Monthly Archives: May 2016

Master Kong Noodle Maker Tingyi Losing the War

master kong

Tingyi’s first quarter earnings report continued its downward slide from 2015.  While gross revenues showed a slightly smaller decline, net profits reached a drop of over 45%.

Tingyi seg rev


Tingyi, as with most Chinese companies selling primarily on the Mainland, blames the economy. Despite the plummet in both noodle and beverages, it states that it continues to dominate the Chinese market with a Nielson market share of 52.4% of sales.

As far as the noodle segment goes, other reports have shown that this is a mature market which has reached close to full saturation.

noodle market.PNG

Even its new: Super FuManDao and Zhen LiaoDao, (plenty of fine ingredients), can’t fight the nationwide slowdown in noodle consumption.  However, a major competitor, Uni-President, HK  220 while slowing, didn’t show the dramatic drop that Tingyi did.  It’s quarterly statement gave no details on revenues but it’s annual 2015 statement showed noodle revenue dropping by 4.9% versus Tingyi’s 12.7%.  Tingyi’s larger noodle slide is most likely due to multiple scandals in 2014, with lingering repercussions through 2015, regarding the use of tainted oil in Tingyi products, particularly those sold in Taiwan. Tingyi made no mention of this in either its annual or quarterly report but only stated that it would spend more on advertising.  The annual sales drop of over twice that of Uni-President appears to reflect a continued distrust by the consumer.

On a quarterly basis, the beverage unit decline appears to be slowing.  The company blamed the weakness on economic weakness resulting in lackluster bottled water demand and a recession in family-size products.  It offers no real turnaround plan but pins its hopes on its Pepsi alliance and the Shanghai Disneyland opening in June, 2016, where Pepsi and Tingyi will be the primary beverage suppliers.  This could help Tingyi but beverage operating margins are much lower than noodles have been and they’ve been in business with Pepsi since 2012 with no obvious benefits to date.

Tingyi’s stock performance reflects its woes but still has a high p/e rating considering its performance an prospects.  It has performed much worse than its smaller rival, Uni-President, with neither showing much room for growth hopes.

Tingyi Stock







Belle International: Fashion Footware Gets Stomped

Shoes Belle

Belle International, HK 1880, a 21,000+ retail store operator concentrated in footwear and sportswear, reported an annual net profit drop of 38%.  This occurred despite a small revenue increase of 2%. As seen below, a major reason for the decline was an impairment in the footwear segment on goodwill and intangibles, exacerbated by a drop in margins.

Belle fs

Without the impairment charge, the drop in net to shareholders would have been about 10.7%, despite the store increase and sportswear increase, due to worsening margins for footwear.

belle no impair

*Impairment Charge – applied to  Goodwill and Intangible Assets related to footwear:

Belle gw

The impairment was blamed on weakened demand for their brand purchases of Mirabell, Millie’s, SKAP and others.

The impairment is hopefully a one-time occurrence.  However, the change in segment revenues, profits and same store sales for footwear is a worrying trend which the company doesn’t project ending.  As reported in a prior review, same store sales for footwear have been steadily declining while  the lower margin sportswear and apparel segment may have stabilized and still show gains.

Belle chart

HK Filings

The footwear segment, dominated by company-owned brands,  is where the company has made its biggest sales and profits. Belle  blamed the weakening economy for the same store sales declines in footwear. Ironically, it states that demand is strong in the sportswear apparel segment. In sportswear apparel, outlets sell licensed brands including Nike, Addidas, Puma and  Converse.  The company states that footwear in department stores is under pressure as department stores are over-saturated while sportswear outlets offer a more flexible placement option.  It also concludes that sportswear has become more popular than fashion brands due to changing consumer appetites toward athleisure and away from more formal wear. With the impairment in footwear due to weak demand and discounts, the popularity of their proprietary brands is definitely declining, whatever the reason.

At the end of the year the company operated 21,017 stores on the Mainland, China and Hong Kong, showing a slight increase of 1.5% from the year before.  The company only operates stores, it doesn’t own them.  This enables them to change the mix and downsize in reaction to market conditions.  Store outlet growth  has declined significantly while the mix has favored growth in the lower-margin sportswear segment.

belle outlets hist

From 2015 to 2016 – the increase in total stores was only about 2%.

