Author Archives: pjdebutler

China Telecoms Forced to Drop Prices and Increase Coverage

Big Three ordered to reduce mobile data tariff by 30%.

China Telecoms can’t catch a break.  In 2017, the beleaguered telecoms were forced to stop charging headset long-distance and roaming fees and to reduce the internet prices for small and medium enterprises.  This year, as they struggle to increase 4G implementation and add Broadband customers, they’re being told to lower prices and increase coverage and speed.  Per the Hong Kong Filings of the China Mobile 941 hk, China Unicom 762 hk, and China Telecom 728 hk..

Presented in the Government Work Report presented in the first session of the 13th National People’s Congress of the People’s Republic of China convened on 5 March 2018,

  • increase efforts in implementing network speed upgrade and tariff reduction measures;
  • achieve full coverage of high-speed broadband in cities and rural areas;
  • expand the coverage of free Wifi Internet access in public areas;
  • substantially reduce the tariffs of household broadband, corporate broadband and dedicated leased line;
  • cancel data “roaming” fee;
  • reduce mobile data tariff by at least 30% in this year.

The three declined on March 5th, along with the HSI and HSCEI indexes but have under-performed year to date and on a monthly basis.  Based on this edict, the stocks will face more declines.

Telecoms

While they haven’t submitted annual reports for 2017 yet, the third quarter showed minimal growth in terms of revenue, profits and Customers.

Telecoms Customers

Despite migrations to 4G and new Broadband customers for China Mobile and China Telecom, revenues increased less than 5% or even decreased in the case of China Unicom,  for the 9 months ending in September.

Telecom 3Q

These less than stellar numbers will be negatively impacted by the new government regulation as well as the uncertainty regarding the continuously changing tower leasing agreements following the 2015 spin-off.

 

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Just in Time for Volatility, HKEX adds New Shorts

Effective 2/9/2018, HKEX announced a revised list of designated stocks for shorting.  The list now includes 929 listings, from 911.  While 44 stocks were added, 26 were deleted.

Shorts Additions

The deletions include the now infamous Huishan Dairy, 6863hk.

Shorts Deletions.PNG

Hang Seng Indexes have dropped dramatically along with US indexes.

Hong Kong Indexes

Things look bad before Hang Seng open, following today’s US market drop.

US Indexes

Hong Kong Indexes in Free Fall

While US markets turned positive yesterday, Hong Kong did not follow but diverged as its major indexes and constituents continued a sequential decline.

Hong Kong Indexes

The Hang Seng, HSI, has had 5 straight days of decline.  The Hang Seng Enterprises Index, declining for 3 days, has entered correction territory at over 10% below its recent high.

The 10 stocks showing the worst weekly drop in the Hang Seng, from 9.7% to 17.24% stocks come from a wide range of sectors, but were dominated by mainland developers including Country Garden, 2007 hk, China Resource Land, 1109 hk and China Overseas, 688 hk. The fall was felt in all sectors, however, as 41 of its 50 members declined at the last close.

Hang Seng Decliners

 

data source: AAstocks

The Hang Seng Enterprises, which has now corrected with an over 10% drop, has been dominated by securities companies and banks.  However, the pain was widespread as the last close saw 39 of its 40 members decline.

HSCEI decliners

data source: AA stocks

In the U.S., the increased volatility and major Monday drop was generally blamed on inflation fears and rate increase expectations.  In the past, Asian markets have often followed the U.S.  However, as China has grown as an economic power, ranked just behind the U.S., the decline may be more indicative of potential weakness in China growth versus reactions to the U.S. market.

Up until this week, both the Hang Seng and the Hang Seng Enterprises Index had been among the best performers year to date.  This made them ripe for  a correction.  Whether there are other reasons under this decline, remains to be seen.  Slowing car sales, slowing cellphone sales, financial crackdowns, pollution enforcement, heavy debt loads, slowing residential construction, may finally be negatively impacting the economy despite continued projections of growth of over 6% by the government.

Hang Seng Enterprise Index Expanding, Adding Tencent.

The Hang Seng Enterprises Index, or HSCEI, will be dramatically growing from 40 to 50 stocks; eliminating one while adding 11 others.  Since the additions include red-chips, and P-chips, it will shed its H-share index moniker.  This is the first increase since 2010.

