Monthly Archives: April 2016

Shanghai Composite and Hang Seng Falter

SH HK UP

Major Chinese indexes faltered pending 1st quarter earnings reports, Wednesday’s data on March industrial profits and  April consumer sentiment and mixed signals from regulators.

Commodity Bubble:

Commodity trading raised alarm bells with both Deutshe Bank and Morgan Stanley noting the spike in volume.  Per Bloomberg:

The recent spike in speculative trading in commodities in China has stunned global markets, according to Morgan Stanley, which cited a jump in local activity for steel, iron ore and cotton as well as eggs and garlic.

“Now China’s speculators engage commodities,” analysts including Tom Price and Joel Crane said in an e-mailed note on Monday. “China’s latest speculative spike has stunned global markets.”

To put it in perspective, also per Bloomberg:

“The fact that trading volume for steel rebar contracts was at 223 million tons of rebar last Thursday, more than China’s full-year production of steel rebar, raised concerns about the repeat of boom-bust scenario seen last year in China’s equity market,” analysts at Oversea-Chinese Banking Corp. wrote in a note on Monday.”

Finally, a picture courtesy Zerohedge:

Trading Volumes Commodities

Banks and Property Agencies Under Pressure to Slow Shanghai Skyrocketing Prices

Per Bloomberg,

China’s banking regulator in Shanghai is halting business between commercial banks and six real estate agencies for a month, the latest in a string of measures to contain risks in the housing market.

The suspension, which takes effect Monday, covers agencies including the local arms of Beijing Homelink Real Estate Brokerage Co., Pacific Rehouse Co. and Shanghai Hanyu Property Brokerage Co., according to a statement by the China Banking Regulatory Commission’s Shanghai office on the city’s official Weibo microblog account.

In the same account, branches for two of China’s largest lenders, Industrial and Commercial Bank of China,  1398 hk, and Bank of China, 3988  hk, along with HSBC are suspended from issuing mortgages for the next two months.  The reasoning given eerily echoes the subprime meltdown as:

China’s central bank Governor Zhou Xiaochuan last month told banks to better assess customer creditworthiness in mortgage lending to reduce risks, adding that unauthorized loans by real estate agents increased the chances of bad debts.

While the overall management on residential mortgage loans is “relatively prudent,” some real estate agents advanced the transactions by providing down-payment loans and bridge loans, the statement said. Some commercial banks also violated rules with their practices on mortgage loans, according to the statement.

China Eastern Stalls Again

Despite the news that CTRIP, CTRP NYEX, is stepping up to invest about 3Billion rmb’s into China Eastern, 670 hk, the stock swooned ovef 5% today while China Southern, 1055 HK, dropped 1.2%, and Air China, 753, hk  dropped 2.5%.  The air pocket could be due partly to the following:

  • The 3Billion rmb is just a small portion of the 15 Billion China Eastern announced it would raise with a new, private A-share offering.   Approved by the CSRC in January of 2016 with this investment being the first actual investment since then. The bulk of the money is needed to buy 23 new planes.
  • China Eastern faced headwinds when it tried to buyback  3.3 Billion yuan notes due March 2017, 4.8%, guaranteed.  After offering to buy via a dutch Auction with a minimum price under par, the company got no quorum and amended the offer to par + accrued interest and extended the offer to 4/27/2016.  (The bonds were issued in March, 2014, to professional investors).
  • The company has been issuing super-short term notes to finance working capital while it waits for  the proposed shares to be bought to finance its expansion. In April alone it issues 4 separate tranches totalling 12 billion rmb.  Since the beginning of 2016, it has issued 19.5 Billion in super short term notes, generally refinancing existing debt.

 

China’s Largest Construction Firm Defies Rebound

China Construction Communications Co., CCCC, 1800 hk, 601800, dropped another 5% + in Hong Kong.  It has now dropped over 10% in Hong Kong since 4/21/16 on disappointing 1st quarter new contracts. The latest drop has been less severe in Shanghai, but has shown a greater year to date drop of 13.7%.

CCCC stock

Source: Bloomberg

While much has been made recently over a China rebound, thanks to construction activities and commodities related to a housing price resurgence, (primarily in tier 1 cities), market optimism has not spread to this mainly infrastructure construction company.  (Infrastructure revenues = 86% of 2015 annual revenues).

