Monthly Archives: August 2016

Tingyi Profit Plunges: Worst in Class

Tingyi Profit

Noodles and beverage seller Tingyi, 322 hk, reported a whopping 67% decline in net profit for the 1st half of 2016.  Other consumer food and beverage companies posted declines but none as extreme as Tingyi and the 2nd quarter looked even worse.

Tingyi 1st half 2nd q

Tingyi blamed the decline on overall China weakness and severe flooding.  Tingyi was expected to benefit from Shanghai Disney’s opening in June thanks to its exclusive Pepsi relationship there.  Since the opening was mid June, it’s too soon to know the impact.  However, it would take an enormous contribution to reverse the declining trends in revenue and profits from its beverage division.

Other companies concentrated in China and Hong Kong beverages and foods have seen drops in revenue and profit, but nothing as severe as Tingyi.  Swire Pacific,19 HK, with Coke manufacturing facilities in China, Hong Kong and Taiwan showed a profit decline in these areas of 14% with a combined profit decline of 37%.  As seen below, mainland China was the hardest hit.  Swire doesn’t see a turnaround in that market in the near future.

Tingyi Swire Pac 1st half

While Swire shared a major decline in beverages, Want Want, 151 HK and  Uni-President 220, hk were much less hard hit. Despite the drop in revenue in beverages, Want Want eked out a profit increase thanks to lower input costs.  90% of Want Want’s beverage business is from “Hot Kid Milk”, which had a 17% revenue decline but was helped by a decline in powdered milk.  The company stated that besides market weakness, consumers were switching to options such as room temperature yogurt drinks.

Tingyi Want Want 1st Half

Tingyi Uni Pres

Uni-President saw  a much lower decline in revenues from beverages than Tingyi and also managed a profit increase in that segment.  In total contrast to Tingyi, its noodle sales saw a revenue and profit increase.

While China consumer food and beverage stocks are reflecting demand weakness, Tingyi’s latest earnings show a much greater decline than the market warrants.  Although the stock performance has reflected this, the downward trends are flashing a strong warning sign.  Tingyi management needs to change its direction quickly.

Tingyi Stock

 

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Short Sellers Were Right, Tech Pro Sales Down 50%, Bleeding Cash

insolvency-96596_640

After numerous negative reports on Tech Pro, 3823 hk, the company finally proved them right.  After giving a vague profit warning on August 5, its newly-released first half financials showed another big loss.  On the balance sheet, its cash dropped by 46.8 million rmb taking it down to 81.7 million rmb.

tech pro first half

 

On the surface, the revenue drop is marginal. Digging deeper, from the segment breakdown, the predictions of the downsizing of the LED business are proven true with a drop of 50%. Despite the drop in sales, there is an outsize increase in administration costs. The company attributed this primarily to an 81 million rmb increase in pro-team expenses. (The team, Sochaux-Montbéliard SA, (FCSM), was acquired in July 0f 2015. It has a listed asset value of 132.9 million rmb against liabilities of 53.3 million rmb. It was acquired for 7 million euros or about 52.5 million rmb.)

tech pro segments

The company gives little explanation for the marked decline in LED sales.  It hopes to improve that segment by attending exhibitions in Europe.

Rental JV Uncertainty

As Glaucus reported in August, the company’s 50% JV interest in Shanghai Fuchao represented a sub-lessor in a building in Shanghai called Universal Mansion.  The building was owned by the Logistics Department of the Chinese People’s Armed Police Force.  In the first half report, Tech Pro stated:

On 30 May 2016, the Group announced that the Central Military Commission (“CMC”) of the PRC issued a notice (the “Notice”) on 27 March 2016 on the stopping of all paid services of the People’s Liberation Army (“PLA”) and the People’s Armed Police Force (“APF”) (關於軍隊和武警部隊全面停止有償 服務活動的通知), pursuant to which, the PLA and the APF are set to stop providing all paid services, which is expected to be completed in three years. The Group has been carrying out study on the impact of the Notice on the business and operations of the sub-leasing services business. The Group has consulted its PRC legal advisers and was advised that since the CMC has not yet specified on how to deal with existing contracts regarding real estates of the military, there are uncertainties as to when and how the rental arrangement under the leasing agreements would be affected by the Notice.