Red chips are mainland-based companies incorporated internationally and listed in Hong Kong, while P-chips are private Chinese enterprises controlled by mainland individuals.

While the number of stocks will increase by only 25%, the market cap combined holdings will more than double, based on the last share closing prices.  The large increase is primarily due to Tencent, 700hk and China Mobile, 941hk.

HSCEI Changes

The additions will diversify the finance-heavy index, with technology company Tencent representing the largest by market cap for the reformed index.

The HSCEI dropped over 5% today, along with most Asian indexes, following the US widespread record-breaking market drop on Monday.  Both the HSCEI and the HSI, have been among the top international index performers over the last 12 months.

HSI HSCEI Performance

The additions are to be phased in, starting March 5, 2018, as announced earlier.

HSCEI phase-in

Per the announcement,  a A Hang Seng H-Share Index will be launched covering the 40 H shares in the HSCEI to cater for market interest in such a benchmark.

 

 

 

Struggling Great Wall Faces Head-On Collision with Honda Motors

Great Wall h6 pic

Great Wall Motors, 2333hk, already grappling with declining margins, has been blind-sided by a lawsuit from Japan’s Honda Motors, HMC, according to Caixin.

Japanese automaker Honda Motor Co. is taking legal action against Chinese car-maker Great Wall Motors, claiming it infringed on its two patents.

Honda requests Great Wall to stop selling its SUV model of Haval H6. It is also demanding more than 200 million yuan for what it claims were economic losses it suffered, according to a statement of the Beijing Intellectual Property Court dated on Jan. 31.

Press officers at Great Wall said they were unaware of the lawsuit and declined to comment.

While the suit will take time, a halt in sales of the Haval H6 would decimate the already struggling auto maker.   The H6 has been struggling to maintain its high place among China SUV’s, with its sales representing a major percentage of Great Wall’s total units: 47% in 2017; and 54% in 2016.

Great Wall December 2017

As can be seen, the Haval H6 has been Great Wall’s most popular vehicle, but its sales have been sliding downward despite Great Wall’s increases in promotions.  These promotions have decimated its bottom line – with 2017 annual sales projected of 101 Billion rmb, an increase of 2.8%, from a unit sales drop of .4%, Net Profit plummeted 52%.

Great Wall H6 Monthly Sales Historical

Great Wall Annual 2017

Great Wall’s “profit warning”, with few details, blamed the major drop in net margins on increased promotions and research and development costs.  It does, however, match up with the 9 month interim report where net profit dropped by 59.9% despite a minor sales drop of .6%.

Great Wall 3Q 2017

Great Wall is one of China’s few auto companies to sell only China made and created vehicles.

No H6 Saviors

In SUV’s, which make the bulk of Great Wall’s Sales, the H2 showed promise for the year, with a 9.2% increase but for the month of December was down 48% year on year. Great Wall has touted its new luxury models VV5 and VV7, which have shown sales, but combined with other new models represented only about 15% of the total unit sales for 2017.

Great Wall Other Models

Great Wall Monthly Sales All Units

Room for the Stock to Fall

Great Wall’s stock has failed to match the H.S.C.E.I index performance.  While it has a low p/e of 7, (vs. darling Geely at 38), it has lower to go without a major shakeup. It can’t look to the government. Thus far, the government has shown no intent to stimulate the auto sector, having discontinued the tax discount started in 2016 and halved in 2017.  Passenger sales in China increased only 1.35% in 2017, with a sales tax decline and a booming stock market.  Without outside stimulus, Great Wall will have to look internally.  It’s CEO and founder, Wei Jianjun, has his work cut out for him.  However, the rumors of a tie-up with Fiat Chrysler have been squashed.  This was not surprising given its established and growing relationship with GAC, 2238 hk.

Great Wall Stock

 

 

 

 

 

China Vanke Shoots For New Board, No Barbarians Allowed

Embattled China Vanke, hk 2202, has finally set a meeting to vote for a new Board, the current term having expired in March of 2017.Vanke Board

Source: Hk Filings, latest

Out: Wang Shi, Vanke founder, China Re Representatives & Blackstone. In: SZMC with equal representation to Vanke.  The board also appears to have some new diversity with non-related representatives.

