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

    Value creation in Chinese public hospital privatization

    Thanks to a subscriber for this report from Deutsche Bank which focuses on the Chinese healthcare sector and may be of interest. Here is a section: 

    We expect the private healthcare service sector to outgrow the public sector in the mid/long term. We have identified three key growth drivers for the sector, including favorable policies towards private healthcare services, accelerated growth in capacity expansion and utilization, as well as rapid growth in  commercial insurance coverage. We expect approximately 8,000 public  hospitals will be privatized over the next 5-10 years due to policy shifts, which  will create substantial growth opportunities for private service providers in the mid/long term. From 2005 to 2013, the CAGR of total beds in private hospitals was 22%, much higher than 7% of the public hospitals in the same period. We also anticipate the utilization rate will improve significantly over the next 5-10 years, from mid-60% to 80-90%. Additionally, the rapid growth of commercial insurance is likely to add another leg of growth for the private healthcare service sector. 
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    We anticipate value creation on two fronts in public hospital reform, including  growth acceleration after privatization and significant margin improvement, driven by change of incentive mechanisms and efficiency improvement  respectively. According to past experience, revenue growth acceleration will be sustained for 3-4 years after takeover while it will take 4-5 years to reach  approximately 10% net margin from breakeven. By our estimates, the order of  ROI generation among four major business models is as follows: OT, IOT  (invest, operate and transfer), equity ownership and greenfield hospitals. We  highlight an approximate 4-5 year payback period for the IOT model and 10 years for the equity method. 

     

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    Bridging Hong Kong, Shanghai for the future

    This article by Zhu Ning for ChinaDaily Asia, dated May 19th may be of interest to subscribers. Here is a section: 

    To be fair, allowing Chinese domestic investors to access the Hong Kong stock market may prove to be even more valuable. Given the controls on capital accounts and cross-country listings, Chinese domestic investors are severely underdiversified in their portfolios.

    Such underdiversification costs Chinese investors dearly, especially given the exorbitantly high volatility and recent disappointing performance in the Chinese A-share market.

    By investing in the Hong Kong market, Chinese investors can not only buy cheaper stocks offered by the same company (for most companies cross-listed between Shanghai and Hong Kong, the H-shares trade at a discount), but also invest in overseas companies that cater to Asian investors and are listed in Hong Kong.

    With the direct investment channel between Hong Kong and Shanghai, Chinese investors can use their existing accounts to invest in overseas companies. Such convenience and familiarity will no doubt boost Chinese investors' confidence in investing overseas, which not only helps their portfolio performance but also propels more Chinese capital into the international financial arena.

     

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    China Sends Top Diplomat to Begin Talks With Vietnam

    This article by Jane Perlez for the New York Times may be of interest to subscribers. Here is a section: 

    But in the last several weeks, the situation appeared to have eased into “dangerous stability,” said an American administration official familiar with the flotillas of Vietnam and China.
    A foreign ministry spokesman in Beijing, Hua Chunying, said Tuesday that Mr. Yang would encourage a “frank and thorough exchange of views on matters of common concern to all.”

    “We hope Vietnam will focus on the broader picture, come together with China and appropriately deal with the current situation,” she said.

    The visit of Mr. Yang, China’s top diplomat, comes as relations between Vietnam and China have been essentially frozen since the arrival of the rig on May 2. Anti-Chinese riots spread through several cities, and looting of factories believed to be Chinese-owned resulted in the deaths of at least four Chinese workers. China evacuated several thousand workers after the riots, leaving some companies in Vietnam, which are dependent on China for supplies and skilled labor, short of employees.

    Mr. Yang is expected to meet with Mr. Minh, who is also Vietnam’s foreign minister, but it was not known if he would meet with more leaders, officials said.

    Prime Minister Nguyen Tan Dung of Vietnam said that he would consider a legal case against China at the United Nations, in the same way that the Philippines has initiated an arbitration case against China. Beijing roundly criticized Mr. Dung’s suggestion.

     

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    Qingdao Metals Trader Facing Probe over Collateral 'Got 15 Bln Yuan in Loans'

    This article by Wu Hongyuran for Caixin.com may be of interest to subscribers. Here is a section:

    Banks were eager to lend to Dezheng Resources and its subsidiaries in recent years. "We all do business with Dezheng companies," one employee of the finance department of a large bank's Qingdao branch said.

    Banks are apparently worried that the borrowing total the CBRC arrived at may only be the beginning. "The figure only shows the loans in Qingdao, and banks are examining whether there are other loans to Dezheng Resources and its subsidiaries across the country," an employee of another bank said.

    Sources that participated in a June 16 meeting held by the Qingdao branch of the banking regulator said the loans include 4 billion yuan from the Export-Import Bank of China and 2.1 billion yuan from Bank of China. Industrial and Commercial Bank of China, Construction Bank of China, Agricultural Bank of China and China Minsheng Bank each lent 1 billion yuan.

    City and Shandong Province banks, such as Rizhao Bank, Qilu Bank and Evergrowing Bank, each lent around 800 million yuan. Some joint stock banks, like China CITIC Bank, Industrial Bank and China Merchants Bank, extended loans of around 600 million yuan.

    It is common for companies in China to use commodities as loan collateral. However, sources close to Dezheng Resources say police are investigating whether the company and its owner, Chen Jihong, used duplicate receipts from Qingdao Port Group Co. to get loans from different banks. It is unclear what police were involved.

