Category Archives: China Macro Reads

Hong Kong Stocks Fly After the New Economic Zone is Announced

What’s in a Name?  If it’s got Beijing or Tianjin in it, a record breaking one day rise on Monday.

ezone table 1

Econ Zone Table Movers2

Large cap, small cap, these are the stocks which the market projected to gain from the newly-announced Xiong’an New Area, which has been heralded as the New Shenzhen. The area is to include the already robust areas of Beijing and Tianjin, while broadening to encompass the rust belt of Hebei province.   Not all the stocks had those names, but they were dominant in the movers. There is skepticism as to what this will really entail, Per a Reuters article.

In a strategy note, NSBO Research said it would be difficult for policymakers to replicate the boom of Shenzhen in Xiongan in the current environment of a slowing economy, but rather it would create another political center.

“It is essentially a greenfield site, with very little in the way of existing manufacturing expertise and no nearby financial centers to call upon,”, said Rafael Halpin, head of research at NSBO.

Nevertheless, the over-exuberance can be seen in the following charts. (The last close was for 4/3/2017 – the Hong Kong stock market was closed on 4/4/2017 for the Ching Ming Festival;  Shanghai and Shenzhen were closed on 4/3/2017 as well as 4/4/2017 so haven’t reflected the good news.)

ezone bbmg 2009

ezone china national building mat 3323

ezone china suntien 956

ezone tianjin dev 882.PNG

ezone Tianjin Jinrun Public Utilities 1265.PNG

ezone tianjin port 3382

ezone china oriental 581.PNG

 

ezone beijing oriental 581

ezone beijing n star 588

ezone capital land 2868.PNG

ezone beijing ent 392 final

ezone beijing urban construction 1599

ezone kunlun energy 135

Whether the rise will be justified remains to be seen.  However, the impact from a political announcement was substantial.

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ICBC of China Issues 117 Million Credit Cards in 1st Half, Why It Matters

icbc stock

As a tantalizing pre-cursor to 1st half earnings, ICBC HK 1398, stated that it issued over 117 million credit cards with 1st half consumption of 1.4 trillion yuan, ($211.25 Billion). However you look at it, that’s a lot of plastic.  However, in relative terms, it’s not quite as stunning.  Particularly for consumption dollars, the increase is substantial, compared to the 1st half 2015 filing:

ICBC credit cards

Why it matters. In terms of market cap, ICBC is the second largest bank in the world after Wells Fargo Bank.  In China, it’s the largest.  Its credit card issuance and consumption therefore give a view of credit card growth in China, which has historically had a higher dependence on debit cards. It’s also a window to consumer credit use in China and the growth of an important revenue source for ICBC.

For ICBC, and the majority of banks in China, debit card issuance has far exceeded credit card issuance.  Based on the last 2 annual reports, ICBC’s credit cards as a % of total cards has inched up , although growing more than debit card issuance.

icbc cards up

Based on the annual report, confirmed by the 1st half 2016 results, Chinese consumers who do have credit cards are getting more comfortable buying on credit.  This should be good news for Chinese banks, since they’ve been squeezed by lower net interest income after multiple interest reductions by the Central bank.

interest rate changes

Source: Reuters

Add to that a market slowdown and increasing, NPL’S, and banks are grasping for sources of income other than net interest.  ICBC , despite its size and  international holdings, needs that extra income.  The last quarter showed minimal growth in net profit, with commission and fee income representing a consecutively larger part of revenue.

icbc q1 2016

Source: HK filing

While quarterly filings don’t break out bank charges, the last annual showed them to be about 5.6% of gross revenue.

icbc annual other income

Comparing this to the increase in annual card issuance, the 12.5% increase in annual bank cards issued brought about a 7.3% increase in total revenue.  While the latest statement mentioned only credit cards, the increase bodes well for an increase in a significant portion of income.  With a trailing p/e of 5 and below, it needs all the help it can get.  Judging by historical filing, we should see if this assumption holds around 8/27 of this month.