RMB Millions

belle outlets

(Source -hk filings)

This slowdown in outlet growth shows the company’s limits to revenue and profit growth in a weakened demand environment.  While the combined outlets increased by only 1.5%, the revenue increased by 1.95% thanks to a growth in revenue in sportswear partially offsetting the revenue decline in footwear.

(In rmb Millions, from HK Filings)

belle rev segm

Unfortunately for Belle, the sell of licensed sportswear results in a lower operating profit margin, although reportedly due to inventory controls and demand it has improved and possibly stabilized. While Sportswear income before tax margins against segment revenue is improving, Footwear is declining significantly, and this is shown before the impairment.

belle rev

Despite the impairment and decline in margins, Belle is still profitable with a low debt/equity ratio.  However, after issuing a special dividend in 2015 the company chose to severely drop its full year dividend reportedly to conserve cash for market moves.

Belle dividend

For growth, at this point in time Belle cannot rely on new stores with a saturated market, and competition from other brands as well as E commerce.  The annual report mentions internet shopping but no details for online sales are given.  The company’s recent history on buying new brands has proven poor with the goodwill and intangibles write down.  The annual statement mentions recent agreements with Baroque of China and Replay of Italy but gives no results and states that it must be patient.

Belle’s stock has felt the brunt of these trends.  It’s recent performance, particularly the rapid decline in same store sales for footwear, hardly warrants the trailing p/e of over 11, despite its size and mainland presence.

Belle stock



China Steel Drops on US Tarrifs

china steelChina Steel Companies, already reeling from Chinese market turmoil, over-capacity and flagging demand, dropped further as the U.S. attacked with 5x tarrifs.  These 5 steel stocks dropped more than the local market, with the exception of the Shenzhen listings.

china indexes


Hang Seng and Shanghai Comp Rise in Tandem

Despite disappointing retail sales numbers released over the weekend, the Hang Seng and China Comp managed to rise, following a weekly decline for both.


This could be blamed either on a short-term correction after falls over 10% from recent highs, or the usual stimulus hopes after weakening retail and credit numbers.

The HSI had positive moves in the majority of sectors.  For the HSCEI, however, the 10 decliners were dominated by banks.

hscei banks

Source: AA stocks


While China banks are under pressure with net interest income declining and, npl’s growing, the latest move could be due to rumors that Chinese regulators will be examining non-performing loan data.  Despite economic weakness in China, NPL’S have stayed relatively low.  While NPL’S have grown, criticism has come from outside regarding the drop in allowances to NPLS, now below the 150% guideline for 2 of the major 4 banks. From the last quarterly reports for China’s big-4 SOE banks:

banks npl

Whatever the reason for the rise in stock values, the quick rise in one company, based on recent and historical performance, is unwarranted.  Belle International, hk 1880, has risen over 14% since May 11.


Belle is a footwear and sportswear apparel retailer with 20,375 stores in Mainland China, Hong Kong and Macao.  Belle has felt the brunt of the Chinese economy slowdown with same store sales declining, particularly in their bigger footwear segment, where they have the most outlets and get the biggest net profit.

Belle chart

Source Data: HKEX filings

While they have yet to issue their annual report, the decline in same store sales has seriously hit the bottom line as a profit warning was issued on 3/29/2016,  stating the company expected a decline in annual net profit of 35% to 45%.  Without giving specific details, the company claimed it was due to declining same store sales, declining gross profit margins and goodwill impairment. This would represent a major decline in performance based on both the last semi-annual report and the last annual.

belle data

Source Data: HKEX filings

As shown above, the company is confronting 2 problems.  Thanks to declining sales in its original footwear core, it has been shifting more into sportswear apparel, which has continued to see same store increases although these are shrinking.  Unfortunately, the margins in sportswear apparel, where they sell mostly licensed goods versus proprietary goods as in footwear, are much lower than footwear.

Based on these trends and the recent profit warning, it is doubtful the company will meet the current projections for about a 20% decline in eps. The company is expecting to publish its annual report by the end of this month.