The Group expects that the property market in the PRC remains favorable. As the location of the premise that the Group operates the sub-leasing business is at the prime area in Shanghai, the vacancy rate is low and the rent is stable. It has less sensitive to the volatility in the PRC economic situation.

It’s interesting to note that the company was informed in May in 2016, but has continued its proposed the buyout of the other 50% of the JV despite this glaring uncertainty.

To recap the bellwethers of Tech Pro’s Fall:

 3/11/2016

The Wall Street Journal noted the strange trading movement at end of day plus the tripling in stock value in 2 years despite repeated, declining losses.

6/1/2016

GeoInvesting

  • The LED business is deteriorating with poor margins
  • Revenue growth in the LED business is suspect
  • The soccer team will need big investments
  • It will continue to need debt or equity financing to fund its operations

7/28/2016

Glaucus

Strong sell, no value

Accused of fraudulently over-reporting transactions and income.  Stock dropped over 90% in one day on that announcement; dropped all the way to .14 but has since recovered to .25. (Was 2.27 before the fall).

 

 

 

Geely Stock Hits the Brakes on 1st Half Earnings

geely first half

Despite a first half where sales prices and units drove upwards,  Geely 175, HK, halted its continued rise. It lost steam after far surpassing the Hang Seng year to date and on a 12-month basis.

GEELY 175

Geely Stock up

Here are a few of the reasons for the rise.

First half gross revenue up 31% on sales volume increase of 11%.

First half sales volume increased by 41% in June over 2015; ytd. up 11.2% over 2015.

First half ex-factory average sales price up 17% year on year.

First half net profits up 34.8% on higher volume, better pricing mix, stable gross margins and lower operating costs as a percent of revenue.

So why the drop?  One analyst at Gutai securities blamed it on the overall auto market in China falling faster than projected in the last half.

Geely’s warning – to investors and regulators:

Despite the improved performance by the indigenous brands in China recently, the implementation of more stringent regulatory requirements in fuel efficiency, product warranty, product recall and emissions standards in China could put tremendous cost pressure on motor vehicle manufacturers in China. The impact could be even bigger for China’s indigenous brands given their relatively weak pricing power, and thus their difficulties to pass on the additional costs to their customers.

Further, the planned expiration of sales and purchase tax reduction policy by the end of 2016 could potentially shift some demand forwards from early 2017 to 2016, thus affecting demand for small and mid-size vehicles in early part of 2017.

Road Bumps

Export Declines

Exports remain challenging.  As I reported back in May,  hometown Geely and Great Wall have struggled with declining exports.  This has continued into July of 2016 and with political and economic turmoil in its targets in the Mid-East, South America and Africa is expected to continue throughout 2016.

Geely Greatwall Exports From HK filings 

Fortunately for Geely, year to date unit exports were 12,871 or only 4.5% of the total sold. This is not great for Geely’s international plans but does show what a minimal effect it has on current and projected sales.  (In 2015  Geely exported 24,342 units or about 9.6% of units sold).

Electric Vehicle Fraud and Subsidy Pains

After an initial surge toward electric vehicles, China has been coming to grips with subsidy fraud and lagging infrastructure support.  Geely admitted to a change in subsidy stance as a reason for selling two electric car related jv’s: Kandi and Ninghai Zhidou, which had combined 1st quarter losses of 137.5 million rmb.  A proposed agreement to a 3rd, independent party fell through with the company now proposing a sale of its interests to its parent, Geely Holding.  The breakdown is as follows:

Geely jv

The circular for the proposal had been delayed so is still not resolved.  Although losses are of concern, jv income has been a tiny proportion of net income.

