Monthly Archives: March 2016

Shanghai Hang Seng Update

shanghai hang seng

The Hang Seng’s rise was muted with only Hong Kong Exchanges & Clearing, HK 388 up over 5%, as Premier Li Keqiang promises a Hong Kong Shenzhen connect. Energy stocks dropped which kept the overall rise relatively flat.  In contrast, the Shanghai Comp rose over 2% thanks to reports that margin lending rates were being reduced.

The smaller Hang Seng Enterprises Index rose more than the Hang Seng , at +.51% thanks to  brokers as well as insurers.

HSCEI Leaders.PNG

 

China Vanke Angers Shareholder: Pits SOE against SOE

 

vanke share sale

I recently showed the potential impact of the proposed share sale by State-owned China Vanke, HK 2202 to State-owned Shenzhen Metro for $6.1 to $9.2 US Billion.  New quotes from a state-owned, majority holder indicate this deal is far from done.

The MOU regarding the sale was a vague proposal to raise a wide amount from 40 to 60 Billion rmb published in a HK filing on 3/12/16 with promises of concrete details on 3/15/16. Those details have yet to materialize.  The only published Hong Kong filings were on the 3/17/16 annual meeting with a note that the A shares would continue to be suspended.  This meeting followed an online meeting, 3/15/16, the details of which haven’t been published on the Hong Kong Exchange.

Although China Vanke published results annual results on 3/13/16, nothing was mentioned of the MOU and its potential impact or the continued A share suspension, now in its 4th month. The annual report included a lot of general and specific statistics on the new “Silver Age” of real estate in China and their synchronous development with municipalities along with details on their current projects, but nothing on subsequent events.

As the above chart shows, the MOU proposal of issuing new shares to Shenzhen Metro would not only dilute the stated adversary’s holdings, Baoning, but would also drop the ownership by the longer-term, State-owned China Resources from 15.3% to between 11.16% to 12.35% depending on how much money is raised and the price assuming a 5 or 20 day average closing price.

Now Reuters reports that China Resources has started to wake up to this reality, pitting  the power of one state-owned entity against another. Fu Yuning, China Resource’s chairman, went so far as to label the lack of presentation at the annual meeting as unfortunate. Low-key words but still unusual in China for a cited source to make a negative comment.

China Vanke last closed at 19.04 HK dollars, down 2.5% while the Hang Seng Enterprises Index on which it was listed, closed up .51%.

 

Vanke Vanquishes Baoneng with A Little Help from the State

Called a buy, more like a swap.  Behemoth developer China Vanke, HK 02202 is selling new shares of itself to a state-owned entity in exchange for equity which will effectively dilute Baoneng’s weighty ownership.  If you can’t fight, dilute!

Shortly after new investor Baoneng had acquired over 22% of China Vanke in 2015, making it the dominant shareholder, Vanke suspended both its A and H shares. The reason given was to prepare a restructure.  The only other major shareholder at that time, state-owned China Resources, held 15.29%.

Various news articles emerged regarding Vanke’s Chairman Wang Shi’s  distrust of the brothers Yao Zhenhua and Yao Jianhui at the helm of Baoneng, in terms of both its money sources via wealth management products and its experience in property development. The H shares in Vanke resumed trading on 1/6/16 while the A shares continued to be suspended as multiple announcements were made of promises of details to come.  Details finally emerged on 3/13/16 about a surprise MOU stating that Vanke would be buying a full or partial equity stake in a target company owned by state-owned Shenzhen Metro Group Co., SZMC.  The purchase is to be arranged mostly through the issuance of new shares of Vanke to SZMC.  On the same day Vanke released its earnings, which showed a nice jump of 32% although net profit to shareholders, thanks to a bigger portion to non-controlling interests, increased only 15%. It also raised the annual dividend from .50rmb to .72 rmb. Given the depressing state of real estate in China in all except the 4 top tier cities, this was a positive result and the stock climbed over 9% today to reach a market cap of 307.47 HKD (approx. $47 Billion US).

No value of the equity in SZMC was given, but the Vanke filing did state that the approach would make SZMC a “long-term important shareholder.”  Per Shenzhen Metro’s website, as of 12/14 it had assets of 156.7 Bill rmb (vs. Vanke’s 611.5 B rmb). SZMC also reported net assets of 70.7 B rmb for an asset/liability, of 54.9%.  It stated that it was pursuing the concept of “build metro, build city” and had started its first real estate project in 2013 of ShanHaijing: residences with views of water and hill.  Sales were “good”.  Property under construction at the end of Q1, 2014 was 700,000 sm, (Vanke delivered 20.6 million square meters in 2015.) The real estate group, Metro Group Development Branch, was established in 2007.

Per the MOU, SZMC intends to inject assets of certain premium property projects above various subway stations into the Target Company upon the signing of Formal Documents by both parties. Formal documents are expected March 15, 2016. There is still no announcement of A share resumption.