FT Camp Alphaville Friday the 13th Sale


At £69, (from £120); almost 1/2 price! Get the code here:

China Explored and Explained:

Moderated by: FT’s David Keohane

Distinguished Panelists:

Michael Pettis, Guanghua School of Management, Beijing.

Anne Stevenson Yang, J Capital Research

Simon James Cox, EM editor, The Economist


Auto Exports Hit the Brakes for Geely and Greatwall

China Cars

Over the weekend, China reported an a year on year April increase  in overall exports of  4.1 percent in yuan terms from a year earlier equivalent to a  1.8 percent decline in dollar terms. Cumulative export data for the year showed more weakening. Shipments declined 2.1 percent in yuan terms in January to April versus the same period a year earlier, while slumping 7.6 percent in dollar terms.

For Chinese auto manufacturers Geely, 175 HK, and Greatwall, 2333 HK, however, the decrease in exports was much more pronounced.

Autos April

(HKex Filings)

Looking at just 2016, it would appear that for both, exports are incidental.  However, going back to 2013, they had ambitious goals for exports and had achieved much higher sales abroad.

annual exports

(Hk Filings, production reports)

Geely, which bought Volvo, is the smaller of the 2 in terms of units produced and sold and market cap.  For Geely, exports dove from 21.6% of units in 2013 to just 5% in 2015. Greatwall, the maker of Haval and Great Wall Brands, didn’t reach the heights that Geely had in exports but went from 9.7% in 2013 to 2.7% of total units sold in 2015.  Both companies blamed political and economic instability in their overseas markets.  With China growth in car sales slowing, (domestic manufacturers reported a 7.3% increase in passenger car units in 2015 but this was a 2.6% decline from the prior year’s growth), these manufacturers could use an injection from exports.

Neither companies have fared too well this year on the Hong Kong exchange compared to the Hang Seng, which has dropped 8.23% ytd.

car stocks

Although both produce popular SUV’S, with Greatwall claiming to be the largest SUV manufacturer in China, competition is stiff between domestic and international producers.  Both companies saw a cumulative increase in the January to April period, but it was far below the projected 6% plus hoped for.  This is particularly worrying given the 50% cut in  in the 10% sales tax on cars with engines lower than 1.6 liters, placed in October, 2015 and effective through the end of this year.  (In 2015, per CAAM, the Chinese Association of Automotive Manufacturers, stated that cars with engines of 1.6L or less made up 68.8% of the 21.1 million domestically sold Chinese passenger vehicles. )

April sales

Sequentially, units actually declined from March, but based on prior years there is seasonality involved.

seasonal sales


(Sources -HK filings on monthly sales and production reports)

While both companies publish monthly sales figures by units, the fight for market share has led to profit declines.  Although Great Wall showed an 8% increase in revenue for the first quarter, thanks to a 9.8% increase in operating costs as well as a 13.7% increase in other costs, Net Profit After Tax declined by 5.5%.  This decline came despite an increase in autos sold of 5.7%.

gr wall q1

(HK Filing)

For 2015, Greatwall increased revenues by 21%, but, as costs increases surpassed revenue increases, net profit rose only an .2%. NOI as a percent of revenue dropped from 12.8% to 10.6%. Greatwall annual units sold increased by 19%.

Geely hasn’t published its quarterly report as of this time. Annually, Geely increased revenue by 38.7% with an increase in net profits of 58%, thanks partly to lower costs as well as higher JV income and government grants representing 37% of net to shareholders. Geely sold 22% more cars in 2015 than 2014.

cars annual

In short, despite the tax decline and hopes for sales increases, neither of these made in China companies is a sure bet.

L is for Level? China Predicts L-Shaped Recovery

L new

An Anonymous, “Authoritative Figure” reported that China will tend toward L-shaped growth (?).  The report went further to say that the build up in leverage was an original sin.  (A Communist mouthpiece using an original sin analogy?).

The report presented conflicting views of how to eliminate overcapacity.  First it states that zombie companies should be transformed through mergers and revamps rather than bankruptcy.  After that statement, however, it stated:

companies beyond salvage should be allowed to fail because debt-to-equity swaps would be costly and self-deceptive.

This last statement would appear to quash the recent rumors of banks exploring debt-equity-swaps for bad loan.  Curiouser and curiouser.