Monthly Archives: April 2017

China Airlines Crash Land

China Eastern, 670 HK, CEA NY,  and China Southern, 1055 HK, ZNH hk posted moderate revenue increases of 4.3% and 10.6% respectively for the quarter but gross margins plummeted.

China Eastern q1 2017.PNG

hk filing

China Southern 1q 2017

hk filing

China Eastern managed to eke out an increase in net profit of 6.6%, but this was primarily thanks to the gain it recorded for transferring ownership of China Eastern Logistics to parent company CEA Holdings.   China Eastern’s capacity year to date increased by 10.8% (RPK), its load factor was at 81.6% for passenger, just 39.3% for cargo and mail. For the month of March, the passenger load factor declined by .76% points with the most profitable international routes down by 2.03% points. The freight load factor increased by .99% points.

China Eastern issued new H shares sold to Delta Airlines, DAL in 2015. Additionally, it issued new A shares to help finance its continuous airline purchases.  Shares issued to Delta totaled  465,910,000 and raised 6.4 Bill $HK at 7.49 $hk per share. China Eastern, 670hk, last  closed in Hong Kong at 4.08 $hk.

China Southern’s net profit declined by 42.4%, despite an increase in non-operating income of 26%.  China Southern’s year to date capacity increased by 12.6% (RPK), its load factor was at 82.6% for passengers, just 49% for cargo and mail.  For the month of March, the passenger load factor increased by 1.93% points with the most profitable international routes down by .11 %points . The freight load factor increased by 4.8% points.

China Southern issued 270,606,272 new H Shares of the Company at the subscription price of HK$1,553.28 million, representing HK$5.74 per share to American Airlines, AAL. China Southern 1055 hk, last closed at 5.18 $hk.

Besides the alarming drop in gross margins, year on year load factors are critical to watch as China and  South Korea tensions escalate over THAAD missile placement in China, which has already reportedly severely dropped Chinese travel to South Korea.

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Great Wall Motors Accelerates Sales But Decelerates Profits

Great Wall Sales Chart

Despite predictions that auto sales in China would be grow around 5% in 2017 thanks to the tax increase from 5% to 7.5% on smaller engine liter cars, homegrown Great Wall Motors, 2333 hk, sold 8.8% more cars in the first quarter than the prior year. Unfortunately, in its battle for sales, its gross margin dropped from 25.3 to 22.1.  This, coupled with an increase in selling and administration expense increases as percent of sales resulted in a net profit decline of 18.3% for the first quarter.   (Without subsidies represented in non-operating income and an apparently lower tax rate, the decline would have been closer to 22%).

Great Wall q1 fs

The decline came despite Great Wall’s success and emphasis in the popular SUV segment.

Great Wall Sales by type q1.PNG

As shown above, SUV’s continue to make up the majority of Great Wall’s sales and grew 15.2% in the first quarter.  It’s most popular model, the Haval 6, however, is showing its age and actually declined in the first quarter.  While the year to date decline is small, the month of March 2017 is the first monthly year on year decline in sales of the Haval H6 since 2015. March is generally a more stable month than January or February since year on year comparisons are skewed by the differing time of the Chinese New Year. It is also, therefore, a more critical month to predict future performance.

Great Wall Haval6 q1 2017

As shown in the earlier chart, the new Haval H2 which has been characterized as a sub-compact SUV, has picked up some of the Haval H6’s slack but its March sales are still just a little over half of the H6.  The quarterly release neglected to provide any data on gross margins per vehicle although it could be assumed that the smaller H2 has a lower gross margin than the H6.  The H6 has been refreshed for 2017 and featured at the Shanghai Motor Show but hasn’t yet hit dealers.  Since buyers were aware of the new model, this could have negatively impacted sales year to date and also forced the company to reduce prices to make room for the new model.

Exports, while showing an increase both monthly and year to date, are still a tiny portion of Great Walls sales.  Reviews from car sites in Australia and New Zealand have been lukewarm with an emphasis on low price for lots of options.

Great Wall Stock April 27

Great Wall’s stock, particularly given its year to date performance, should be under pressure due to its declining profits.

