Category Archives: Overcapacity

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.

 

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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.

China Steel Drops on US Tarrifs

china steelChina Steel Companies, already reeling from Chinese market turmoil, over-capacity and flagging demand, dropped further as the U.S. attacked with 5x tarrifs.  These 5 steel stocks dropped more than the local market, with the exception of the Shenzhen listings.

china indexes

 

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.

Shanghai Comp Hang Seng Diverge

sh hk upd

The Shanghai Composite, down over 3.86% for the week, managed an anemic rise today while the Hang Seng fell but was slightly positive for the week.  In Hong Kong, the malaise was widespread with 90% of its constituents down.

For the HSCEI, down 1.38%, resource stocks including Anhui Conch, 914 hk,   CNBM, 3323 hk  , China Shenhua, 1088 hk,  were particularly hard hit possibly on the news that infrastructure construction giant, China Communications Construction Company, 1800 hk, down 5.04%, first quarter contracts indicated a much weaker 2016 than projected. First quarter contracts were reported at: RMB107.884 billion, an annual increase of 2.2%. On an annualized basis this would mean it would fall short of its annual full-year new contract target amount (RMB650-700 billion), by about 218 to 268 billion rmb.  Putting this company into perspective, it’s market cap converted to dollars is about 26.4 billion vs. New York Stock Exchange listed Fluor, FLR at 7.57 billion.  It is an SOE which also employs about 110,000 people vs. Fluor’s 38,000. (As an aside, check out an amazing company video.)  Oddly enough, China Communications Construction, 601800 SH,  fell only .172% in Shanghai.

Autos:

As mentioned yesterday, BAIC, 1958 hk, down 6.27%, disappointed with declining net profits. Credit Suisse took down the price target from 5.3 to 5.1, keeping it at underperform as the Hyundai JV profit contribution was weaker than expected.  It also noted that
BAIC changed the accounting treatment on new energy vehicle’s (NEV) government subsidy in 1Q16, shifting from “Other income” to “Revenue”. As a result, the company’s gross margin rose to 5% in 1Q16.

As shown in earlier filings, for the first quarter total volume sold was down by 4.3% with the largest decline and segment, the JV Beijing Hyundai, dropping the most.  This is despite the fact that the company was projecting better performance here thanks to the PRC passing a 50% consumption tax decline for vehicles with a displacement of 1.6L or below from October 2015 through December of 2016.  With auto sales highly variable by month, March alone showed some improvement.

baic sales

Cement Capacity Continues to Defy Government

Following in the footsteps of smaller Asia Resources, 743 HK, China Resources, 1313 HK, reported a stunning first quarter loss 17.3 million rmb from a profit of 632 million rmb the prior year.  This was despite an increase in product sold which was unable to offset the decline in material prices of 26% (Asia Resources reported a decline in price per ton of 22%).

cement 1q charts

While both companies are small compared to Anhui Conch, 914 hk, or CNBM, 3323 hk, they show a disturbing trend of increasing production and sales despite obviously lower demand, in conflict with the constant assurances of the PRC to tackle the overcapacity problem of which cement is a major component.

cement capacity

Source: HK Filings. Asia Cement materials reported as: Cement, Clinker and Slag.  China Resources material reported as Cement, Clinker and Concrete.

Other News:

The PBOC, CSRC, CBRC and CIRC jointly announced that they support iron and coal enterprises to expand exports of iron and coal and to issue corporate bonds for debt restructuring.

China Indexes Go Red

China Indexes slipped after yesterday’s exuberant rise. The drop left traders scratching their heads.

SH HK UP

Given that the indexes are still above the start of the last 30 days, it could be a short-term correction.

Sh HK 1 mo Chart

(1 month – Shanghai Comp Orange; Hang Seng Index Blue)

The decline was felt pretty much across the board.  For the Hang Seng, 76% of its members dropped.  The small positive group of 18% consisted  mainly of property related companies. The HSCEI, which declined 1.19% also had negative members dominate at 88%. The four positive movers were: Wanda Commercial, hk 3699, China Vanke, hk 2202, PICC 2328 and Air China, HK 753. The only one of these linked to news was PICC, with UBS expecting a positive improvement in the Property and Casualty Financial Service Industry  in China, lifting its target price of PICC to 17.2 and rating it a buy.

Telecoms – Telecoms continued yesterday’s slide despite the biggest, China Mobile, announcing that its 1st quarter saw a net addition of 7.61 million mobile customers. Net profit was up only .5% and the company noted the growth rate for the whole year would be challenged, ” in the first quarter of 2016, ARPU of mobile customers was RMB57.6 and recorded a slight increase compared to last year. “China Mobile, 941 HK, down .949%; China Unicom,  762 HK, down 2.977% with UBS noting its profits are under a lot of pressure and cooperation with rival China Telecom is minimal. China Telecom, 728 HK, down 3.118.