Golden Paradise, Golden Dream, Golden City and Joying Gold are among the many projects of Vanke where increased control by Baoneng will be rebuffed thanks to the new share sale to SZMC. Details are sketchy, and the parameters are broad, but based on the average closing prices of Vanke H-shares, this would mean an increase of 19% to 27% in shares outstanding dependent on whether they raise 40 or 60 million rmb ($6.1 to $9.1 $US Billion).  Below is the possible scenario and its resultant share increase and ownership changes based on the amount to be raised at a 5 day or 20 day average closing price for China Vanke H shares. (This is based on the pre and post ownership – see below.)

 

Vanke Share Issue 1.PNG

As stated above, there are currently few details on the swap.  Based on the scenarios I’ve shown, which are reasonable based on other transactions in the Chinese market for private share issuance, China Vanke shareholders will face a significant stock dilution to fight off the Baoneng bid.  It’s much too early to see if the swap for property related to metro stations will be worth it.  Additionally, Shenzhen Metro will have a large, controlling interest in Vanke which will give it leverage over decisions.  State ownership, including China Resources, will be from 32% to 38% and could lead to less control over projects than Wang Shi had bargained for.

Original Ownership: Pre- and Post Issue based on 20 day avg. stock priceVanke 20 dayOriginal Ownership – Pre- and Post Issue based on 5 day avg. stock priceVanke 5 day

Shanghai Comp down over 2%, Hang Seng Flat

 

shanghai hang seng

Most sectors of the Hang Seng were down with the exception of Consumer related companies including wholesaler Li and Fung, HK 494 and up 4.94% and food manufacturers Tingyi, HK 322 and Want Want China, HK 151 both up slightly over 1%.  With no specific news an these, it would be assumed they rose in response to the news of the CPI rise of 2.3%, particularly with the Food component rise of 7.3%.  This rise is most likely unwarranted, with an interesting critique of the statistics by Christopher Balding.  China Life, HK 2628, continued its precipitous slide from last week. Wharf Holdings, HK 4, tumbled after earnings as Citi, despite a target price rise from 31.7 to 34.5, kept it at Sell due to continuing weakness in high-end Hong Kong retail sales.

 

Hang Seng Movers

 

 

 

8 Reasons Why China Swapping Loans for Equity is Bad

Reuters reports that China banks will be allowed to swap bad debt for equity in troubled companies.

Equity for NPL’s starkly conflicts with reform promises and will damage China’s economy.

1. Over supply in construction, steel, cement and aluminum will continue in conflict with State promises to halt.

2. Needed bankruptcies will be avoided, need for debt restructure eliminated.

3. Personnel lay-offs will be deferred for sake of employment numbers, not economics.

4. Production slowdowns and halts will be unnecessary, in conflict with declining demand and prices.

5. Declines in prices for major products: steel, cement, aluminum and coal, will accelerate.

6. Capital expenditures in unprofitable assets will continue.

7. Banks will have more money to lend, due to less restrictions, but won’t recognize shit “assets”.

8. Opaque reporting will be increased. Banks stock prices, already with the lowest international p/e ratios on trailing and projected eps, will continue to be low as investors are doubtful of their true health.

China Big4 Banks Surge on Rumoured Support

The Big 4 SOE banks of the PRC surged in Shanghai on reports of government intervention to prop up prices before this weekend’s annual policy meeting.  While the Shanghai Composite rose a mere .5%, the Shanghai 50, dominated by financials and energy,  increased by 3.36%.  The outsize volume for the Big 4 Banks reinforces the support comments made by anonymous sources.

Big 4 Volume.PNG

The gains in Shanghai, from over 2% to over 4%, were more robust than those in Hong Kong, none of which exceeded 2%. Still, with the bearish movements in Shanghai and Hong Kong, the stocks are generally well below the start of the year with the exception of Agricultural Bank of China, on the Shanghai exchange.

banks big 4 upd

Despite today’s changes and the rally from the 52-week lows, these shares have tumbled hard from their 52-week highs.  These 4 banks are among the top 10 in the world in terms of assets.  Even after today’s Shanghai shoot, the p/e’s of a couple of their peers in the top 10, BNP Paribas, p/e of 8.86; JP Morgan Chase, p/e 9.9 demonstrate the continued market skepticism toward these Banks and a China stimulus save.

Big 4 Banks pe

The 3rd quarter’s growth in NPL’s and flat to negative growth in net earnings reinforce this skepticism.

big 4 banks npls and net income.PNG

None of these banks have yet to report annual earnings.  Based on history, the banks will be reporting in late April.

Bank                                                  Last Annual Release

Agricultural Bank of China                           4/28/2015

China Construction Bank                              4/29/2015

Bank of China                                                    4/30/2015

Industrial & Commercial Bank                    5/5/2015

 

Shanghai and Hang Seng Ratchet Up, Following Monday’s US Rise

shanghai hang seng

Apart from a bit of a jump in oil, there was no rational reason for the rise in the Hang Seng other than the U.S. market rise.  The one big exception was China Resources Beer Holdings, HK 291, which rose over 18% thanks to the perceived under-payment for the 49% of Snow Beer, from SABMiller.  Unfortunately for China Resources Beer, (catchy name), this sale was too late to save it getting the boot from the Hang Seng index in March.  Whether the exuberance will last for this SOE remains to be seen.