because it generates incredible amounts of cash.
For example, Amex reported an investing cash flow of $21.927 billion on 31 March 2020. American Express’s investing cash grew from $5.455 billion on 31 December 2019.
Impressively, American Express’s ending cash flow grew from $-908 million on New Year’s Eve 2019 to $38.608 billion on 31 March 2020. Hence, American Express is still a money machine. Finally, American Express’s cash and short-term investments grew from $23.932 billion on 31 December 2019 to $36.095 billion on 31 March 2020.
Additionally, that money machine could grow dramatically because the PBOC gave Amex the key to the Chinese market. However, politics could wreck American Express’s plans.
How safe is the China Market for American Express?
The danger for American Express is that the growing conflict between the US and China could lead to business restrictions.
U.S President Donald J. Trump Sr. (R-Florida) could impose tariffs on Chinese products to win votes in November; for example. The People’s Republic could retaliate by rescinding Express (Hangzhou) Technology Services’ network clearing license.
However, I think such economic warfare is a remote possibility. To explain, I believe the “tensions” between the United States and China are a “work” Trump is using to fool the American people into thinking he is anti-Chinese.
Is Trump China’s Friend?
Notably, Trump is revoking the preferential treatment the United States gives Hong Kong, Reuters reports. Trump claims the action is in retaliation for Beijing’s restrictive security measures in Hong Kong.
Strangely, I think Trump’s action will strengthen Beijing’s hand by eliminating one of the principal reasons for maintaining Hong Kong’s autonomy. To elaborate, special treatment by the United States provides a rationale for keeping Hong Kong autonomous.
Eliminate America’s preferential treatment and there is one fewer reason for an autonomous Hong Kong. Additionally, ending U.S. preferential treatment will weaken Hong Kong’s economy and increase Chinese control over Hong Kong.
Consequently, I have to wonder if Trump’s action is a concession to his friend Chinese President Xi Jinping. Hence, I believe Trump wants America and China’s special economic relationship to continue.
Does Amex’s Bet on China Make Sense?
Under those conditions, American Express’s bet on China makes sense. American Express management believes that there will be no Cold War or economic conflict between the United States and the People’s Republic.
On the other hand, Amex could face huge losses if the US-China conflict is real. In particular, American Express (NYSE: AXP) could face a hostile Chinese environment if Joe Biden (D-Delaware) wins the U.S. president election.
Biden is playing to anti-China nationalism and racism in his campaign ads. In fact, Biden’s campaign released an anti-China video ad that is so offensive, Asian American groups label it racist. However, I cannot tell if Biden’s hostility to China is real or a work.
The risk for American Express is that the United States could have a new president who is genuinely hostile to China in January 2020. Conversely, Biden could plan new concessions to China to appease big-money campaign donors such as American Express executives.
Biden’s campaign receives money from 100 billionaires, Forbes estimates. Thus, I think Biden is an establishment candidate who wants to preserve America’s status quo and the special relationship with China.
Is American Express a Good Stock?
I think Mr. Market undervalued Amex (NYSE: AXP) at $105.62 on 16 June 2020. I think Amex is worth $200 because of the Chinese deal and all its cash.
On the negative side, American Express does not keep its value. To explain, AXP started 2020 at $125.85 on 2 January 2020 and fell to $101.68 on 12 June 2020, and returned to $105.62 on 16 June 2020.. In between, Amex rose to a high of $136.58 on 20 February 2020 and fell to a low of $68.96 on 23 March 2020.
Thus, American Express has an unstable stock price. However, I think the instability could make Amex a value investment. To explain, many investors will avoid this cash-rich company with vast growth potential in China because of the unstable share price.
Appealingly, Amex is a cash-rich company with growth potential that pays a good dividend. For instance, American Express paid a 43₵ quarterly dividend on 7 May 2020. Overall, Dividend.com gave Amex a $1.72 annualized payout, a 1.69% dividend yield and a 57.91% payout ratio on 16 June 2020.
Dividend.com credits American Express with eight years of dividend growth. Therefore, I consider AXP an outstanding dividend stock.
American Express is a cash-rich financial company with strong growth potential
If you are looking for a cash-rich financial company with strong growth potential American Express (NYSE: AXP) and a nice dividend deserves a look. I think the Chinese network clearing license could add a lot of value to American Express.
Ironically, American Express could be an excellent investment for those who think China will soon overtake the United States as the world’s dominant economy.