The latest price drop has been blamed on q1’s new contracts, which showed only a 2% increase from the prior year.  This drop brought a downside risk prediction from Nomura,  which projected a target price of 10.06 at buy.  Despite the lower year on year increase, CCCC reportedly held onto its guidance which was a 9.6%% increase in new projects and a 6.0% increase in revenue, stating that the start of the year was not reflective of the full year.

In fairness, historical quarterly earnings have fluctuated based on the quarter, with the final quarter at the highest.

CCCC quartely

Historical Data based on hkex filings; 1Q 2016 from press report.

While the company may state that the first quarter is its slowest, as is born out in historical comparisons, the decline of 2014 and minimal growth from 1q, 2014 indicates good reason for skepticism.

Full quarterly results have yet been released for 2016 on the Hong Kong Exchange. However, its last annual release showed a continuting downward trend in ROE.

CCCC roe

Source: Morningstar

A summary of the annual report of this 112,000 employee firm follows:

cccc annual

*Helped by effect Tx rate drop – from 21.1% to 19.1% due to “high-tech” enterprise qualification
**Mid term Note, MTN – ISSUED 12/14; INTEREST GENERATED BUT NOT DECLARED; COUNTED AS EQUITY

Source: HK Filings

The company has limited means to match its 2015 performance growth or its projected goals. While it has been pushing to add international exposure, revenue outside of China represented only 19% of the total for 2015.  The company has primarily been investing outside of China in Hong Kong, Macao and Africa but has been prohibited from working on any road projects funded by the World Bank until 2017, due to fraudulent practices found on a road project in the Phillipines in 2009. The company is therefore primarily dependent upon infrastructure projects in China, which have approached saturation, are heavily indebted and have questionable ability to repay debt let alone turn a profit.

Conclusion – CCCC, the dominant China infrastructure SOE company has dropped significantly over the last 12 months but uncertainty in future earnings adds extreme risk to its valuation.  Comparing Financial Times projections to Company projections, shows the Hong Kong listing price to have room to fall, particularly since the company itself projects only 6% annual revenue growth and with 2% year on year for the first quarter.

CCCC PROJ

 

Shanghai Comp Hang Seng Diverge

sh hk upd

The Shanghai Composite, down over 3.86% for the week, managed an anemic rise today while the Hang Seng fell but was slightly positive for the week.  In Hong Kong, the malaise was widespread with 90% of its constituents down.

For the HSCEI, down 1.38%, resource stocks including Anhui Conch, 914 hk,   CNBM, 3323 hk  , China Shenhua, 1088 hk,  were particularly hard hit possibly on the news that infrastructure construction giant, China Communications Construction Company, 1800 hk, down 5.04%, first quarter contracts indicated a much weaker 2016 than projected. First quarter contracts were reported at: RMB107.884 billion, an annual increase of 2.2%. On an annualized basis this would mean it would fall short of its annual full-year new contract target amount (RMB650-700 billion), by about 218 to 268 billion rmb.  Putting this company into perspective, it’s market cap converted to dollars is about 26.4 billion vs. New York Stock Exchange listed Fluor, FLR at 7.57 billion.  It is an SOE which also employs about 110,000 people vs. Fluor’s 38,000. (As an aside, check out an amazing company video.)  Oddly enough, China Communications Construction, 601800 SH,  fell only .172% in Shanghai.

Autos:

As mentioned yesterday, BAIC, 1958 hk, down 6.27%, disappointed with declining net profits. Credit Suisse took down the price target from 5.3 to 5.1, keeping it at underperform as the Hyundai JV profit contribution was weaker than expected.  It also noted that
BAIC changed the accounting treatment on new energy vehicle’s (NEV) government subsidy in 1Q16, shifting from “Other income” to “Revenue”. As a result, the company’s gross margin rose to 5% in 1Q16.

