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

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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 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

 

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

 

 

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.

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.