 

 

 

 

 

China Vanke Points the Finger at High Risk Baoneng Ventures While Anbang Investor Embraces Risk

Vanke FingersAs China Vanke, 2201 HK, 000002 SH, continues to fight corporate raider Baoneng, it’s latest charge is that Baoneng has raised the money to increase its stake to 25% was done with dangerous disregard to risk.  Ironically, Anbang, a 4.6% owner in China Vanke,  has recently shown the same criminal disregard to risk, as its premiums sold increased by almost 5 x in June from the prior year.  Anbang is the mysterious, multi-billion dollar company that tried to buy Starwood, HOT, for $14 billion. It was able to increase those premiums in June by increasing sales of high-yield hybrid policies increasing by 16x.  If the reported guaranteed rate of 4.5% is correct, risk is blatant when the official deposit rate maximum in China is just 1.5% and the local stock market returns have been paltry, if any, with the Hang Seng up only .36% year to date and the Shanghai Comp down 14.76%.

Vanke is obviously more concerned with Baoneng’s holdings, reported at 25% on July 6, 2016 after A shares resumed trading on July 4, 2016 and Baoneng added 78.4 million shares.

This saga is far from over as the Chairman of one of the largest developer’s in the world, Wang Shi, continues to fight to maintain control of the China Vanke he founded in the 1990s.

In case you missed it, as Baoneng, upped its ownership in Vanke, Vanke first suspended its A shares to “consider a restructure”, and then tried to sneak through a private share issue to the SOE Shenzhen Metro.  The grounds for the potentially massive share issue to raise between 40 and 60 million yuan, was that Vanke desperately needed the land Shenzhen Metro was sitting on, mainly close to or connected with its metro system.  Once this issuance went through, Baoneng would lose its prominence as a majority shareholder and be replaced by Shenzhen Metro as the largest shareholder.  Vanke may have succeeded since Baoneng had no Board presence but was thwarted when China Re, which had 3 votes, balked at losing its percentage interest.  On top of that, when Vanke caved and asked for a vote, one member abstained, a Blackstone member, claiming he had an interest in the outcome since Vanke was negotiating a purchase from Blackstone.  Without that vote, the approval of the majority vote was protested by China Re, claiming that the abstention meant there was less than the required 2/3 majority.

Thankfully, the public isn’t too affected since Vanke managed to get a waiver on the 25% rule to 10%, (rules are meant to be broken), but admits that the new proposal could drop the float to below that.  Based on the proposal and the last reported share holdings, it definitely will drop it.

Vanke Proposal

Meanwhile, despite the fact that Vanke is one of China’s largest developers, with projects dominating the 1st and 2nd tier cities, its stock has suffered more than the indexes for both the Hong Kong and Shenzhen Exchanges.  (12/18/15 was the date at which the A-shares were halted.  They resumed trading on July 6, 2016, despite the fact that the restructure still wasn’t concluded.)

Vanke stock.PNG

Even the Shenzhen exchange wasn’t happy with the deal and wrote Vanke a letter with 7 problems.  Vanke wrote back with the synopsis as follows: 7/4/2016

1) Re: question on the reasoning for abstention – Vanke stated that conflict of interest which is based on the fact that deal Blackstone is working on would be affected by outcome of vote.

2) Re: question of Independent Director’s Independence: Rebuts that the Indep Director is independent, Vanke states that he is independent per the rules of the Shenzhen stock exchange.

Although Blackstone shares some interests with Vanke, states that these interests are below the threshold & therefore enable the director to be classified as independent.

3) Rebuts question on lack of 2/3 majority required with the abstention. Claims that they had enough members voting without the abstaining member.Claims they needed only 50% to attend, then 2/3 of those attending to pass. 10 out of 11 voted, with 7 voting yes.

Free float under Approved Minimum & Remedy

2) Admits the free float will most likely be below the 10% (standard was 25% but they got a waiver for 10%). Based on pre-existing ownership, free-float will definitely drop below – from 11.91% to 9.45%.  Company considers the .55% deficiency to be immaterial. Company has made no plans to rectify, will act once it happens – could issue more H shares.