As shown in earlier filings, for the first quarter total volume sold was down by 4.3% with the largest decline and segment, the JV Beijing Hyundai, dropping the most.  This is despite the fact that the company was projecting better performance here thanks to the PRC passing a 50% consumption tax decline for vehicles with a displacement of 1.6L or below from October 2015 through December of 2016.  With auto sales highly variable by month, March alone showed some improvement.

baic sales

Cement Capacity Continues to Defy Government

Following in the footsteps of smaller Asia Resources, 743 HK, China Resources, 1313 HK, reported a stunning first quarter loss 17.3 million rmb from a profit of 632 million rmb the prior year.  This was despite an increase in product sold which was unable to offset the decline in material prices of 26% (Asia Resources reported a decline in price per ton of 22%).

cement 1q charts

While both companies are small compared to Anhui Conch, 914 hk, or CNBM, 3323 hk, they show a disturbing trend of increasing production and sales despite obviously lower demand, in conflict with the constant assurances of the PRC to tackle the overcapacity problem of which cement is a major component.

cement capacity

Source: HK Filings. Asia Cement materials reported as: Cement, Clinker and Slag.  China Resources material reported as Cement, Clinker and Concrete.

Other News:

The PBOC, CSRC, CBRC and CIRC jointly announced that they support iron and coal enterprises to expand exports of iron and coal and to issue corporate bonds for debt restructuring.

Shanghai Hang Seng Update

All Sectors go for Chinese Indexes, buoyed by oil prices.

SH HK UP

Telecom: Telecoms reversed losses with China Mobile, 941 hk, leading the way up 3.6%. (HSI component). China Unicom, 762 hk, trailed up 1.06% (also on Hang Seng), while China Telecom,    728 hk, rose .74% (component of HSCEI).  China Mobile’s results were announced after yesterday’s bell, with net revenue of .5% Per AA Stocks, newest ratings were mostly positive:

China Mobile Ratings

Autos:

BAIC , 1958  hk,  suspended on 1st quarter results.  Finally released annual earnings report along with 1st quarter report.  BAIC, which has become increasingly reliant on sales of Mercedes Benz vehicles, saw a quarterly sales revenue increase of 30% but a decline in net profit of 25%.(HK Filing). More on this later today.

 

 

China Indexes Go Red

China Indexes slipped after yesterday’s exuberant rise. The drop left traders scratching their heads.

SH HK UP

Given that the indexes are still above the start of the last 30 days, it could be a short-term correction.

Sh HK 1 mo Chart

(1 month – Shanghai Comp Orange; Hang Seng Index Blue)

The decline was felt pretty much across the board.  For the Hang Seng, 76% of its members dropped.  The small positive group of 18% consisted  mainly of property related companies. The HSCEI, which declined 1.19% also had negative members dominate at 88%. The four positive movers were: Wanda Commercial, hk 3699, China Vanke, hk 2202, PICC 2328 and Air China, HK 753. The only one of these linked to news was PICC, with UBS expecting a positive improvement in the Property and Casualty Financial Service Industry  in China, lifting its target price of PICC to 17.2 and rating it a buy.

Telecoms – Telecoms continued yesterday’s slide despite the biggest, China Mobile, announcing that its 1st quarter saw a net addition of 7.61 million mobile customers. Net profit was up only .5% and the company noted the growth rate for the whole year would be challenged, ” in the first quarter of 2016, ARPU of mobile customers was RMB57.6 and recorded a slight increase compared to last year. “China Mobile, 941 HK, down .949%; China Unicom,  762 HK, down 2.977% with UBS noting its profits are under a lot of pressure and cooperation with rival China Telecom is minimal. China Telecom, 728 HK, down 3.118.

InsuranceChina Life, 2628 hk, down 1.837%, announced its first quarter profit could decrease by 55% – 65% due to a decline in investment income an a change in accounting methods. China Life has had a dismal run, down 49.6% over the last 12 months and 12.19% year to date.

china life hsi

China Life H2628 HK, Orange; Hang Seng Blue

Overcapacity and Cement

Asia Cement, 743 hk, up 2.9%, one of the smaller players in the cement industry, continues to produce despite negative earnings and government edicts to decrease production in cement nationwide. Today’s filing revealed an 11% decline in revenue, coupled with a drop in gross margin from 16% to 9.9%.  First quarter NOI losses after Taxes were -62.8 million rmb from NOI of 1.4 million rmb the prior year. The company continues to churn out product despite obvious declines in demand, upping sales tonnage by 17% while prices dropped by 24%. The pledged decline in overcapacity industries in China appears to be a myth.

