- China stocks 2010 first quarter earnings season is on. Investor, how are you doing?
May 2010 Newsletter: 2010 first quarter earnings season is on. Investor,
how are you doing?
Thursday, 06 May 2010 13:16 Blaze Fabry .12345(1 - user rating)1
April of 2010 proved to be more difficult for China stocks investors than
originally thought. Investors took very seriously the austerity measures the
Chinese government put in place, selling-off financials and real estate
related stocks the heaviest. The month of April was a highly unusual one:
Chinese stocks fell while U.S. equities continued to recover. These two
markets have developed a close correlation in the past, a trend that was
absent in April.
Statistically speaking, the DJIA (INDEXDJX:.DJI) advanced +1.4% while the
Hang Seng Index (INDEXHANGSENG:.HSI) shed –0.6% and the Shanghai Composite
Index (SHA:000001) dove –7.7% well under the psychologically important 3,
000 level. Chinese stocks listed in the U.S. suffered as well, the China ADR
Index tumbled –6.8% for the month. The steep fall in Chinese stock prices
was particularly painful at a time when the most important indicators
suggested that the global economy is back on track to leave the recession
behind. The housing and jobs market improved, manufacturing activity along
with improved productivity contributed to a strong first quarter GDP growth,
helping U.S. indices to continue to rally. Yet Chinese stocks fell to 2010
record lows. What’s wrong with China, one may ask.
Stocks mentioned in this report: China Eastern Air (NYSE:CEA), China South
Air (NYSE:ZNH), China Mobile (NYSE:CHL), China Unicom (NYSE:CHU), China
Telecom (NYSE:CHA), Yanzhou Coal (NYSE:YZC), Petrochina (NYSE:PTR), CNOOC
Ltd. (NYSE:CEO), Sinopec (NYSE:SNP), Sinopec Shanghai Petchem (NYSE:SHI),
Huaneng Power (NYSE:HNP), China Life Insurance (NYSE:LFC), Fushi Copper (
NASDAQ:FSIN), UTStarcom (NASDAQ:UTSI).
It all comes down to the break neck growth of the past year when banks
pumped liquidity into the system to avoid a significant slowdown. Part of
this excess funds went to the housing market accelerating property prices to
a dangerous level. According to vital statistics, first quarter fixed asset
urban investment rose 26.4% in China while property prices jumped to a
record 11.7% in March.
Policy makers reacted swiftly in an effort to avoid property price bubbles:
bank reserve ratios were lifted for the third time in 2010, banks were told
not to lend for multiple home owners, applications for home loans were made
more difficult. The result was a sell-off of property developers first, then
banks and finally it became a broad sell-off.
And it wasn’t just the property market that became instable. China’s first
quarter GDP growth exceeded the forecasted 11.7% rate by 0.2%, suggesting
the economy might overheat as well.
But administrative measures had a cooling effect not limited to the equity
markets alone; the April Purchasing managers’ index fell to a six months
low of 55.4 from 57 a month before. Any reading above 50 means expansion.
With all that said, investors shouldn’t lose sight of the long term
opportunity China represents. While this short term noise is certainly
troublesome, investors will have to look though it and focus on what’s
driving stock prices: earnings.
From this respect China looks attractive with corporate profits soaring not
just in 2010 Q1 but beyond.
Earnings: there has been a handful of Chinese companies delivering earnings
in April 2010. Most NYSE listed, large cap companies delivered 2009 full
year and or 2010 first quarter earnings. Let’s take a look at them.
Chinese airliners: China Eastern Airlines (NYSE:CEA) and China Southern
Airlines (NYSE:ZNH) returned to profitability in 2009 from losses a year
before, thanks to lower oil and a high utilization rate. Both companies
reported high passenger traffic growth and this trend is here to accelerate
for CEA thanks to the Shanghai Expo 2010. China Eastern Airlines (NYSE:CEA)
acquired smaller Shanghai Airlines at the end of 2009 and now controls over
50% of the skies over China’s financial center. Both airliners remain
highly leveraged, CEA more heavily in debt, while ZNH is going to lose
customers to the high speed rail linking Guangzhou to Wuhan and soon Beijing
. Nevertheless the economic environment remains favorable for both airliners
in the first six months of 2010.
Chinese telcos reported 2009 full year and 2010 first quarter numbers as
well, initiating a rotation within the sector. China Telecom (NYSE:CHA), the
best performing Chinese carrier in 2010 up until earnings, fell out of
favor giving up the leading position back to China Mobile (NYSE:CHL).
Investors continue to shun China Unicom (NYSE:CHU), the second largest
mobile carrier after China Mobile (NYSE:CHL).
Based on the latest reports, China Mobile (NYSE:CHL) was able to keep its
leading position in both 2G and 3G markets, adding more subscribers in 2009
than the rest of the market combined, while its 2009 and 2010 Q1 financial
position improved year-over-year (YoY). This is in sharp contrast to China
Unicom (NYSE:CHU), whose 2010 Q1 net income fell –68% on high 3G network
development and marketing expenses.
