Category Archives: China Manufacturing

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.

 

 

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

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 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

 

BBMG Building Materials Company Up 34.7% Thanks to Economic Zone Frenzy

bbmg stock

Data source: Bloomberg

Three magic words sent a boring cement company up 34%. The three magic words were: Beijing, Tianjin and Hebei. (aka Jing-Jin-Ji).

The rocketing rise for this 2009, hong kong listing was definitely not due to its latest earnings report.   (It’s Shanghai listing didn’t move thanks to a mainland holiday). Following its earnings announced on 3/29/17, the HK listing actually fell slightly from 3.39HK$ to 3.24hk$.  (Shanghai went from 4.83rmb to 4.66rmb and had barely budged year to date.)

Ruling out the earnings and a lack of other news – the sole blame is the frenzy created by the PRC’S weekend announcement of a new economic zone: Xiong’an New Area.  (Less catchy than Shenzhen but maybe there is a reason for that Xi.)

Per Caixin,

The Xiong’an New Area, located about 130 kilometers (80 miles) to the south of Beijing and Tianjin, forms essentially an equilateral triangle with the two municipalities. It consists mainly of three counties in Hebei province and initially covers 100 square kilometers. The plan is to ultimately expand it to 2,000 square kilometers.

Xinhua said the Xiong’an New Area is the first to be of the same national significance as the Shenzhen SEZ and the Shanghai Pudong New Area, the first national new area, which was opened 25 years ago. It didn’t explain the difference between a SEZ and a national new area.

The new area’s mission is to deepen institutional reform, explore ways to build smart and ecologically friendly cities, develop better infrastructure and efficient transportation networks, and pursue further opening-up in a comprehensive way, Xinhua said. Non-governmental functions of Beijing will be moved into an appropriate part of the zone, Xinhua said.

The details are vague and reportedly surprising.  Nonetheless, it appears to have convinced the market that BBMG is poised for an outsize benefit.

BBMG isn’t a growth company.  It’s an enormous, state-controlled company producing a commodity product in an acknowledged over-capacity industry.  Thanks to a recent forced absorption of less “profitable”, (read lower losses), company Jidong, it has increased its work force as well as its assets and liabilities with undocumented synergies.  Indigestion in the form of lower margins, higher debt payments and unwieldy employment costs from this recently absorbed acquisition is sure to follow.

BBMG Overview

BBMG is primarily a cement producer in an over-capacity sector which does a side business in property development and management.  While it showed an increase in revenue of about 16.6%, its net before taxes and various extraordinary, non-operating items rose only 1.5 %. (Even with a drop in business taxes of 28%, unexplained).  It’s a behemoth of a company, majority owned and controlled by the state, which has grown from 28,619 employees to 49,721, thanks to the forced integration of Jidong. Meanwhile, its gross margins have shrunk.

bbmg income.PNG

As the above shows, operating profit only increased by about 1.5% despite a revenue increase of 16.6%.  Despite the increase in most operating items, business tax and surcharges actually declined by 28%.  The announcement fails to address this difference but without it, there would have been a decline in operating revenue.

Other Income: Subsidies  

The company met its impressive 38% growth in profit thanks mainly to non-operating income items, (which it partly classified as operating, I’ve re-organized).  Although no real details are given on the fair value increases or investment gains, subsidies continue to be a given. (From its annual results announcement).

bbmg other

Cement Volume Sales

As noted, revenue increased by 16.6% for 2016.  During that time, BBMG reported to selling 28.9% more cement and 14.1% concrete.  Segment results from the annual are condensed as follows:

bbmg segment annual

While the increase in revenues in cement is notable, the profits for this segment were a fraction of the revenues, reflecting the overall pressure on price.  The more profitable sectors of property development and property investment showed an alarming decline. These segments taken separately and combined present weak evidence for investing based on profits and growth.

Asset Quality

As can be seen in the segment reporting above, assets in the cement segment have increased by more than 190% while liabilities have surpassed that change with a 274% increase.  The asset quality is also under pressure and opaque.

bbmg bal sheet.PNG

Once again, there is little detail on either Goodwill or Intangibles, which have grown significantly.

Asset quality in terms of receivables, showed an increase in bad debt and maturities.

bbmg receivables

While the economic zone designation could help BBMG in terms of increased demand for that region, it is a national player which has had marginal growth and minimal margins. The overnight rise smacks of speculation and is unwarranted.

 

Geely July Sales up 64% over 2015

geely cars

Geely Auto, 175 HK, maintained its momentum in July thanks partly to the acceptance of its new Emgrand GS crossover SUV and the recently introduced Boyue SUV.

GEELY MONTHLY JULY.PNG

 

*HK filings – January and February based on an average for both months since company presented combined sales, due to the skewed impact of the Chinese New Year.

Although monthly increases have been gradual, the year on year changes: 16.75%  year to date and 64.05% monthly year on year, show just how bad 2015 was.

GEELY YTD AND SEQ

Geely even managed to turn around dismal export numbers, at least compared to June.

Geely Exports July

Geely’s stock more than reflects this increase, with a 12 month return of 73%, far outpacing the Hang Seng.

GEELY STOCK

Whether the first half earnings will show a major increase in profit, however, remains to be seen with stiff competition and big players like Ford, which sold 577,097 autos in China in the first half compared to Geely’s 280,337, representing an increase of 6%, projecting negative pricing for the full year 2016 for itself and the industry in China to be 6%.  (Ford, F, sells in the Chinese market mainly through Changan-Ford and Jiangling Ford). Based on history, Geely should report around August 19, 2016.  Tighten your seat belts.

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.