SUV Reliance As Sedans Slip

As mentioned above, Geely has been helped by increased sale prices which has been due in part by SUV’S.  Geely has continued to move toward greater emphasis on SUV’S, while its sedans sales continue to slide.  Geely Monthly Type

Geely appears to have had success with this move.  It introduced 2 new vehicles in the first half, a new SUV crossover, the Emgrand GS and the Boyue SUV which replaced the NL3. The Boyue sold 10,128 in July, its first month while the Emgrand GS has sold 14,128 since its introduction – beating company expectations.  For the second half, a new compact SUV, the Vision will be launched as well as a Emgrand GL sedan and an Emgrand sedan hybrid. All of these cars have at least one version that would be under the 1.6 liter engine maximum to qualify for the 50% tax reduction effective in China until the end of December.

Great Expectations for the Last Stretch

While June was good, July was even better in terms of unit sales.  Geely reported that July sales were up over 64% from 2015 and up 16.75% year to date from 2015.  With Geely raising its annual projections from 600,000 to 660,000 units, it appears to be expecting this run to continue.  This will mean a shift of its sales at year end from 2015.

Geely august through dec.PNG

Geely’s sales definitely have been picking up steam.  If they continue as the company projected, they will be on track for the projected unit increase of 29%.  Momentum and the looming tax incentive deadline could push them there. Geely beat 1st half forecasts easily with eps up 36% vs. 18.9% and 30% vs. 23% projected on revenues.

geely first half forec

Forecasts from the Financial Times

Annual Projections

Currently, projections are for a bit over 46% increase in annual revenues and eps.  If this is an achievable target, it would leave room for the stock to climb with its moderate p/e even after its dramatic climb over the last 12 months.

Geely annual

Forecast from the Financial Times

Dalian Wanda Names Last Day to Trade

Wanda A Shares

Dalian Wanda,  3699 hk, will stop trading on the Hong Kong Exchange on September 13, 2016.  The stock resumed trading after the de-listing approval, and closed at 52.5 hkd, just .3 below the offer price made by a consortium put together by Wanda.

In the meantime, it’s working on its A share listing, which it promised within 2 years from the Hong Kong de-list, giving the consortium buyers liquidity and itself improved access to capital markets. The original A share listing was submitted in July of 2015, with a 1 year extension approved in August, 2016.  As shown above, this would equate to about 56.16/share hkd vs. the accepted offering price on the H shares of 52.8 hkd.

Originally the total shares proposed were 300,000.  That dropped to 250,000 in August, 2015 while the projected proceeds of 12 Billion rmb remained unchanged.  Additionally, the extension request stated that the listing would be on the Shanghai Exchange while the original offered either the Shanghai or the Shenzhen.

The proceeds were earmarked for the following:

Wanda A share proceeds

The A-share request was submitted to the CSRC in November of 2015 but has yet to be confirmed.

Wanda and its 60 year old Chairman, Wang Jianlin, has a lot riding on the approval besides the needed proceeds.  It has reportedly guaranteed an annualized 12% return to domestic investors and 10% to overseas investors if the listing doesn’t happen by 8/31/2018 via promised buyback.

 

 

Wanda Wins Thanks to No Shows

 

 

Wanda Final Vote

Dalian Wanda,  3699 HK,  won its fight to de-list, thanks to low voter turnout.  Wanda showed that it got more than the 75% votes needed to de-list its H-shares. The against votes were also less than the needed 10% to defeat. However, the “For” votes only represented 58% of the eligible Independent votes, which would have been well below the 75% needed assuming those absent voted either against or abstained.  The missing 217,357,004 of eligible voters represents a whopping 34% of the shares.  Makes you wonder why they didn’t vote.  No mail or internet?  No flights to Beijing? (Also makes me feel a little better about what I wrote here.)