Huge Difference between original Capital Contribution of Assets being Bought and appraised value.

3) Deal Value – Claims that value is reasonable due to sign. Land price appreciation since 2012. Since 2012, Shenzhen land price per GFA have increased by 354% while Nanshan prices have increased by 284%. In contrast, the value of Qianhai hub increased by 123% while Antuoshan increased by 44.7%

State of Development of Parcels

4) Explain where the development process, approvals obtained, is on the assets. Early progress, no construction to date, need environmental impact, etc.

Profitability

5) Notes that there has been negative to minimal profits for assets acquired The land injection was made in 2016 – development will eventually make it profitable.

Avg. Trading Price Justification

6)Rule 45 – price can’t be less than 90% of market reference price. Market reference price based on average trading of 20 days, 60 days or 120 days prior to announcement of resolutions of acquisitions. The company justified the price of 15.88 rmb/share stating that it was more than 90% of the 60 day average – prior to the suspension. This price was also supported by historical p/e, & price to net asset value. Based on history – states that the projected price is about 93% of avg.

Dilution of EPS

7) Admits that it will take time for assets to be profitable so there will most likely be a dilution of eps in the “short term”.  Both are in early stages, minimum approvals to date & no construction started.

Where are they now?  The latest filing, 7/21/2016, states that the Blacktone deal did go through, with China Vanke setting up a JV which would own 96% of the properties, at a cost to Vanke of RMB 3,889 million, about $582 million US. Otherwise, the last filing on July 18, 2016 regarding the restructure noted there was nothing new to report, with no approval yet from the State owned assets and Supervisory Boards, the Vanke Board and the CSRC.

In case you were wondering: What are the Baoneng Entities?

Although Baoneng has increased its ownership since the annual report, at the annual, the following entities were listed with their shares, all related to Baoneng:

Baoneng Related

 

 

 

 

 

 

Hong Kong Cement Companies: Rally or Dead Cat Bounce?

CEMENT RALLY

Hong Kong Cement companies rose across the board after BBMG, 2009 HK  announced an increase in net profits for the 1st half of 60% to 80%.  The increase was attributed to an increase in its property sales segment, with net profit of 1,047,743,400 and eps of .22 for the first half.  This is the only indication of the source of the profit increase.  The property development segment had an increase in booked gross floor area of 82% from 398 square meters to 727 from prior year period.

The company stated that sales of cement and clinker product increased by 20.5% year on year, at 17.09 million tons.  No mention of profits in this segment were made.  For the year ending 2015, cement sales were 26.8% of revenue with property development at 41.9%.  Gross profits were just 3.6% of revenues for cement; 15.4% for property development.  For the first quarter of 2016, gross revenue was down 4.25% and gross profits were down 10.4% making the 6 month projection a surprise and dependent upon unpredictable property sales versus higher cement prices and revenue.

In contrast, major operator Anhui Conch, 914 HK,  with a massive market cap of 99 Billion HK (12.8b US) – no 2nd quarter or first half reports yet but 1st quarter showed a sales revenue decline of 5.5%, a gross margin decline of 34.5% and a net profit decline of 31.7% despite government subsidies.  This pure play cement company blamed the declines not on volume declines but on price declines.  It is doubtful that the first half will show a major change in cement prices, while prices remain under pressure and the much promised capacity declines remain a myth.

Belle International: Fashion Footware Gets Stomped

Shoes Belle

Belle International, HK 1880, a 21,000+ retail store operator concentrated in footwear and sportswear, reported an annual net profit drop of 38%.  This occurred despite a small revenue increase of 2%. As seen below, a major reason for the decline was an impairment in the footwear segment on goodwill and intangibles, exacerbated by a drop in margins.

Belle fs

Without the impairment charge, the drop in net to shareholders would have been about 10.7%, despite the store increase and sportswear increase, due to worsening margins for footwear.

belle no impair

*Impairment Charge – applied to  Goodwill and Intangible Assets related to footwear:

Belle gw

The impairment was blamed on weakened demand for their brand purchases of Mirabell, Millie’s, SKAP and others.