China Minsheng Bank Officer In Custody as Wealth Management Product Evaporates

China Minsheng Bank 1988 HK, today released a statement that an officer was being interrogated by police over “illegal conduct”. No further details were given regarding the officer,  Zhang Ying, the president of Hangtianqiao sub-branch of the Beijing branch of the Company.

The South China Morning Post reported that the conduct was related to the evaporation of 3 billion yuan in a Wealth Management Product, WMP.

If correct, the picture painted is a disturbing one.

The Minsheng case involved an “innovative” WMP in which yields were amplified by purchasing a secondhand WMP. Consecutive interest rate cuts and a flood of WMPs sold on the mainland market over the past three years have already seen wealthy investors shun common WMPs with unattractive yields.

According to investor contracts seen by the South China Morning Post, Minsheng’s private banking customers purchased transferred WMPs from the original investors. Bank employees told the buyers that the original investors urgently needed cash and were willing to cash out of the WMPs, which at the time were not yet due, and forego part of the supposed yields. As a result, the original WMPs that guaranteed principle and at least 4.2 per cent annual return “turned into” a product with more than 8 per cent annual return. Bank employees said the products were exclusively for longstanding private banking customers who owned at least 10 million yuan in financial assets.

Last week an investor happened to ask a friend who works at a bigger branch of Minsheng about the WMP at Hangtianqiao, but was told it didn’t exist. Officials at the Beijing branch of Minsheng subsequently reported Zhang Ying to the police, who then arrested her. By Thursday night all investors had become aware of the situation.

The situation casts doubt on Minsheng’s internal controls and management.  Ironically, the company highlighted its wealth management business in its annual results filing:

3. ..The Company vigorously expanded major businesses including asset management, asset custody, financial market and interbank financial services, and actively built the “Apex Asset Management (非凡資產管 理)” brand. As at the end of the Reporting Period, the balance of wealth management products amounted to RMB1,427,816 million, representing an increase of 34.89% as compared with the end of the previous year.

The bank cannot afford bad management or controls as it reported lackluster annual earnings on March 30, with revenue and earnings relatively flat despite 20% loan growth thanks to an increase in impairments of 25% as well as lower net interest margins dropping from  2.26 to 1.86. Loan growth surpassed deposit growth which only increased by 12.8%.

China Minsheng Bank.PNG

Net income growth would have been negative if it weren’t for the operating expense decline, which was not due to cost savings, but to a May change in reporting from Business Tax to Value Added Tax.  (This mid-year accounting nightmare was applicable to finance, life services, property and construction companies. The Big 4 Banks showed the same dramatic decrease in operating expenses.)

China Minsheng Op Exp

Prior to the illegal conduct event, Minsheng was targeted as sell by Deutsche Bank in March, which cited concerns regarding its heavy interests in shadow banking and its reliance on wholesale funding.  It’s target price was at $7.31 hkd. At its last close at $7.86 hkd, it had a market cap of 323.7 Billion hkd, ($41.6 US) which would make it about half the size of US Bank, USB, the fifth largest bank in the United States.

Mortgage Loans More than Doubling

Like the majority of Chinese banks, Minsheng saw a major increase in mortgage loans in 2016.

Minsheng Loans Personal.PNG

Given the recent sales restrictions imposed by the government after the explosive sales increases in first tier cities, this growth cannot be sustained.  There will, however, be an increase in risk if home prices fall.

High Flyer BBMG Announces Net Profit Growth Over 100%

bbmg stock up

Data Source: Bloomberg

BBMG 2009 HK, announced 4/11/2017 at 21:27 a positive profit to net shareholders in the range of 380 Million rmb to 450 Million rmb for the first quarter.  The first quarter net profit to shareholders was at 150 Million rmb, indicating a rise of 152% to 199%.

No revenues, shares outstanding or eps estimates were given.  The company stated that the rise was due to an increase in booked GFA in its property sector as well as better pricing on cement and clinker.   As shown  here,  property development profits dropped by 48% in the annual statement.  In that same article, it mentions caution needed since the incorporation of Jidong cement has greatly increased both assets, liabilities and leverage.