The shares, which closed at 51.2 hkd prior to suspension on 8/16/2016, will resume trading on 8/16/16.  The offer price was 52.8, hkd.  Dalian Wanda will be filing for the listing withdrawal.  The H shares represented just 14.4% of the total shares of the company or about $4.4 Billion US of the $30.8 Billion US market cap based on the offer per share.  Of that $30.8 billion US, about $17 Billion US is currently owned by Jianlin Wang and Wanda directors.

Next Up: the A share listing.  The extension of the A share listing was approved by 99% of the total shares and will be pursued.

Current Ownership

Here are the owners as presented at the date of the meeting.

wanda a and h owners

i Ms. LIN Ning is the spouse of Mr. WANG Jianlin
.ii Mr. DING Benxi, Mr. QI Jie, Mr. ZHANG Lin and Mr. YIN Hai are directors of Dalian Wanda Group.Mr. LIU Zhaohui is a director of the Company and the vice president of Dalian Wanda Group.Mr. QU Dejun is a director of the Company and the president of a wholly-owned subsidiary of Dalian Wanda Group.
iii Dalian Wanda Group is controlled by Mr. WANG Jianlin through Dalian Hexing. which in turn controls approximately 99.76% of the voting rights in Dalian Wanda Group.The remaining 0.24% voting rights in Dalian Wanda Group is controlled by Mr. WANG Jianlin directly.
iv This includes the shareholding of one Director.In respect of the Domestic Shares, Mr. WANG Zhibin, an executive Director, held 1,600,000.Domestic Shares.In respect of the H Shares, Mr. QI Daqing, an independent non-executive Director, held 20,000 H Shares.
v CICC is the financial advisor to the Joint Offerors and relevant members of the CICC group
vi The limited partners of WD Knight VIII are PA Investment Funds SPC II and PA Investment Funds SPC III,and all the management shares.in both companies are owned by Ping An of China Securities (Hong Kong) Company Limited, a subsidiary of Ping An Insurance (Group) Company of China, Ltd.Certain group members of Ping An Insurance (Group) Company of China, Ltd, hold in aggregate 505,561 H Shares.All such H Shares are not proprietary interests of PA Investment Funds SPC II and PA Investment Funds SPC III,
vii One of the limited partners of WD Knight IX is Guotai Junan Finance (Hong Kong) Limited.Guotai Junan Securities (Hong Kong) Limited is a fellow subsidiary of Guotai Junan Finance (Hong Kong) Ltd.
viii All these Domestic Shareholders who hold H Shares have abstained from voting on the resolution in relation to Delisting in the EGM and in the H Share Class Meeting.
ix The percentage numbers of total Shares in issue in the above table add up to only 99.99% due to rounding
x This means H Shares held by the Independent H Shareholders, being H Shareholders other than theOfferers and persons acting in concert with any of them.Such Joint Offerors and persons acting in concert with any of them do not include relevant members of CICC.group, Ping An Insurance (Group) Company of China, Ltd., Guotai Junan Securities (Hong Kong) Limited whichholding of interests. H Shares are non-discretionary and not their proprietary owned.

 

Dalian Wanda’s Delist: The Odds Could Be Against

 

HKEX X

Press reports and various confidential sources have stated the chances of Dalian Wanda’s, 3699 hk, delist are guaranteed.  Granted, the power and connections of its chairman and founder, Wang Jianlin, make it hard to argue against.   The clock is ticking until the vote count on Monday, August 15, to approve the de-listing.

Background:

On April, 25, 2016, hardly long enough to let the ink dry from the Hong Kong IPO listing in December, 2014, Wanda halted share trading, on an important announcement.  After getting together the money needed, the company announced on 5/30/16 that it had  a consortium ready to buy out the existing H share holders and de-list from the Hong Kong Exchange.  The offer was reportedly due to dis-enchantment with the downward spiral of the H shares – going from the 48 hkd offering to 38.8.   The offer was at 52.8 hkd, a 36% premium to the last close on 3/31/16.  The targeted investors were reportedly offered  a guaranteed return if the company subsequently failed to list the A shares.  The investors included newly formed subsidiaries of Dalian Wanda, under the name of WD Knight I through X, with the CEO of Wanda Investment Company, Mr. Lu Xiaoma, as director of the majority of them.  The interests would then be transferred to various investment entities. The bulk of the financing was provided by China Merchants Bank and CICC Hong Kong Finance.

