With Fed Rate Rise, Will Hong Kong’s Red Hot Real Estate Finally Cool?

The impact of the Federal Reserve’s rate rise will be far reaching.  With the Hong Kong dollar pegged to the greenback, the HIBOR base rate continues to rise.

HIBOR 2

Although not in strict tandem, short term rates have finally begun to rise.

HIBOR 1

Despite the inexorable rise in short-term rates, Hong Kong lenders held steadfast until August 8, when HSBC, Hang Seng Bank, Standard Charter and Citibank adjusted their prime rate to an effective rate of 2.25%.  This was the first change since 2008.  Typically, Hibor linked mortgages revert to prime when a rise in Hibor makes prime-linked mortgages cheaper.

The pain will shortly be felt, as new borrowers have been forced into variable-rate mortgages as banks prepared for the rise.

Hong Kong New Mortgages

While Hong Kong banks may adjust to the risk with variable rate loans, developers have less room to avoid the pain.  Thanks to the rise in Hong Kong property prices, along with the weaker yuan, and restrictions on mainland development in tier one cities, mainland developers have joined the feast in Hong Kong, but may have come to the table late and without a full menu.  Prices and volume appear to have peaked.

Hong Kong Property Prices Chart

Source: Midland Realty

Two of the largest mainland developers, Country Garden, HK 2007 and China Evergrande, HK 3333  bought land at the peak and are therefore vulnerable to a fall.

Mainland developers [are] in a more vulnerable position to any price corrections in the Hong Kong residential market. Their projects in Hong Kong may struggle to break even, or potentially run into losses, if prices decline by more than 15 per cent or 20 per cent,” said Cindy Huang, an analyst at S&P Global Ratings.

UBS has predicted Hong Kong home prices will tumble as much as 10 per cent from this month to the end of 2019, while Citibank forecast a 7 per cent fall in the second half this year.

That is roughly when Evergrande and Country Garden plan to start selling thousands of units now under construction in Tuen Mun and Ma On Shan.

In January, Evergrande Group paid the highest amount per square foot – about HK$8,300 – ever recorded in Tuen Mun, when it bought a site that is expected to be developed into a 1,982-unit project on 8 Kwun Chui Road from Henderson Land Development for about HK$6.5 billion (US$830 million). Henderson reaped an 80 per cent profit on the deal for the land that it bought in June 2015.

Adding in construction costs and interest expenses, the total investment cost for Evergrande’s Tuen Mun project will be about HK$14,410 per square foot.

That means Evergrande will need to sell flats in the development at about HK$16,600 per square foot to generate a reasonable profit of about 15 per cent. However, used homes at a nearby development, Wheelock Properties’ Napa, have been selling for about HK$14,200 per square, which means Evergrande is vulnerable unless home prices continue to climb.

Wheelock Properties, a Hong Kong developer, benefited from buying land early. In 2013, it paid HK$1.39 billion – or just HK$3,683 per square foot – for the Napa site. In 2017, its average flat sold for HK$11,500 per square foot, giving Wheelock a 67 per cent profit, after adding in construction and other costs.

One mainland developer may escape the “late penalty”. Vanke Property (Hong Kong) bought a parcel for HK$3.8 billion in 2015, or HK$4,541 per square foot. That gives it more room to still make a profit if profits begin sliding. To achieve a 15 per cent profit margin, Vanke would only need to price its Le Pont flats at about HK$11,790 per square foot.

“[Vanke Property (Hong Kong)] bought the land relatively early when land in the area was sold at around HK$4,000 per square foot,” said Alvin Lam, director at Midland Surveyors, who added the developer may escape from any possible market downturn as its land price is relatively low.

Like Evergrande, Country Garden also got in late.

Last September, Country Garden paid about HK$2.44 billion, or HK$10,498 per square foot, for a 60 per cent stake in a plot in Ma On Shan owned by Wang On Group.

For Country Garden to net a 15 per cent profit, the 547-unit project would need to sell its flats at about HK$18,219 per square foot.

In contrast, Henderson Land achieved a profit margin of 68 per cent at its nearby Double Cove project by just selling its flats at about HK$15,000 per square foot. It had bought the land there in 2009 for HK$3,253 per square foot.

“These mainland developers have responded to this challenge by slowing down their land purchases in Hong Kong this year, due to expectations of thin margins and tightened financing conditions,” said Huang of S&P Global ratings. “Refinancing pressures continue to hamper mainland developers [however]. This lower rate of land acquisition in Hong Kong is likely to continue.”

Quote Source: South China Morning Post

With the rising prices, Hong Kong has grown to be among the least affordable markets in the world.

Housing Affordability Hong Kong

Developer stocks, which have seen explosive growth on both the Mainland and Hong Kong have finally been declining, along with the indexes thanks to both the creeping interest rates and the US China trade war.  The majority have fallen close to 20% from their peak. There is most likely more pain to come.