BBMG rose over 42% last week, after the surpise weekend announcement of a new economic zone, Xiongan New Zone, an area where BBMG dominates in the building material segment.

China Auto Stocks Drop on Uncertainty

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Hong Kong Listed Chinese auto stocks were mixed yesterday, 4/11/17, despite a minuscule drop in the Hang Seng.

Auto Stocks upd

 

Data Source: Bloomberg

All of the above stocks, with the exception of BAIC 1958 hk, had previously reported sales for March.

Update: China March Overall Auto Sales

Depending on which source you read, and what they interpreted, monthly and year to date auto sales were up.  How much is apparently subject to interpretation from a meeting with the China Association of Automobile Manufacturers, (CAAM).  However, nothing has been published on the CAAM website regarding the update.  Unlike other international auto manufacturers, sales are not presented as seasonally adjusted.

January and February are poor monthly indicators due to the China Lunar New Year, aka Spring Festival.  For 2017 it fell on January 28, 2017: 2016; in 2016 it fell on February 8, 2016. Technically it lasts approximately one week, when all of China is on vacation – but the impact can be felt as workers leave or change jobs two weeks in advance. This even makes January to February sequential sales and year on year data unpredictable.

Reuters:

First Quarter Auto Sales China up 7%; March up 4% to 2.5 million units

Wall Street Journal:
First Quarter Vehicle Sales China up .59% to 2.84 million units; Passenger Sales March up 1.7% to 2.1 million units.

Both agreed that CAAM held to its earlier projection of 5% auto sales growth in China for 2017.

China March 2017 Auto Sales Picture – Proceed With Caution

The downward slide yesterday occurred as two reports threw tacks on the road of this fragile, critical barometer of China’s economy.  Now the biggest single car market in the world, the closely watched auto sector is under scrutiny.  2016 managed overall increases thanks partly on the sales tax reduction from 10% to 5% for the year on smaller liter engines, (1.6 liters – the majority of autos sold in China in 2015).  Under pressure to continue growth, instead of resuming the 10%, the tax was partially raised to 7.5% starting in January 2017 through the end of the year.

First Report: High-flying Geely 175hk, was flagged by Credit Suisse, its report, said

..this is the first monthly decline in March in over ten years. Continuing the falling trend for four days, it once fell to $10.44 at most, hitting over 1-month low; it last printed at $10.52, down 4.7%, on surging volume of 117 million shares.

It went on to project Geely’s gross profit margin would be under pressure and kept it at neutral with a target price of $11.4 hkd.

Geely had actually released its numbers on April 7th, with strong year on year growth so the blame for the drop on that report is most likely misplaced.

Geely March

Production Cut

While Geely’s drop is of concern, a report by CICC, 3908 hk, (Per Bloomberg, the Goldman Sachs of China), was more alarming, with an output cut of 16.7% by Great Wall Motors 2333hk.  Although other companies weren’t cited, the report implied other auto makers had done the same.

Slow Lane Data Releases

Auto sales data, unlike elsewhere in the world, is slow to be officially released in China.  The China Association of Automobile Manufacturers, CAAM, releases data for the prior month around the 22nd of the following month.  Specific company data is sporadic and lacks conformity either in presentation and or release dates. This creates the perfect situation for the market’s most hated state: uncertainty.

Mixed Picture

Adding to the uncertainty, March numbers in China reported to date from domestic and international players have been inconsistent.

In China, Nissan reported year to date sales in March up 5.3%; GM saw a ytd decline of 5.2% with Toyota up just 1.7%.

Domestically, auto sales were seemingly resilient, with the exception of Great Wall 2333   hk and Dongfeng 489 hk. Great Wall is a home grown auto company while Dongfeng sells autos produced by joint ventures with Nissan, Honda, PSA and Renault.

Great Wall March

Dongfeng

GAC 2238 hk, showed impressive growth, buoyed by increases in its proprietary brand Guangzhou as well as its JVs with Honda, Toyota and Chrysler.  A breakdown of those brands was shown here.

