Hong Kong and Mainland Stocks Continue to Rise

Thanks to Morgan Stanley and Goldman Sachs bullish notes on China, the Hang Seng and Shanghai composite continued their positive runs.  Goldman cited China economic growth as well as Xi’s incentive to keep things going well prior to the  19th Communist Party Congress in the fourth quarter of 2017.

Data Source: Bloomberg

Practically all sectors were go for the Hang Seng, from banks to developers to consumer stocks.  The top 20 were as follows:

Data Source:  aastocks.com

Most Hang Seng stocks were up, with only 5 of the bottom 10 performers in negative territory.

Data source: aastocks.com

 

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

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:

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.

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.

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.

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.

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

As 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.

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.)

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:

 

 

 

 

 

 

China Steel Drops on US Tarrifs

China 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.

 

Hang Seng and Shanghai Comp Rise in Tandem

Despite disappointing retail sales numbers released over the weekend, the Hang Seng and China Comp managed to rise, following a weekly decline for both.

This could be blamed either on a short-term correction after falls over 10% from recent highs, or the usual stimulus hopes after weakening retail and credit numbers.

The HSI had positive moves in the majority of sectors.  For the HSCEI, however, the 10 decliners were dominated by banks.

Source: AA stocks

 

While China banks are under pressure with net interest income declining and, npl’s growing, the latest move could be due to rumors that Chinese regulators will be examining non-performing loan data.  Despite economic weakness in China, NPL’S have stayed relatively low.  While NPL’S have grown, criticism has come from outside regarding the drop in allowances to NPLS, now below the 150% guideline for 2 of the major 4 banks. From the last quarterly reports for China’s big-4 SOE banks:

Whatever the reason for the rise in stock values, the quick rise in one company, based on recent and historical performance, is unwarranted.  Belle International, hk 1880, has risen over 14% since May 11.

T

Belle is a footwear and sportswear apparel retailer with 20,375 stores in Mainland China, Hong Kong and Macao.  Belle has felt the brunt of the Chinese economy slowdown with same store sales declining, particularly in their bigger footwear segment, where they have the most outlets and get the biggest net profit.

Source Data: HKEX filings

While they have yet to issue their annual report, the decline in same store sales has seriously hit the bottom line as a profit warning was issued on 3/29/2016,  stating the company expected a decline in annual net profit of 35% to 45%.  Without giving specific details, the company claimed it was due to declining same store sales, declining gross profit margins and goodwill impairment. This would represent a major decline in performance based on both the last semi-annual report and the last annual.

Source Data: HKEX filings

As shown above, the company is confronting 2 problems.  Thanks to declining sales in its original footwear core, it has been shifting more into sportswear apparel, which has continued to see same store increases although these are shrinking.  Unfortunately, the margins in sportswear apparel, where they sell mostly licensed goods versus proprietary goods as in footwear, are much lower than footwear.

Based on these trends and the recent profit warning, it is doubtful the company will meet the current projections for about a 20% decline in eps. The company is expecting to publish its annual report by the end of this month.

 

 

Shanghai Hong Kong Diverge

After disappointing export data was released on Sunday, the Shanghai composite dropped while the Hang Seng rose slightly.

Per AA stocks, the Shanghai and Shenzhen stock markets saw a widened loss after opening lower and closed the market at nearly intra-day lows. At the market close, the Shanghai Composite Index dove 2.79%, the Shenzhen Component Index plunged 3.07% and the CSI dropoped 2.07%. The ChiNext Index tumbled 3.55% to end the day at 2,053.6. More than 100 stocks hit the down limits for the two stock markets. Market turnover totaled RMB499.6 billion.

In contrast to the mainland exchanges, for the Hang Seng, 58% of the components rose while only 19% declined with 2% showing no change. Both indexes were retreated further in the red year to date.

