Category Archives: China Economy

GAC Stays in the Fast Lane in April

gac overall units

While April US auto sales have disappointed across the board, with declines in all major automakers, China has yet to release numbers for April, with the exception of GAC, 2238 HK.  If March offers a clue as to performance, it will be a mixed bag.  For those with declines in the first quarter, the increase in the sales tax on the majority 1.6 liter or less vehicles was blamed; Ford and GM. Despite the change in tax, some auto makers saw sales growth in China.  Hyundai, however, saw a dramatic decline as a result of stoppages related to discontent over the US THAAD missile in South Korea.  VW Audi, took a dive at least partly due to dealer discontent over its planned 2nd jv with SAIC.  Thanks to company specific issues, the outlook for overall China growth, projected at 5%, is cloudy. (The data is primarily from Reuters except for Chinese makers Geely, GAC, Ford and Daimler which were based on SEC and HKEX filings).

Major Autos China March

Skies are sunny for GAC, however, which just reported 36% growth ytd in April over 2016.  If revenues and costs stay on track from the first quarter as reported here, it bodes well for the GAC’s stock.

GAC April

Honda and Toyota have shown significant growth, but the proprietary Guangzhou has been an out sized contributor to growth as has Fiat Chrysler.

Guangzhou units

FCA April

While recent performance is no indicator of the future, at least in the short term GAC is conservatively valued with a trailing p/e of 9.

GAC stock

Advertisements

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.

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.

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

traffic-light-876046_640

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 Auto Stocks Could Get Boost From GAC’S March Sales

GAC chart March

Source: HK Filings

While overall auto sales in the US disappointed for March, one of the first auto manufacturers to report in China, Guangzhou Auto or GAC, 2238 hk, had surprisingly good numbers.

GAC SALES March Spread.PNG

Source: HK Filings

The company sells its own brand as well as Honda, Toyota, Fiat and Mitsubishi. Guangzhou Auto and Fiat took the lead in growth both for March and year to date.

gac sales by manu march

As has been the case with China overall, SUV’s showed the greatest growth, overtaking sedans in terms of numbers and growth.

gac SALES BY TYPE MARCH

Sentiment for auto sales in China has been flat to negative thanks to the increase in the sales tax on smaller liter engines, from 5% to 7.5% starting in January.  In December, the tax is scheduled to revert to 10%.  As the top chart shows and was the case for many automakers and sellers in China, this caused a spike in last quarter sales of 2016.

GAC’s 2016 annual earnings were strong, with a net profit increase of 35.8% thanks primarily to the earnings from its joint ventures.

GAC financial annual

While it’s increasing sales of its own, less than profitable Guangzhou brand, the strong performance of its joint venture partners could give its first quarter results and price a boost.

Hong Kong listed auto stocks closed down on April 5th, except for Great Wall, 2333 hk, despite a rise in the Hang Seng.

Auto Stocks Hong Kong Listed