David Fuller and Eoin Treacy's Comment of the Day
Category - China

    Facebook Shares Rise to Record on Mobile Growth, Instagram

    This article by James Callan and Kelly Gilblom for Bloomberg may be of interest to subscribers. Here is a section: 

    Facebook Inc. shares rose to a record as the social network caps a year in which mobile advertising increased and marketing initiatives expanded with applications and video.

    The shares advanced as much as 2.5 percent to $81.88 in New York trading, the highest price since Facebook’s initial public offering in May 2012. The stock has jumped 49 percent in 2014, a year of rally for the Standard & Poor’s 500 Index, which increased 12 percent.

    This year Facebook made further headway in mobile, a business that has flourished from a minor portion of ad revenue at the time of the IPO to a majority. Facebook’s acquisition of Instagram in 2012 for $1 billion has also been paying off: A Citigroup Inc. analyst last week said the photo-sharing app is worth $35 billion.

    “While the shares have likely benefited from the recent market rally, we see growing confidence in the monetization prospects of Instagram as an impetus to the recent uptick,”

    James Cakmak, an analyst at Monness Crespi Hardt & Co., said in an e-mail. He recommends buying the shares.

    Facebook was trading at $81.57 at 11:57 a.m., up 2.1 percent, giving the company a market value of about $228 billion. The stock has more than doubled since the IPO. 

     

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    Email of the day on Hong Kong REITs

    I emailed several weeks ago to ask that you include Prosperity REIT (808:HK) in the Chart Library, but I gave you the wrong ticker, so could you please add this again. And do you think you could review the Hong Kong REIT market at some point as well? It might prove interesting for us all. Thanks so much, and happy holidays.

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    Global Metals Playbook: 2015 Outlook

    Thanks to a subscriber for this informative report from Morgan Stanley which may be of interest to subscribers. Here is a section: 

    Metal’s flagship has got upside: Copper’s price has come under pressure late in the year, reflecting the energy sector sell-off and a perceived short-term metal surplus. Weaker, but the price remains well above its long-term average, and above the industry’s 90th percentile. Robust support of its value comes mainly from two drivers: China’s overwhelming dependence on imports (70% of supply); and the fickle nature of copper’s complex supply chain (mine supply; concentrates; scrap). Unlike other commodities, copper’s mine supply growth never quite matched demand growth during the Super Cycle, a condition that is unlikely to change over the medium term – underpinning our bullish price outlook.

    Why so bearish? Consensus view: copper’s trade will now report persistent surpluses. Yes, current signals point to adequate supply: inventories are rising; key merchant premia are soft; backwardation may just reflect concentrated LME positions. Elsewhere, concentrate flows are adequate (TC/RCs are high); scrap flows are expanding. We acknowledge these bear signals. We’re just not convinced by the mine supply growth story. Low-risk re-rating of Escondida output over the past two years was actually unusual. To expect short-term green/brownfield deployments to proceed without disruptions at a lower price level (assuming unchanged demand growth) ignores the history of this industry.

    Projects to watch: Key mine supply growth drivers to watch include Las Bambas, Toromocho, Sentinel, Cerro Verde; track Codelco’s ability to fund growth to >2Mtpa; Indonesia’s exports remain at risk, politically; in 2016, Escondida may de-rate again on lower grades; Rio Tinto has pared Kennecott’s supply outlook. We expect ongoing supply disappointments, simply because it is a feature of the industry.

     

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    Must... FiX... This...

    Thanks to a subscriber for this report from Maybank which may be of interest. Here is a section: 

    However, the currency risk is the issue and we suspect a lot of companies have borrowed USD given low interest rates and on the expectation that the USD would continue to depreciate (Figure 19).

    8) This is particularly true for China where BIS data shows borrowing increased an impressive 4.5x over the past five years (Figure 20). While external debt to GDP is manageable from a level perspective, the acceleration is a cause for concern in a world where exchange rates are driven by capital rather than current account flows.

    9) Our analysis of Chinese corporate returns reveals that there is overcapacity through much of the listed sector, including the consumer space. Furthermore, returns on equity would have been even lower had leverage not sharply increased. Falling margins, falling asset turnover, falling ROAs, rising leverage, falling ROEs are not great combinations (Figures 34, 39 and 42).

    10) We suspect it was weak growth and a strong USD that encouraged the PBoC to surprise the market and cut rates. Left to itself, Chinese policy making credibility is high enough that the work-out can be achieved. The risk is that external pressures, via a stronger USD, attracts capital away and we see downward pressure on the RMB. This keeps us underweight Chinese properties. We would be Neutral China.

     

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    Email of the day on China funds and high yield (received on the 4th)

    I am currently long ASHR (yay!!), which is looking mighty parabolic and amazingly extended... 

    But, what are the best US-traded ETFs for investing in China with some diversification across sectors, based on your (extensive) knowledge of China?

    <change of subject>

    I noted that HYG and JNK are moving down, which is a bit of a non-confirmation of the recent S&P performance (though, if I may say so, breadth still sucks). Any thoughts?
    Hope you're staying dry. We call this "winter" in CA. :)

     

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    Spring Cleaning

    Thanks to a subscriber for this report on the Chinese Waste and Environment Services sector for RHB OSK. Here is a section: 

    Environmental protection investment. China budgeted CNY3.4trn for environmental protection under the 12FYP, ie 140%/57% above the budgeted/actual for 11FYP respectively. The upcoming Water Pollution Prevention and Treatment Plan will assign CNY2.0trn in 2013-2017 for water projects, 45% above 12FYP’s numbers. This shows China's commitment at least until 2017 on this matter. 