What’s Missing: Baoneng, Anbang.

The major reason for the delay in the new vote was to ensure Vanke executives maintain control, or at least split it with an entity of their choosing, despite their minority ownership interests.  They’ve been aided in their quest from outside sources.

  • China Re, which owned 15.3%, agreed to transfer them to Shenzhen Metro, SZMC.
  • China Evergrande, 3333 hk, a competing developer which had been stockpiling shares, volunteered transferring its voting rights to SZMC.
  • Evergrande officially sold the shares, at a loss to its original cost, to SZMC.  (No, Evergrande isn’t a charity – they are pursuing a back-door listing in Shenzhen which will very possibly be aided by this gesture).
  • Other heavy owner & tagged a barbarian, Baoneng, was prohibited from selling certain insurance products and its Chairman was prohibited from insurance for 10 years.
  • Vanke started a lawsuit in February, 2017, to invalidate Baoneng’s shares based on its use of leveraged products to acquire them.

Despite all these visible moves, the fact remains that Baoneng still holds 25.4% of the company’s shares and would be assumed to have a legitimate reason to expect Board representation.  The executives from Vanke’s side own a minor percentage of shares. Another insurance company, Anbang, also owns a significant amount of shares.

Baoneng Owner

Source: HK filings

The June Meeting, Friday the 30th of June, should be an interesting one.  Although the stock has been rising on the news, it’s still too early to know if the proposal will get the 2/3 majority needed.

 

 

 

 

Great Wall Motors Zooms Upward on Fumes

WEY Great Wall wey

Despite CAAM’S report of another month of declining auto sales in China, Great Wall Motors, Hk 2333, powered above all its peers.

Auto Stocks May 2017The report for overall passenger sales in China, issued by the China Association of Automobile Manufacturers, CAAM, showed a May year on year decline of 2.6% following an April decline of 3.7%.  A decline from last year’s 13.7% growth was expected after the sales tax drop on smaller engine vehicles from 10% to 5% went up to 7.5%.  (63% of cars sold in 2016 were 1.6 liters or less, the maximum size for the tax incentive.) With the decline in the tax incentive, expected sales growth for 2017 is only 5%.  Thus far, sales have been running below those expectations.

Defying the letdown, Great Wall rocketed up over 21%.  The apparent reason: a positive upgrade by Credit Suisse.  Thanks to the pending introduction of the WEY brand luxurious but affordable SUV, Credit Suisse raised the sales projections and profit projections for Great Wall.  Besides projecting impressive unit sales increases, a net profit increase over the popular Haval was seen at 5,000 rmb/unit. Although Credit Suisse lowered the 2017 earnings forecast by 14%, it raised the target price from $8 hkd to $12.5 hkd mainly on the basis of the projected sales growth and profits of the WEY.

WEY Sales Projections

Putting this in perspective, Great Wall  had the following sales in 2016: (from HK filings)

1Great Wall 2016

Thanks to both its emphasis on SUV’S and its Haval H6, Great Wall surpassed the industry average in 2016.  This increase also translated to profits.

2 Great Wall Fin 2016

Source: HK Filing

Sales Growth Slower in 2017

Like the industry, Great Wall has seen a drop in unit sales growth as well as profits for 2017.  In the first quarter, while overall China auto sales surprised with a rise of 7%, Great Wall exceeded that rise with a unit increase of 8.9%.  That increase, however, came at a cost as its net profit actually declined thanks to a gross profit drop from 25.3% to 22.1%.

3Great Wall q1

Source: HK Filing

Great Wall’s Unit Sales growth to date has slowed since the first quarter, particularly with the once popular but now aging Haval 6.  For May, the 3.76% drop was worse than the overall industry.

4Great Wall May

Source: HK Filing

Price Change Overshoots Short Term Prospects

While Credit Suisse may eventually be proven correct in its forecast, given the industry’s recent and projected performance, the untested demand for the WEY SUV, and the strong competition in the Chinese auto market, the rapid stock rise is unwarranted.  We are a long way from June’s sales reports and earnings for Great Wall shouldn’t be out until about 8/25/17.  Additionally, Great Wall, as are all China auto sellers, is entering the slowest part of the year for sales.

6 Great Wall Monthly Chart

Time to Hit the Brakes on Great Wall.