The impairment is hopefully a one-time occurrence.  However, the change in segment revenues, profits and same store sales for footwear is a worrying trend which the company doesn’t project ending.  As reported in a prior review, same store sales for footwear have been steadily declining while  the lower margin sportswear and apparel segment may have stabilized and still show gains.

Belle chart

HK Filings

The footwear segment, dominated by company-owned brands,  is where the company has made its biggest sales and profits. Belle  blamed the weakening economy for the same store sales declines in footwear. Ironically, it states that demand is strong in the sportswear apparel segment. In sportswear apparel, outlets sell licensed brands including Nike, Addidas, Puma and  Converse.  The company states that footwear in department stores is under pressure as department stores are over-saturated while sportswear outlets offer a more flexible placement option.  It also concludes that sportswear has become more popular than fashion brands due to changing consumer appetites toward athleisure and away from more formal wear. With the impairment in footwear due to weak demand and discounts, the popularity of their proprietary brands is definitely declining, whatever the reason.

At the end of the year the company operated 21,017 stores on the Mainland, China and Hong Kong, showing a slight increase of 1.5% from the year before.  The company only operates stores, it doesn’t own them.  This enables them to change the mix and downsize in reaction to market conditions.  Store outlet growth  has declined significantly while the mix has favored growth in the lower-margin sportswear segment.

belle outlets hist

From 2015 to 2016 – the increase in total stores was only about 2%.

RMB Millions

belle outlets

(Source -hk filings)

This slowdown in outlet growth shows the company’s limits to revenue and profit growth in a weakened demand environment.  While the combined outlets increased by only 1.5%, the revenue increased by 1.95% thanks to a growth in revenue in sportswear partially offsetting the revenue decline in footwear.

(In rmb Millions, from HK Filings)

belle rev segm

Unfortunately for Belle, the sell of licensed sportswear results in a lower operating profit margin, although reportedly due to inventory controls and demand it has improved and possibly stabilized. While Sportswear income before tax margins against segment revenue is improving, Footwear is declining significantly, and this is shown before the impairment.

belle rev

Despite the impairment and decline in margins, Belle is still profitable with a low debt/equity ratio.  However, after issuing a special dividend in 2015 the company chose to severely drop its full year dividend reportedly to conserve cash for market moves.

Belle dividend

For growth, at this point in time Belle cannot rely on new stores with a saturated market, and competition from other brands as well as E commerce.  The annual report mentions internet shopping but no details for online sales are given.  The company’s recent history on buying new brands has proven poor with the goodwill and intangibles write down.  The annual statement mentions recent agreements with Baroque of China and Replay of Italy but gives no results and states that it must be patient.

Belle’s stock has felt the brunt of these trends.  It’s recent performance, particularly the rapid decline in same store sales for footwear, hardly warrants the trailing p/e of over 11, despite its size and mainland presence.

Belle stock

 

 

L is for Level? China Predicts L-Shaped Recovery

L new

An Anonymous, “Authoritative Figure” reported that China will tend toward L-shaped growth (?).  The report went further to say that the build up in leverage was an original sin.  (A Communist mouthpiece using an original sin analogy?).

The report presented conflicting views of how to eliminate overcapacity.  First it states that zombie companies should be transformed through mergers and revamps rather than bankruptcy.  After that statement, however, it stated:

companies beyond salvage should be allowed to fail because debt-to-equity swaps would be costly and self-deceptive.

This last statement would appear to quash the recent rumors of banks exploring debt-equity-swaps for bad loan.  Curiouser and curiouser.

China to Spend 11.9B on Aviation Infrastructure

China is preparing to spend 77 Billion yuan, (US Eq. $11.9B),on aviation infrastructure this year.  This should be good news for infrastructure engineering giant, China Communications Construction Company, HK 1800, down 3.08% vs. Hang Seng .37% drop. (It’s Shanghai listing, SH 601800, declined .09% vs. the  CSI 300′s .14% rise.)  As mentioned in a previous post, this mammoth SOE disappointed in its first quarter contracts.