    Municipal waste water treatment, higher budget. The NDRC budgeted CNY430bn for municipal waste water treatment in 12FYP. This was 30%/14% above the budgeted/actual numbers under 11FYP. The huge investment was intended to raise the treatment rate for cities/counties/towns to 85%70%/30% in 2015 from 77%60%/20% respectively. Future municipal sewage volume is on an uptrend, backed by the ongoing urbanisation process. Near-term drivers are: i) the “go rural” (county/town) with still low treatment rates, and ii) a discharge standards upgrade.

    Industrial waste water treatment, a more centralised treatment. Despite the already high treatment rate of 95% in 2010, industrial sewage still offers enormous opportunities via waste water treatment by third-parties, which have better cost efficiencies than manufacturers that treat sewage by themselves. China’s economy slowdown may drag down industrial sewage volume, but textile industry has better visibility due to the recoveries in the US. We prefer the BOO model for industrial waste water treatment as it charges higher, more flexible tariffs.

    Sludge, a new market. Sludge is highly toxic, and its treatment rate was low in 2010 (below 25%). The NDRC plans to raise this rate up to 70% for cities in 2015, and budgeted CNY35.0bn for 12FYP, 7% more than its 11FYP budget. Guangdong has committed the most on sludge treatment and its market is large, accounting for 11% of China’s total new sludge treatment capacity for 12FYP. Sludge BOOs can deliver 20% IRR

     

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    China Deposit Insurance Plan Seen as Risk for Small Banks

    This article from Bloomberg News may be of interest to subscribers. Here is a section: 

    While the move could limit systemic risks, it may fuel competition for deposits and drive up lenders’ borrowing costs as savers divert money to stronger banks or those that offer higher interest rates, according to Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd.

    China may offer customers deposit protection as soon as the start of 2015, the official Xinhua News Agency reported, citing unidentified sources. The insurance would help to prepare China’s financial system for bank failures as the economy slows and authorities allow banks to pay higher interest on deposits.

    “Competition for large deposits will clearly increase, with pricing and the perceived financial strength of the banks being the key factors for consumers,” Antos wrote in an e-mail.
    “We expect to see a shift of large deposits to the megabanks which, being government-owned, are viewed as stronger institutions.”

    The government may cap coverage at 500,000 yuan ($81,000) and set different premium levels based on a bank’s regulatory rating under the plan, Economic Information Daily reported today, citing a person close to regulators.

    Multiple government departments, including the People’s Bank of China and the China Banking Regulatory Commission, are preparing the program, Xinhua said.

     

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    China Loosens Monetary Policy Further as PBOC Scraps Repo Sales

    This article for Bloomberg News may be of interest to subscribers. Here is a section: 

    Industrial profits in China fell 2.1 percent from a year earlier in October, the biggest decline since August 2012, government data showed today.

    The halt to repo sales was “an expected move following the rate cut in the previous week,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. “Market interest rates remain sticky in general. This reflects a policy dilemma faced by the Chinese authorities as the rate cut alone cannot manage market expectations.”

    And

    There will probably be two more rate cuts by mid-2015, each by 25 basis points, and banks’ reserve-requirement ratios are forecast to be lowered by 150 basis points cumulatively next year, HSBC Holdings Plc economists Qu Hongbin and Julia Wang wrote in a Nov. 24 report.

     

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    PBOC Past Shows Multiple Moves as Analysts See More Cuts

    This article from Bloomberg News may be of interest to subscribers. Here is a section:

    In his 12 years as People’s Bank of China Governor, Zhou Xiaochuan has never stopped at a single shift to benchmark interest rates once prompted into action.

    Zhou, who took office in 2002 when Alan Greenspan was still chairman of the Federal Reserve, has overseen two tightening and two easing cycles for a total of 22 moves to the one-year lending rate and 20 to the one-year deposit rate. Simple math suggests his latest cut is unlikely to be a one-off.

    By joining Mario Draghi and Haruhiko Kuroda in the global stimulus camp, Zhou signaled deeper concern over China’s outlook and recognition that targeted measures alone weren’t going to be enough to revive growth. A Bloomberg survey conducted late Nov. 21 through yesterday showed economists forecast further monetary loosening by the middle of next year.

    “Expect more interest rate cuts ahead,” said Shane Oliver, who helps oversee about $125 billion as Sydney-based head of investment strategy at AMP Capital Investors Ltd.

    “China’s rate cut highlights that global monetary conditions are still easing with monetary easing in Japan, Europe and China taking over from the end of quantitative easing in the U.S.”

    The one-year lending rate will be 5.35 percent in the second quarter of 2015 and the one-year deposit rate will be 2.5 percent, according to the median forecast of economists surveyed by Bloomberg. AMP’s Oliver has the lowest forecast, predicting the lending rate will fall to 4.5 percent by the end of next year; by contrast four of 15 economists see no further reduction.

     

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