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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.

 

 

Great Wall Hits A Pothole

Great Wall April Units

Data source: HK filing

Great Wall Motors, 2333 hk, disappointed with April sales down 8.1% year on year bringing its year to date sales growth to 4%. Sequentially the picture was much worse, with a decline of 14.3% from March.  As can be seen above, April is typically lighter than March but the drop from 2016 same month sales could be a signal for more pain to come.

 

Great Wall April ytd monthly sequential

Data Source: Hk Filing

Great Wall is not alone in this decline, with the China Passenger Car Association (CPCA) reporting that in April China’s broad-sense passenger vehicles sales were 1.6934 million units, showing 1.7% yearly decrease and 13.7% monthly decline.   A 5% growth for the full year has been projected, despite the rise in tax from 5% to 7.5% on small liter engines. Home grown Geely, however, managed a 94.5% increase in April year on year which translated to a 94.4% year to date increase over 2016 and a minor -.3% drop from March.

Geely April ytd yoy

Additionally, Guangzhou Auto, a China brand produced by GAC AUTO, managed to increase its April units by 55.8% for April, bringing year to date sales up 64.2%.  It even managed a sequential increase of 27.1% thanks to its popular Trumpchi GS4 compact crossover.

Guangzhou April

Data Source: Hk Filing

A major portion of the decline for Great Wall was due to the drop in sales of its aging SUV Haval H6.  While some analysts have said it’s due to competition from the Trumpchi as well as Geely’s Boyue, (although the Boyue only just 21,693 in April, up from 20,461 in March – wasn’t selling in April, 2016); Great Wall’s H6 sales were 36,367.  Great Wall partly made up for the decline in the H6 with the H2’s 36% April increase but it’s still less than half the sales of the H6, even at April’s lower units.Great Wall detail April.PNG Data Source: Hk filing

Great Wall’s descent warranted a downgrade in the stock price by Credit Suisse from hk$ 8.5 to 8.00 and kept at neutral.  The bank noted that the decline came despite major price concessions by Great Wall such as the RMB1 billion “red packet” cash incentive program and RMB 9,000-15,000 per unit discounts on selected models.  Finally, it noted that sales for the first week of May had fallen by 24%.  Thanks to the drop, Credit Suisse expected Great Wall to aggressively discount and therefore revised its earnings down by 2-3% for the year.  As shown here, Great Wall’s first quarter net profit showed a decline of 18% despite a unit increase of 8.9%.

Since Great Wall is heading into the slower sales period in China, it will be some time before there is clarity on its direction or profits.  Caution signals are flashing.

Great Wall Stock.PNG

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

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.

China Minsheng Bank Officer In Custody as Wealth Management Product Evaporates

China Minsheng Bank 1988 HK, today released a statement that an officer was being interrogated by police over “illegal conduct”. No further details were given regarding the officer,  Zhang Ying, the president of Hangtianqiao sub-branch of the Beijing branch of the Company.

The South China Morning Post reported that the conduct was related to the evaporation of 3 billion yuan in a Wealth Management Product, WMP.

If correct, the picture painted is a disturbing one.

The Minsheng case involved an “innovative” WMP in which yields were amplified by purchasing a secondhand WMP. Consecutive interest rate cuts and a flood of WMPs sold on the mainland market over the past three years have already seen wealthy investors shun common WMPs with unattractive yields.

According to investor contracts seen by the South China Morning Post, Minsheng’s private banking customers purchased transferred WMPs from the original investors. Bank employees told the buyers that the original investors urgently needed cash and were willing to cash out of the WMPs, which at the time were not yet due, and forego part of the supposed yields. As a result, the original WMPs that guaranteed principle and at least 4.2 per cent annual return “turned into” a product with more than 8 per cent annual return. Bank employees said the products were exclusively for longstanding private banking customers who owned at least 10 million yuan in financial assets.

Last week an investor happened to ask a friend who works at a bigger branch of Minsheng about the WMP at Hangtianqiao, but was told it didn’t exist. Officials at the Beijing branch of Minsheng subsequently reported Zhang Ying to the police, who then arrested her. By Thursday night all investors had become aware of the situation.

The situation casts doubt on Minsheng’s internal controls and management.  Ironically, the company highlighted its wealth management business in its annual results filing:

3. ..The Company vigorously expanded major businesses including asset management, asset custody, financial market and interbank financial services, and actively built the “Apex Asset Management (非凡資產管 理)” brand. As at the end of the Reporting Period, the balance of wealth management products amounted to RMB1,427,816 million, representing an increase of 34.89% as compared with the end of the previous year.

The bank cannot afford bad management or controls as it reported lackluster annual earnings on March 30, with revenue and earnings relatively flat despite 20% loan growth thanks to an increase in impairments of 25% as well as lower net interest margins dropping from  2.26 to 1.86. Loan growth surpassed deposit growth which only increased by 12.8%.

China Minsheng Bank.PNG

Net income growth would have been negative if it weren’t for the operating expense decline, which was not due to cost savings, but to a May change in reporting from Business Tax to Value Added Tax.  (This mid-year accounting nightmare was applicable to finance, life services, property and construction companies. The Big 4 Banks showed the same dramatic decrease in operating expenses.)

China Minsheng Op Exp

Prior to the illegal conduct event, Minsheng was targeted as sell by Deutsche Bank in March, which cited concerns regarding its heavy interests in shadow banking and its reliance on wholesale funding.  It’s target price was at $7.31 hkd. At its last close at $7.86 hkd, it had a market cap of 323.7 Billion hkd, ($41.6 US) which would make it about half the size of US Bank, USB, the fifth largest bank in the United States.

Mortgage Loans More than Doubling

Like the majority of Chinese banks, Minsheng saw a major increase in mortgage loans in 2016.

Minsheng Loans Personal.PNG

Given the recent sales restrictions imposed by the government after the explosive sales increases in first tier cities, this growth cannot be sustained.  There will, however, be an increase in risk if home prices fall.