Property Developers Hong Kong Mainland

 

 

 

 

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China Telecoms Forced to Drop Prices and Increase Coverage

Big Three ordered to reduce mobile data tariff by 30%.

China Telecoms can’t catch a break.  In 2017, the beleaguered telecoms were forced to stop charging headset long-distance and roaming fees and to reduce the internet prices for small and medium enterprises.  This year, as they struggle to increase 4G implementation and add Broadband customers, they’re being told to lower prices and increase coverage and speed.  Per the Hong Kong Filings of the China Mobile 941 hk, China Unicom 762 hk, and China Telecom 728 hk..

Presented in the Government Work Report presented in the first session of the 13th National People’s Congress of the People’s Republic of China convened on 5 March 2018,

  • increase efforts in implementing network speed upgrade and tariff reduction measures;
  • achieve full coverage of high-speed broadband in cities and rural areas;
  • expand the coverage of free Wifi Internet access in public areas;
  • substantially reduce the tariffs of household broadband, corporate broadband and dedicated leased line;
  • cancel data “roaming” fee;
  • reduce mobile data tariff by at least 30% in this year.

The three declined on March 5th, along with the HSI and HSCEI indexes but have under-performed year to date and on a monthly basis.  Based on this edict, the stocks will face more declines.

Telecoms

While they haven’t submitted annual reports for 2017 yet, the third quarter showed minimal growth in terms of revenue, profits and Customers.

Telecoms Customers

Despite migrations to 4G and new Broadband customers for China Mobile and China Telecom, revenues increased less than 5% or even decreased in the case of China Unicom,  for the 9 months ending in September.

Telecom 3Q

These less than stellar numbers will be negatively impacted by the new government regulation as well as the uncertainty regarding the continuously changing tower leasing agreements following the 2015 spin-off.

 

Just in Time for Volatility, HKEX adds New Shorts

Effective 2/9/2018, HKEX announced a revised list of designated stocks for shorting.  The list now includes 929 listings, from 911.  While 44 stocks were added, 26 were deleted.

Shorts Additions

The deletions include the now infamous Huishan Dairy, 6863hk.

Shorts Deletions.PNG

Hang Seng Indexes have dropped dramatically along with US indexes.

Hong Kong Indexes

Things look bad before Hang Seng open, following today’s US market drop.

US Indexes

Hong Kong Indexes in Free Fall

While US markets turned positive yesterday, Hong Kong did not follow but diverged as its major indexes and constituents continued a sequential decline.

Hong Kong Indexes

The Hang Seng, HSI, has had 5 straight days of decline.  The Hang Seng Enterprises Index, declining for 3 days, has entered correction territory at over 10% below its recent high.

The 10 stocks showing the worst weekly drop in the Hang Seng, from 9.7% to 17.24% stocks come from a wide range of sectors, but were dominated by mainland developers including Country Garden, 2007 hk, China Resource Land, 1109 hk and China Overseas, 688 hk. The fall was felt in all sectors, however, as 41 of its 50 members declined at the last close.

Hang Seng Decliners

 

data source: AAstocks

The Hang Seng Enterprises, which has now corrected with an over 10% drop, has been dominated by securities companies and banks.  However, the pain was widespread as the last close saw 39 of its 40 members decline.

HSCEI decliners

data source: AA stocks

In the U.S., the increased volatility and major Monday drop was generally blamed on inflation fears and rate increase expectations.  In the past, Asian markets have often followed the U.S.  However, as China has grown as an economic power, ranked just behind the U.S., the decline may be more indicative of potential weakness in China growth versus reactions to the U.S. market.

Up until this week, both the Hang Seng and the Hang Seng Enterprises Index had been among the best performers year to date.  This made them ripe for  a correction.  Whether there are other reasons under this decline, remains to be seen.  Slowing car sales, slowing cellphone sales, financial crackdowns, pollution enforcement, heavy debt loads, slowing residential construction, may finally be negatively impacting the economy despite continued projections of growth of over 6% by the government.

Hang Seng Enterprise Index Expanding, Adding Tencent.

The Hang Seng Enterprises Index, or HSCEI, will be dramatically growing from 40 to 50 stocks; eliminating one while adding 11 others.  Since the additions include red-chips, and P-chips, it will shed its H-share index moniker.  This is the first increase since 2010.

Red chips are mainland-based companies incorporated internationally and listed in Hong Kong, while P-chips are private Chinese enterprises controlled by mainland individuals.

While the number of stocks will increase by only 25%, the market cap combined holdings will more than double, based on the last share closing prices.  The large increase is primarily due to Tencent, 700hk and China Mobile, 941hk.

HSCEI Changes

The additions will diversify the finance-heavy index, with technology company Tencent representing the largest by market cap for the reformed index.

The HSCEI dropped over 5% today, along with most Asian indexes, following the US widespread record-breaking market drop on Monday.  Both the HSCEI and the HSI, have been among the top international index performers over the last 12 months.