This came after a a week of retrenchment for both indexes. Last week’s performance:

After a drop thanks to both disappointing earnings and a ban on Macao proxy phone betting, gaming companies revived a bit in Hong Kong:

Although all gaming companies were hit when the VIP proxy betting was halted, it should be noted that Sands had halted the practice last year.

 

Shanghai Composite and Hang Seng Falter

Major Chinese indexes faltered pending 1st quarter earnings reports, Wednesday’s data on March industrial profits and  April consumer sentiment and mixed signals from regulators.

Commodity Bubble:

Commodity trading raised alarm bells with both Deutshe Bank and Morgan Stanley noting the spike in volume.  Per Bloomberg:

The recent spike in speculative trading in commodities in China has stunned global markets, according to Morgan Stanley, which cited a jump in local activity for steel, iron ore and cotton as well as eggs and garlic.

“Now China’s speculators engage commodities,” analysts including Tom Price and Joel Crane said in an e-mailed note on Monday. “China’s latest speculative spike has stunned global markets.”

To put it in perspective, also per Bloomberg:

“The fact that trading volume for steel rebar contracts was at 223 million tons of rebar last Thursday, more than China’s full-year production of steel rebar, raised concerns about the repeat of boom-bust scenario seen last year in China’s equity market,” analysts at Oversea-Chinese Banking Corp. wrote in a note on Monday.”

Finally, a picture courtesy Zerohedge:

Banks and Property Agencies Under Pressure to Slow Shanghai Skyrocketing Prices

Per Bloomberg,

China’s banking regulator in Shanghai is halting business between commercial banks and six real estate agencies for a month, the latest in a string of measures to contain risks in the housing market.

The suspension, which takes effect Monday, covers agencies including the local arms of Beijing Homelink Real Estate Brokerage Co., Pacific Rehouse Co. and Shanghai Hanyu Property Brokerage Co., according to a statement by the China Banking Regulatory Commission’s Shanghai office on the city’s official Weibo microblog account.

In the same account, branches for two of China’s largest lenders, Industrial and Commercial Bank of China,  1398 hk, and Bank of China, 3988  hk, along with HSBC are suspended from issuing mortgages for the next two months.  The reasoning given eerily echoes the subprime meltdown as:

China’s central bank Governor Zhou Xiaochuan last month told banks to better assess customer creditworthiness in mortgage lending to reduce risks, adding that unauthorized loans by real estate agents increased the chances of bad debts.

While the overall management on residential mortgage loans is “relatively prudent,” some real estate agents advanced the transactions by providing down-payment loans and bridge loans, the statement said. Some commercial banks also violated rules with their practices on mortgage loans, according to the statement.

China Eastern Stalls Again

Despite the news that CTRIP, CTRP NYEX, is stepping up to invest about 3Billion rmb’s into China Eastern, 670 hk, the stock swooned ovef 5% today while China Southern, 1055 HK, dropped 1.2%, and Air China, 753, hk  dropped 2.5%.  The air pocket could be due partly to the following:

• The 3Billion rmb is just a small portion of the 15 Billion China Eastern announced it would raise with a new, private A-share offering.   Approved by the CSRC in January of 2016 with this investment being the first actual investment since then. The bulk of the money is needed to buy 23 new planes.
• China Eastern faced headwinds when it tried to buyback  3.3 Billion yuan notes due March 2017, 4.8%, guaranteed.  After offering to buy via a dutch Auction with a minimum price under par, the company got no quorum and amended the offer to par + accrued interest and extended the offer to 4/27/2016.  (The bonds were issued in March, 2014, to professional investors).
• The company has been issuing super-short term notes to finance working capital while it waits for  the proposed shares to be bought to finance its expansion. In April alone it issues 4 separate tranches totalling 12 billion rmb.  Since the beginning of 2016, it has issued 19.5 Billion in super short term notes, generally refinancing existing debt.

 

Shanghai Comp Hang Seng Diverge

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.

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%).

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.

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.

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

(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.

Insurance – China 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 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.

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.

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

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.

 

 

China Indexes Rise On Oil and Output

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 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.