GAC Mar

 

BAIC 1958 hk, hasn’t yet reported sales.  However, as noted previously, China’s unhappiness with South Korea has prompted reports of Hyundai reducing production hours in China.  Hyundai units made up 60% of BAIC’s unit sales in 2016.

As sales data for March trickles in, these stocks look poised for more negative surprises.

(Sales data and graphs compiled from HK filings.)

Xiongan New Zone Hong Kong Stock Weekly Wrap

As mentioned in an earlier post,  at least 14 Hong Kong listed stocks showed a one day ramp up after the surprise announcement last weekend of a new economic zone, the Xiongan New Zone.

Xiongan New Area

Buoyed by the belief that this triangular area will be the next Shenzhen, at least 14 stocks moved sharply upwards on Monday in Hong Kong, following the weekend announcement.

For the week, 5 of the 14 stocks had a weekly change which resulted in a lower weekly move than that on the first day, indicating some rethinking of the over the top optimism on the relatively vague news.

econ zone upd1

econ zone upd2

The stellar performer was building materials and property owner and manager, BBMG 2009 HK.   The move on this large-cap,  industrial and real estate company was so unexpected that the company itself warned investors to be rational.   In the same announcement, it admitted to supplying about 60% of the cement output for the designated region.  Citi picked it as a winner in the new zone,  Credit Suisse raised it to Outperform, with a target price of 5.8hkd to 6.4 hkd, while Morgan Stanley removed it from its focus list, dropped it to Underweight, stating that cement regional sales would increase about 8%/year, giving the most benefits to Jidong Cement.  As I wrote here, BBMG’s financials and recent asset, liability and workforce increases make its future performance unpredictable.

The other big weekly movers, with the exception of Steel stock China Oriental, 581 hk, would need to show major financial improvement in the first quarter of 2017 since annual results showed either minimal revenue or operating net profit before taxes growth.

Tianjun Jinrun 1265

As shown above, Tianjin Jinrun, 1265 hk, utility company actually had a decline in revenues and a minimal increase in net profit.  Thanks to the weekly move, its now at a lofty 31.39 trailing p/e despite its 2016 revenue drop.
Tianjin Cap 1065.PNG

While sewage treatment utility company Tianjin Capital, 1065 hk, showed a substantial net profit growth of 36% in 2016, its revenue only increased by a little over 1%, indicating that other, non-core and more volatile items contributed to the increase.

Beijing N Star 588

Despite the real estate company’s Beijing N Star 588 hk, revenue increase of 37%, its gross profit increased by only 2.4%% and its net profit actually dropped by 6.8%. It’s doubtful that the first quarter will show much improvement, which could result in an immediate drop in the stock price after the first quarter’s earnings release.

China Oriental 581

The steel company China Oriental, 581 hk, had an impressive increase in net profit from 2015, which followed through with an increase in gross profit in terms of dollars and margins while operating income went from a loss to a profit.  While its trailing p/e is only 9.39, the stock has increased by 124% over the past year.

Kunlun Energy 135

Natural gas-related utility Kunlun Energy, 135 hk, although increasing over 10% last week to reflect a trailing p/e of 97, would need significant positive impact from the new area to justify its latest rise.

(All annual performance numbers taken from hk filngs.)

China Anger with South Korea is Bad for Auto Stock BAIC

baic chart

China’s displeasure over South Korea’s move to allow the U.S to deploy the THAAD missile system on its territory is being felt by Hyundai.  Reports of lower production in China is bad news for BAIC 1958 hk, since Hyundai represents the largest portion of its unit sales.

BAIC hasn’t yet released its March sales. But year to date February sales and annual unit sales in 2016 indicate a large negative impact of a decline in Hyundai sales.

BAIC Jan Feb Sales.PNG

baic annual auto sales

BAIC closed down on 4/5/17 but hasn’t yet reported March sales. While it makes the biggest profit from its subsidiary, Beijing Benz, at 55% to 60% of its unit sales, a decline in Hyundai sales will hurt.

Auto Stocks Hong Kong Listed