InsuranceChina Life, 2628 hk, down 1.837%, announced its first quarter profit could decrease by 55% – 65% due to a decline in investment income an a change in accounting methods. China Life has had a dismal run, down 49.6% over the last 12 months and 12.19% year to date.

china life hsi

China Life H2628 HK, Orange; Hang Seng Blue

Overcapacity and Cement

Asia Cement, 743 hk, up 2.9%, one of the smaller players in the cement industry, continues to produce despite negative earnings and government edicts to decrease production in cement nationwide. Today’s filing revealed an 11% decline in revenue, coupled with a drop in gross margin from 16% to 9.9%.  First quarter NOI losses after Taxes were -62.8 million rmb from NOI of 1.4 million rmb the prior year. The company continues to churn out product despite obvious declines in demand, upping sales tonnage by 17% while prices dropped by 24%. The pledged decline in overcapacity industries in China appears to be a myth.

Asia Cement

Ping An, 2318 HK, released its 1st quarter financial statements for its banking subsidiary. At first pass, results are impressive with net interest income, commission and fees all up. As noted in the filing, these increases were due to an emphasis on Mega: “This is to establish a platform for “mega investment banking, mega asset management and mega transaction” supported by the four engines of growth, namely “corporate banking, retail banking, interbank banking and investment banking”.

However, while revenues were up 33% year on year, net income after tax was up only 8.1% thanks mainly to a doubling of asset impairments.

ping an income

Not surprisingly, the NPL ratio and Loan loss provision increased dramatically.

ping an npl.PNG

It’s interesting to note that despite interest rate drops by the Central Bank, Ping An has actually increased its net interest margin, thanks to a slight drop in yield on interest earning assets more than offset by a decline in interest rates on liabilities.

ping an interest income.PNG

 

 

China Indexes Rise On Oil and Output

SH HK UP

With oil prices currently up thanks to a Kuwaiti strike, production surging in steel mills, and gains in residential prices in top tier cities, indexes rose in China.  All sectors benefited despite a lack of major, company-specific news with the exception of Telecom: China Telecom, HK 728 down 1.418%; China Unicom, HK 762, down 1.913% & China Mobile, HK 941, down .5%.  China Unicom took the sector down as it expected first quarter profit to tumble 85% yearly to RMB480 million. It blamed the loss on higher selling and costs.  The three telecoms transferred their tower assets to a separate entity, state-owned China Tower, in October of 2015 with lease-back costs still under negotiation. Ownership after the October transfer was split:

27.90% China Telecom
28.10% China Unicom
38.00% China Mobile
6.00% China Reform Corp*

*China Reform Corp. is a full subsidiary of State Owned Assets and Supervisory Committe and Administrations, SASAC

(Per Bloomberg, China Tower would then be pushing a private placement  IPO in 2017 potentially worth $10 Billion US. )

China Eastern Airlines, HK 670, down 2.48% in Hong Kong, announced that its controlling shareholder would not sell the 700M shares following its  lock-up expiration. “In view of the optimism on the long-term prospect of the company’s investment value, CEA Holding has undertaken that it will not dispose of their unlocked shares of the company within 24 months from 18 April 2016.” This would be better than the market perception, with the stock losing 21.5% in Hong Kong, 16.03% in Shanghai, SH 600115 over the last 12 months.

China Eastern chart

(China Eastern HK 670 Orange; SH 600115 Blue)

Steel News Irony – Conflicting Reports of Production Inside China & Out

Today’s report by the China Iron and Steel Association, CISA, showed that first quarter Chinese production of steel smashed all previous records.  Maintaining the 70.65 million tons produced in March, would result in an annual production of 834 million tons.  (Total China steel production for 2015 was reported at 803.8 million tons).  This would mean about a 3.4% production increase annually.

Meanwhile, in an interview with the National Bureau of Statistics, NBS commissioner Ning Jizhe said the changes in China’s economic trend in the first quarter of 2016 had shown its reform efficiency. As to trimming capacity, he said iron and steel and coal showed negative growth, with crude steel production dropping 3.2% yearly, while crude coal production dropped 5.3%.

Regardless of whether overall Chinese steel production has increased or decreased, the CISA reports show that steel exports have definitely increased, despite China’s recent disparagement through PRC mouthpiece Xinhua, of Western threats as a lame and lazy excuse for protectionism.  (Not content with deriding the West, the same edition chastised India for promoting anti-dumping and urged it to honor WTO rules .) While Xinhua stated that steel production declined by 90 million tons over the past 3 years, the CISA reported that China’s steel exports jumped 30 percent to 9.98 million tonnes in March from a year ago despite a slew of anti-dumping measures globally.

The over-capacity and export growth was noted in the annual report by steel giant Arcelor Mittal, MT NYX, which stated that for 2015, China exported 112 million tons of steel, up 18 million tons from the year before. It indicated that the exports were done to offset the 4.5% decline in Chinese consumption.  Despite the increase, Arcelor reported that the CISA assumed that the exports were being sold below cost, as large and medium sized mills lost RMB 53 billion ($8.6 billion) from January through November 2015), negatively impacting prices and therefore margins in many regions.