On the surface, this looked like a great deal.  All cash and a nice premium.  A ticket out of the volatile, frightening China market. The company needed 75% of the independent votes, basically all the H shares, the holders of which were mostly  based in China or Hong Kong with links to Wanda. There was the little matter of the ability to cancel with just 10% disapproval, but that should be easily overcome.

The announcements make the point of the many different premiums of the final offer. Premium over last trade, over average, etc.  The one premium which is harder to accept, is just 13% over the Net Asset Value as of 12/31/2015.  The other less exciting premium is the amount over the original IPO – just 10%, about 7% annualized.  Less than Wanda is reportedly guaranteeing investors if the  A shares don’t list  in 2 years.

Do the current investors actually believe that legendary Wang Jianlin has only managed to eke out a 10% return on investment since the 12/14 IPO?  By his own admission, in a 2015 speech at Harvard, he boasted that, thanks to Wanda’s size and connections: “We thus can take the initiative, and we have the bargaining power,” he told the students at Harvard. That means he acquires land at less than half the cost to his competitors…”  That same article quoted from the IPO prospectus: Even as property prices set records in China, the price that Dalian Wanda paid for access to land fell by more than 40 percent from 2011 to 2014.  Did he lose his magic touch in 2015? Remember, this is the same man who said his wolf-pack could destroy Disney’s tiger.

Since 2015, Wanda has a land reserve of 73.95 gfa million square meters.  This encompasses China as well as overseas. (From its annual report):

wanda gfa regional

While the Hang Seng has only risen 3.8% year to date, real estate prices in tier 1 and 2 cities in  China have made outsized gains.  Per Moody’s,  for the sixth consecutive month, all four first-tier cities posted double-digit year-on-year price growth. Shenzhen continued to register the highest price growth at 47.4% year-on-year in June, followed by Shanghai’s 33.7%. Meanwhile, year-on-year growth was 22.3% in Beijing and 19.4% in Guangzhou in June, and the pace of growth remained on an increasing trend. On average, these four first-tier cities registered year-on-year growth of 30.7% in June compared to 32.1% in May. Average property prices in second-tier cities rose for a seventh consecutive month in June, at a year-on-year growth rate of 7.6%, compared to 6.6% in May. Prices in Xiamen grew the most, at 34% in June year-onyear, followed by Nanjing and Hefei at 31.5% and 29.1%, respectively. Hangzhou, Tianjin, Fuzhou and Wuhan also reported double-digit year-on-year price growth.

Wanda’s detail of land reserves doesn’t specify cities.  However, as stated in the 2015 annual report,

In 2015, the Group took a more prudent approach by selectively investing in first-tier and second-tier cities and certain third-tier cities with good fundamentals, as well as controlling the overall land acquisition cost, to further optimize the land reserve structure of the Company. As at 31 December 2015, the Group had land reserves with an aggregate GFA of approximately 73.95 million sq.m.. We have 52 newly acquired land projects in 2015 (including the land acquired in phases for future development of Wanda Plaza and Wanda City) with an aggregate GFA of approximately 17.73 million sq.m.

In that same report, Wanda breaksdown the land reserves by city tier:Wanda land reserves % tier

Source: 2015 Dalian Wanda Annual Report

The bulk of those properties are in the rich coastal and central areas, as shown by a map from the report.

Granted, Wanda is a mixed-use developer with investments in commercial and residential properties which it both sells and manages.  However, the bulk of its profits and net income in 2015 were made from property sales.

Wanda Income Sources

This gives further strength to the argument that Wanda’s value, based on property values, has most likely increased since December 2015.