HSI HSCEI Performance

The additions are to be phased in, starting March 5, 2018, as announced earlier.

HSCEI phase-in

Per the announcement,  a A Hang Seng H-Share Index will be launched covering the 40 H shares in the HSCEI to cater for market interest in such a benchmark.

 

 

 

Struggling Great Wall Faces Head-On Collision with Honda Motors

Great Wall h6 pic

Great Wall Motors, 2333hk, already grappling with declining margins, has been blind-sided by a lawsuit from Japan’s Honda Motors, HMC, according to Caixin.

Japanese automaker Honda Motor Co. is taking legal action against Chinese car-maker Great Wall Motors, claiming it infringed on its two patents.

Honda requests Great Wall to stop selling its SUV model of Haval H6. It is also demanding more than 200 million yuan for what it claims were economic losses it suffered, according to a statement of the Beijing Intellectual Property Court dated on Jan. 31.

Press officers at Great Wall said they were unaware of the lawsuit and declined to comment.

While the suit will take time, a halt in sales of the Haval H6 would decimate the already struggling auto maker.   The H6 has been struggling to maintain its high place among China SUV’s, with its sales representing a major percentage of Great Wall’s total units: 47% in 2017; and 54% in 2016.

Great Wall December 2017

As can be seen, the Haval H6 has been Great Wall’s most popular vehicle, but its sales have been sliding downward despite Great Wall’s increases in promotions.  These promotions have decimated its bottom line – with 2017 annual sales projected of 101 Billion rmb, an increase of 2.8%, from a unit sales drop of .4%, Net Profit plummeted 52%.

Great Wall H6 Monthly Sales Historical

Great Wall Annual 2017

Great Wall’s “profit warning”, with few details, blamed the major drop in net margins on increased promotions and research and development costs.  It does, however, match up with the 9 month interim report where net profit dropped by 59.9% despite a minor sales drop of .6%.

Great Wall 3Q 2017

Great Wall is one of China’s few auto companies to sell only China made and created vehicles.

No H6 Saviors

In SUV’s, which make the bulk of Great Wall’s Sales, the H2 showed promise for the year, with a 9.2% increase but for the month of December was down 48% year on year. Great Wall has touted its new luxury models VV5 and VV7, which have shown sales, but combined with other new models represented only about 15% of the total unit sales for 2017.

Great Wall Other Models

Great Wall Monthly Sales All Units

Room for the Stock to Fall

Great Wall’s stock has failed to match the H.S.C.E.I index performance.  While it has a low p/e of 7, (vs. darling Geely at 38), it has lower to go without a major shakeup. It can’t look to the government. Thus far, the government has shown no intent to stimulate the auto sector, having discontinued the tax discount started in 2016 and halved in 2017.  Passenger sales in China increased only 1.35% in 2017, with a sales tax decline and a booming stock market.  Without outside stimulus, Great Wall will have to look internally.  It’s CEO and founder, Wei Jianjun, has his work cut out for him.  However, the rumors of a tie-up with Fiat Chrysler have been squashed.  This was not surprising given its established and growing relationship with GAC, 2238 hk.

Great Wall Stock

 

 

 

 

 

China Vanke Shoots For New Board, No Barbarians Allowed

Embattled China Vanke, hk 2202, has finally set a meeting to vote for a new Board, the current term having expired in March of 2017.Vanke Board

Source: Hk Filings, latest

Out: Wang Shi, Vanke founder, China Re Representatives & Blackstone. In: SZMC with equal representation to Vanke.  The board also appears to have some new diversity with non-related representatives.

What’s Missing: Baoneng, Anbang.

The major reason for the delay in the new vote was to ensure Vanke executives maintain control, or at least split it with an entity of their choosing, despite their minority ownership interests.  They’ve been aided in their quest from outside sources.

  • China Re, which owned 15.3%, agreed to transfer them to Shenzhen Metro, SZMC.
  • China Evergrande, 3333 hk, a competing developer which had been stockpiling shares, volunteered transferring its voting rights to SZMC.
  • Evergrande officially sold the shares, at a loss to its original cost, to SZMC.  (No, Evergrande isn’t a charity – they are pursuing a back-door listing in Shenzhen which will very possibly be aided by this gesture).
  • Other heavy owner & tagged a barbarian, Baoneng, was prohibited from selling certain insurance products and its Chairman was prohibited from insurance for 10 years.
  • Vanke started a lawsuit in February, 2017, to invalidate Baoneng’s shares based on its use of leveraged products to acquire them.

Despite all these visible moves, the fact remains that Baoneng still holds 25.4% of the company’s shares and would be assumed to have a legitimate reason to expect Board representation.  The executives from Vanke’s side own a minor percentage of shares. Another insurance company, Anbang, also owns a significant amount of shares.

Baoneng Owner

Source: HK filings

The June Meeting, Friday the 30th of June, should be an interesting one.  Although the stock has been rising on the news, it’s still too early to know if the proposal will get the 2/3 majority needed.