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    China Nuclear coming online

    Thanks to a subscriber for this report focusing on China’s utilities as newly constructed nuclear power stations come on line. Here is a section: 

    According to China Electric Power Promotion Council (CEPPC) report, Fuqing Nuclear unit 1 completed its last round of security checks in mid-April before loading fuel and is currently on schedule to be commissioned from August 2014. However, after Datang’s Ningde nuclear recorded c.Rmb100m loss in 1Q14 due to a 90-day overhaul, investors become a bit concerned whether Fuqing’s profit contribution is likely to be compromised by the undertaking of regular maintenance. While we understand that a new nuclear unit would need to perform a major overhaul for fuel re-load in its second year of operation, the time period is normally shorter. Hence, we do not think the longer-than expected maintenance period for Ningde is a common situation to be assumed for other nuclear projects.

    Average utilization still over 7,300 hours despite maintenance In Figure 1, we summarize the utilization hour record of China’s operating nuclear units with GII or GII+ technology. Result shows that, excluding Tianwan unit 1, which incurred some technical issues during the first three years, average utilization in the second year is still above 7,300 hours, quickly climbing to above 7,700 hours in the third year.

     

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    China's property problem: Not as bad as you think, but bad enough

    This article from www.lowyinterpreter.org may be of interest to subscribers. Here is a section: 

    The investment bank CLSA recently conducted a survey of 609 projects nationwide. By physically visiting the sites by day and night, watching the lights go on, noting decorations and talking to guards, they calculated an estimate of 15% vacancy rate in apartments built since 2000. That implies about 10 million empty units nationally, considerably less than feared (one report had suggested implausibly that 64 million homes lay empty). Still, 15% is high, more than Las Vegas and considerably more than the US at 10% overall.

    Adding construction already underway, CLSA say China's vacancy rate will hit 20% and could go even higher unless developers immediately curb new starts. Vacancy is heavier in small cities, already nudging 20%. The ghost cities are altogether worse.

    And

    Indeed, officials are saying demand may be peaking, and that's what the market today worries about. CLSA, which is not known as especially bearish, thinks small cities may need to collapse construction by a shocking 60% over the next few years. These cities consume 70% of materials used in all residential construction, which accounts for half of all steel use. Do the maths: that's a 20% impact on steel demand.

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    IML Market Musings

    Thanks to a subscriber for this interesting trip report centring on China. Here is a section: 

    Despite this, sensitivity to popular feeling is clearly strong. Many people worry about a crisis in Wealth Management Products (WMPs), which amount to RMB10 trillion in assets (almost AUD 2 trillion). China has a very high savings rate but savers do not have a lot of attractive options. Official deposit rates are controlled at a low level (below inflation), it is not possible to invest significant amounts abroad, the stockmarket has been a poor performer despite fantastic GDP growth and corporate governance can be suspect, and the property market boasts some bubble characteristics and the government makes it hard to own property other than one’s principal residence.

    Apparently couples sometimes get divorced so that they can buy two properties! The paucity of investment options has pushed savers into a hunt for “safe” yield, in a similar trend to what has happened elsewhere for somewhat different reasons, and that has lead them to WMPs. Issued but not underwritten by banks, the WMPs have channelled money to poor credits including developers, entrepreneurs and local government schemes. Even the governor of the People’s Bank of China referred to the WMPs as a Ponzi scheme given the actual returns on investments do not match the returns promised to investors. They may yet cause a crisis but for now people believe WMPs are guaranteed by the issuing banks. The government forced a sponsoring bank of a failed WMP, that was not actually legally liable, to repay savers’ investments in full after a protest outside the bank and a storm on social media.

     

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    Chinese Stocks Advance Amid Speculation of State Share Purchases

    This article by Weiyi Lim and Kana Nishizawa for Bloomberg may be of interest to subscribers. Here is a section:

    China’s stocks rose, with a gauge of mainland shares traded in Hong Kong climbing the most in a week, as speculation that state-linked investors are buying equities overshadowed concern that the economy is slowing.

    And  
     
     “The stock market is approaching the level which the government can’t tolerate,” said Cai Feng, a strategist at Guoyuan Securities Co. in Shanghai. “The level of 2,000 is more crucial. The government will use tactics including policies, public opinion and funds. In terms of injection of funds, it will increase holdings of big state-owned companies and buy index ETFs.”

     

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    No doomsday scenario, but also no need for major relaxation

    Thanks to a subscriber for this interesting report from Deutsche Bank which may be of interest to subscribers. Here is a section:

    Bad news is that major policy relaxation is unlikely in the near term 
    In the 2008/11 downturns, we saw policy relaxations by the government. For 2014, given the central government’s adamant stance on economic reform and still-solid sales performance for end-user properties, we believe any significant adjustments to property market policies by the central government are unlikely and that the key adjustment should be pricing by developers (instead of economic reform, which is positive for the Chinese economy for the medium term). With our 2014E negative cash flows for the listed developers (mainly on aggressive land purchases in 2013), rising net gearing and inventory levels, developers should start cutting prices more meaningfully in the next two/three months. A key risk is that some developers may make incorrect market judgments on pricing, which could exacerbate the risks of financial distress.
     
    Home upgrades no longer included in the PBOC’s support list 
    Recently, the PBOC has reiterated financing support only to first-time  homebuyers, but financing to upgraders (which used to be part of the government’s support list) and developers has not been mentioned at all. The government has also further tightened rules on trust and non-standard loans to developers, cracked down on zero-downpayment plans offered by some developers, and accelerated the establishment of realty registration (which is a step towards the introduction of property taxes). All this highlights that the overall property policy environment should not see much change for the rest of 2014. While we could see some minor policy fine-tuning by selected local governments, significant policy relaxation by local and central governments is unlikely unless there are significant price declines in the individual cities that pose major threats to the banking system, employment and the economy. 

     

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