While Mr. Wang Jianlin may have been unhappy with the stock performance, the company has benefited from its listing with high quality, low interest debt.  In 2016 alone, it added 37 Billion yuan worth of debt, equivalent to about $5.6 billion, at interest rates from 3.2% to 4%, all maturing in 5 years.  The use of the funds was listed simply as working capital, bank repayments and project investment. This  has also added to the value of Wanda since December of 2015.

The original offering was for 600 million shares.  With additional shares added and the over-allotment, the final shares were 652,547,600.  The cornerstone investors plus the additional shares issued after and the over-allotment, total about 75% of that.  Only two of the cornerstone, China Life and Kuwait Investment Authority, KIA, have committed to the vote, or about 14.85% of the total. Ping An, which has extended loans to Wanda and is involved in one of the buyers, has another 14.85% and could be assumed to vote in favor.  Blackrock has been adding shares and last reported about 6.2%.  Adding that to the 4.95% shares of APG, there is the potential for a 10% dissent. That is all that is needed for the deal to crash.  Monday will tell.

 

China July Auto Sales Up, BAIC Skids Downhill From June to July

July Car 1

The China Passenger Car Association reported that July year on year sales increased by 23%. Ytd increases were 11% over 2015. Three Hong Kong car stocks with a combined market cap of 205 Billion hkd, (23 Billion usd equivalent), beat that rise. Geely 175 hk, Great Wall 2333 hk, and BAIC  1958 hk, all reported year on year monthly and year to date sales increases. Geely and Great Wall managed to drive up over 4% from June, but BAIC dove 27%.

3 car stock july changes

BAIC sells its own brand, Beijing Benz, but relies on Hyundai and Mercedes Benz for the bulk of its sales and profits.

BAIC July Sales Type

The drop was striking and defied continued increases by home-grown competitors Geely and Great Wall.

great wall july monthly

geely july monthly

baic july monthly %

Much has been made over the Chinese voracious appetite for SUV’S.  Geely and Great Wall are polar opposites in their reliance on SUV’S, with Great Wall relying heavily on SUV’S, particularly its Haval H6, which is considered a close clone of the 4th generation Honda CRV.  Other types have had little growth, including  the Wingle pickup, with pickups banned  in major cities although some restrictions are easing along with a hope for more acceptance. BAIC only breaks down the sales by type for its own brand, with SUV’s ramping up to 50% of 2016 unit sales from only 7% in 2015.

Geely Monthly Type

great wall july types 2

Based on 2015 unit sales for Geely and Great Wall, there do appear to be seasonal sales variances with the highest sales occurring in the last quarter.  (BAIC was excluded since it didn’t provide monthly sales data for the full year of 2015).

great wall geely seasonal

China sales growth is critical for these companies, with Geely and Great Wall exports shriveling, (BAIC doesn’t report any exports).

Geely Greatwall Exports

Note: All charts and data were prepared from HK Filings with the exception of the stock data, which was from Bloomberg.  March was primarily used as the starting point since January and February are extremely variable due to Chinese New Year.

Despite the year on year overall increases, the stocks in Hong Kong are showing  a moderate trailing p/e ratio; with Geely outperforming the Hang Seng on a year to date and 12 month return basis.  Geely has recently completed the acquisition of two subsidiaries, Shanxi & Baoji, with combined capacity of 300,000 vehicles, construction completion expected in 3Q 2016.

3 car stocks

None of these companies provide sales dollars in their monthly updates.  Interim results have not yet been presented.  BAIC’s Q1 showed an increase in revenue of 30% but a drop in net profit of 25% due to lower JV numbers with Hyundai and increasing operating losses for its own brand.  The increase in profit was mainly due to Beijing Benz, which is owned 49% by Daimler.  Greatwall’s Q1 showed an 8% increase in revenues but a 4.5% decrease in profit, thanks to a lower gm and operating margin. Geely doesn’t provide quarterly statements.

Great Wall Q1

BAIC Q1