Asia Cement

Ping An, 2318 HK, released its 1st quarter financial statements for its banking subsidiary. At first pass, results are impressive with net interest income, commission and fees all up. As noted in the filing, these increases were due to an emphasis on Mega: “This is to establish a platform for “mega investment banking, mega asset management and mega transaction” supported by the four engines of growth, namely “corporate banking, retail banking, interbank banking and investment banking”.

However, while revenues were up 33% year on year, net income after tax was up only 8.1% thanks mainly to a doubling of asset impairments.

ping an income

Not surprisingly, the NPL ratio and Loan loss provision increased dramatically.

ping an npl.PNG

It’s interesting to note that despite interest rate drops by the Central Bank, Ping An has actually increased its net interest margin, thanks to a slight drop in yield on interest earning assets more than offset by a decline in interest rates on liabilities.

ping an interest income.PNG

 

 

China Indexes Rise On Oil and Output

SH HK UP

With oil prices currently up thanks to a Kuwaiti strike, production surging in steel mills, and gains in residential prices in top tier cities, indexes rose in China.  All sectors benefited despite a lack of major, company-specific news with the exception of Telecom: China Telecom, HK 728 down 1.418%; China Unicom, HK 762, down 1.913% & China Mobile, HK 941, down .5%.  China Unicom took the sector down as it expected first quarter profit to tumble 85% yearly to RMB480 million. It blamed the loss on higher selling and costs.  The three telecoms transferred their tower assets to a separate entity, state-owned China Tower, in October of 2015 with lease-back costs still under negotiation. Ownership after the October transfer was split:

27.90% China Telecom
28.10% China Unicom
38.00% China Mobile
6.00% China Reform Corp*

*China Reform Corp. is a full subsidiary of State Owned Assets and Supervisory Committe and Administrations, SASAC

(Per Bloomberg, China Tower would then be pushing a private placement  IPO in 2017 potentially worth $10 Billion US. )

China Eastern Airlines, HK 670, down 2.48% in Hong Kong, announced that its controlling shareholder would not sell the 700M shares following its  lock-up expiration. “In view of the optimism on the long-term prospect of the company’s investment value, CEA Holding has undertaken that it will not dispose of their unlocked shares of the company within 24 months from 18 April 2016.” This would be better than the market perception, with the stock losing 21.5% in Hong Kong, 16.03% in Shanghai, SH 600115 over the last 12 months.

China Eastern chart

(China Eastern HK 670 Orange; SH 600115 Blue)

Steel News Irony – Conflicting Reports of Production Inside China & Out

Today’s report by the China Iron and Steel Association, CISA, showed that first quarter Chinese production of steel smashed all previous records.  Maintaining the 70.65 million tons produced in March, would result in an annual production of 834 million tons.  (Total China steel production for 2015 was reported at 803.8 million tons).  This would mean about a 3.4% production increase annually.

Meanwhile, in an interview with the National Bureau of Statistics, NBS commissioner Ning Jizhe said the changes in China’s economic trend in the first quarter of 2016 had shown its reform efficiency. As to trimming capacity, he said iron and steel and coal showed negative growth, with crude steel production dropping 3.2% yearly, while crude coal production dropped 5.3%.

Regardless of whether overall Chinese steel production has increased or decreased, the CISA reports show that steel exports have definitely increased, despite China’s recent disparagement through PRC mouthpiece Xinhua, of Western threats as a lame and lazy excuse for protectionism.  (Not content with deriding the West, the same edition chastised India for promoting anti-dumping and urged it to honor WTO rules .) While Xinhua stated that steel production declined by 90 million tons over the past 3 years, the CISA reported that China’s steel exports jumped 30 percent to 9.98 million tonnes in March from a year ago despite a slew of anti-dumping measures globally.

