Index Changes HSI and HSCEI: In with the New, Out with the Old

Old Timers Li & Fung, 494 HK and Tsingtao Brewery, 168 HK  will be booted out of Hong Kong Indexes due to poor performance and or international dealings.  They’ll be replaced by home-grown Geely, 175 HK,  and infant IPO Postal Savings Bank, 1658 HK, favoring made in China and SOE investments, respectively.  The stock performance and market caps give a clue to the underlying reason but don’t explain it all.

hong-kong-index-changes

Data Source: Bloomberg

The mature, 50-member Hang Seng Index, HSI, loses Li & Fung, a member since 2000, as its profits and core earnings continue to drop.  It’s last reported interim statement showed a gross revenue drop of 6.4% and a core profit drop of 14.2%.  Li and Fung, a Wal-Mart and Marks and Spencer supplier, most recently reported getting 62% of its sales coming from the US.  It’s being replaced by Made In China and Sold in China: Geely Auto.  As Li and Fung’s stock has dropped, Geely has shot upwards, helping it achieve a market cap 3 times the size of veteran Li and Fung.  Geely’s sales climbed 50% in 2016, fueled by a 50% drop in the sales tax on cars with less than 1.6 liter engines.  While Geely’s annual sales climbed 50%, it reported on January 6, 2017 a preliminary profit climb of over 100%.

geely-annual-w

Geely has apparently kept the pedal to the metal with January year on year sales reported at an   annual increase of 71% although down 5.15% from December.  This increase is astounding, with the Lunar New Year starting in 2017 on Jan. 28 vs. 2016 in Feb. and Ford and GM both reporting yoy China drops of 24% and 32%, respectively, from HK filings.

geely-jan

As Home town Geely replaces exporter Li and Fung; Tsingtao Brewery, the first China incorporated  H-listed stock in history, is being removed from the younger Hang Seng China Enterprises Index, HSCEI; to be replaced by recent IPO Postal Savings Bank.  Tsingtao has faced declining sales; its last reported revenue drop of 5.3%.  However, perhaps more importantly, it has also been hit by rumors that Asahi Breweries of Japan is hoping to dump its 19.99% ownership interest. (The majority-holder of Tsingtao is Qingdao SASAC).  An index removal could reflect the  dissatisfaction of the effects of outside interests on Chinese companies.

The possible rationale for replacing Tsingtao  with Postal Savings Bank is more difficult  to explain than Geely replacing Li and Fung.  While Geely has been climbing, Postal Savings Bank has actually declined in price since its September IPO.  It’s first half report for 2016 was uninspiring, with loans increasing but net interest margin dropping significantly and a low core ratio.  It’s non-performing loan ratio of .78 is difficult to believe as world behemoth China’s Industrial and Commercial Bank,  1398 HK, ICBC, reported a npl ratio of 1.55 for the first ½ of 2016.  In the first half, ICBC had a capital adequacy ratio of 13.11 vs.  Postal Savings Bank’s first half CAR of 10.04% .

Postal Savings Bank had a less than spectacular IPO, heavily dependent upon its mostly majority state-owned cornerstone investors, which purchased over 75% of the offering.

Postal Cornerstone.PNG

 

 

Source: HK filings

*Acquisition Loans “may be” financed by SOE China Banks: China Construction Bank, 939 hk, Bank of Communications, 3328 hk, and Agricultural Bank of China, 1288 HK.
**One of 4 asset management firms set up in the 1990’s to deal with bad debt, related to the big 4 banks.  China Great Wall was linked with Agricultural Bank of China.

Rather than a strictly index-related move, the inclusion of Postal Bank could be more to the aid of those cornerstone investors,  which would face an expiration of their 6-month lock-up period close to the time of the index inclusion.  Whether this will give Postal the boost it needs remains to be seen.

 

 

 

 

 

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