The over-capacity and export growth was noted in the annual report by steel giant Arcelor Mittal, MT NYX, which stated that for 2015, China exported 112 million tons of steel, up 18 million tons from the year before. It indicated that the exports were done to offset the 4.5% decline in Chinese consumption.  Despite the increase, Arcelor reported that the CISA assumed that the exports were being sold below cost, as large and medium sized mills lost RMB 53 billion ($8.6 billion) from January through November 2015), negatively impacting prices and therefore margins in many regions.

 

 

 

China Indexes Stall

sh hk upd

China indexes stalled, with slight drop despite gdp meeting estimates.  Apparently, after earlier export data, all the good news had been absorbed.  Both indexes held onto impressive gains for the week.

China met projected gdp growth target of 6.7% for the first quarter, down from last quarter’s 6.8%.  (Compared to full year 2014 gdp growth of 7.3%). Growth fueled by debt, primarily for SOE’S and local government infrastructure. Per WSJ,

Higher investment in property and infrastructure is also providing a boost to many of the industries that are beset by the excess capacity government has vowed to eliminate.

While investment in factories, buildings and other fixed assets grew 10.7% over the quarter, the rate was up 23.3% for state-owned firms and only 5.7% at private firms. China’s state-owned enterprises tend to be less profitable; last year their profits fell 21.9%, compared with a 3.7% increase for private companies. And the government has made nurturing the private sector—and the job growth it brings—a priority.

Cement production rose 24% year on year in March compared with an 8.2% decline in January and February combined, while crude steel rose 2.9% last month, compared with a decline of 5.7% in January-February.

Both of these industries are on the “over-capacity” list of industries which the government has promised to curtail.  Unfortunately, the conflict of interest between SOE majority ownership in these industries and SOE reform makes that less than likely.  For steel alone, the China Iron & Steel Association, CISA, reported that China had a capacity surplus of around 400 million tons, with utilization rates falling to 67% in 2015.  To put it in perspective, publicly traded steel major Arcelor Mittal, MT, NYX, in 2015 stated that capacity rates of it’s 4 large US hot strip mills, running at 70%, were well below optimal and would require some sort of change. (Andy Harshaw, CEO Arcelor USA).” It is not sustainable to operate multiple HSMs at low utilization rates when the same volume of steel could be produced by fewer HSMs at higher utilization rates.” Arcelor Mittal shipped 84.6 million tons of steel in 2015 per the annual report.  In that same report, it was stated that China exported 112 million tons, up 18 million tons from the prior year. This was on an overall reported production decline in China of 2%.  Exports were made to offset the Chinese consumption yoy decline of 4.5%.

Filings

Jiangxi Copper, HK 00358, down .922%, announces delay in circular from 3/18 to 4/15, now extending to 5/12/2016.  Delay reportedly related to financial details regarding its new share issuance and confirmations over “indebtedness statement.”  Got approval to issue new, non-public shares at last annual board meeting.  2016 has brought no clarity and lots of red flags:

  • Profit to Owners decline of 93%.
  • CFO resigns: 2/26/2016
  • Litigation: 3/22/2016: Trial over monies owed to Jingxi Subsidiary.  Principal and interest owed of 392.5 and 33.2 million rmb, respectively.  Court ruled in Jiangxi’s favor but plaintiffs appealed.  Ability to pay is another story.

See my weekend edition for more insight into this company.

China Shanshui Cement, HK 691, suspended. saga continues.  The company, which has had trading suspended since May 2015 in a brutal ownership fight, filing states that corporate seal held by former directors is invalid.  Is applying for new seal.  In the meantime, everything signed with that seal, (origination date is unclear), is invalid – including any and all filings.  As of the announcement, the company was aware of 102 lawsuits from creditors.

Great Wall Motor, HK 0233, down 2.446% responds to questions over declining gross margins from first quarter to last, risks on reliance on SUV’S.  Answers aren’t pretty. Promotions and competition are the underlying causes. Haval H8 & H9, were released in 2014 and 2015 but weren’t shown under specific sales.  Company states they were below expectations, with no material impact on earnings.  Haval H7 was projected to launch in 2015 – no explanation had been given why it didn’t. Company stated it adjusted the schedule to April, 2016. It was also asked to explain why the gross profit margin decreased from 26.6% in q1 to 22.9% in q2. Company stated it was focusing on its SUV sales, 82% of 2015 sales, which required promotions and employee compensation increases.