China Telecom (NYSE:CHA) reported a 9% drop in net income for the first
quarter of 2010 as high 3G related costs dented into profits. Investors were
reminded again that China Telecom (NYSE:CHA) is essentially the largest
fixed-line carrier of the country despite a fact that its mobile arm has
been growing rapidly.
Energy: Chinese oil companies reported strong 2009 financials with Sinopec (
NYSE:SNP) surprising to the upside. Lower oil prices throughout 2009 helped
Asia’s largest refiner to enjoy hefty margins and as a result, strong
Chinese oil producers, Petrochina Co. Ltd. (NYSE:PTR) and CNOOC Ltd. (NYSE:
CEO), reported net income declines of –10.6% and –33.4% as price of the
crude fell sharply from 2008 levels. Chinese oil producers recorded a sales
price of $61.6/barrel on average, down –38.2% from 2008. But on the
operational level both CNOOC LTd. (NYSE:CEO) and Petrochina (NYSE:PTR) were
able to increase production, a trend that stretched over to the first three
months of 2010 as well.
Profitability of Chinese oil producers boils down to this: the higher the
crude the more the bottom line. So it’s really the crude production growth
that keeps CEO and PTR apart. China’s offshore oil specialist, CNOOC Ltd. (
NYSE:CEO), reported +31.9% oil production growth in 2010 Q1 vs. Petrochina’
s 2.1% growth rate. As long as price of oil stays over $60/barrel CNOOC Ltd.
(NYSE:CEO) looks to be a better bet.
Besides oil companies, Yanzhou Coal (NYSE:YZC) reported an extremely strong
2010 first quarter. The third largest Chinese coal miner reported a +190.8%
jump in net income for the first three months of 2010 thanks to higher coal
prices and increased production. Yanzhou acquired Australian Felix Resources
, increasing production by over 15% for the group. Coal production increased
in its domestic mines but the big increase in production came from
Australia. Despite strong first quarter operational and financial results,
the stock came under pressure lately as Australia is formulating the
toughest tax regime for resource players, denting directly into the bottom
line of the company.
The largest listed Chinese power producer, Huaneng Power (NYSE:HNP),
reported outstanding 2010 Q1 operational and financial report. Total
revenues increased 38.7% to $3.58 billion and net income rose 40.9% to $167.
8 million. Despite strong results the stock price of the company has been
virtually unchanged since January 2010. Part of the problem is lack of
confidence that the company will be able to repeat such a strong financial
performance. Rapid power generating capacity growth puts pressure on
utilization and margins, putting investors on hold for now. On the same time
, I personally think HNP is an outstanding investment opportunity for the mi
-term given China’s 10% plus GDP growth and a flat stock price in the last
Sinopec Shanghai Petrochemical (NYSE:SHI), the largest Chinese ethylene and
propylene maker, swung back to profits in 2009 thanks to lower oil price.
Total revenues fell almost 20% but the company reported a 2009 net profit of
$234 million vs. a huge net loss of $917.4 million a year before. Going
forward the oil price is going to determine the bottom line of the company.
When oil is above $60/barrel, Chinese refiners and oil byproduct makers make
less than they did a year before.
China Life Insurance (NYSE:LFC), the largest Chinese life insurer, reported
a strong 68% income growth for 2009—yet the stock price remained virtually
unchanged. Most of the gains are attributed to investment income, an income
reliant on the performance of the Shanghai Composite Index. With Chinese
indices under pressure in 2010, shares of China Life Insurance (NYSE:LFC)
came under pressure.
Nevertheless it is safe to say that most NYSE listed Chinese stocks are
sound investments for the mid– to long-term. To play these large cap stocks
for the short term one has to time stocks right, depending on the price of
oil, performance of the Shanghai Composite Index (SHA:000001) or simply just
stay on the sidelines.
NASDAQ listed China plays are different. Some offer higher return with a low
level of risk, but some don’t even meet basic investment criteria. Take a
look at the two following stories: Fushi Copperweld (NASDAQ:FSIN) and
UTStartcom (NYASDAQ:UTSI). Both companies reported 2010 first quarter
financials on April 4, Tuesday with remarkably different characteristics.
Fushi Copperweld (NASDAQ:FSIN) reported strong revenue and profit growth YoY
though profits fell from previous quarter. Nevertheless the company issued
a bullish profit outlook for the upcoming quarter. Note that FSIN has been
profitable for the past three years despite the economic slowdown in 2009.
The company accumulated $82 million in net profits over the last three years
. This is in sharp contrast to UTStarcom (NASDAQ:UTSI), a company that was
profitable for one out of the last thirteen quarters and accumulated a total
loss of approximately $600 million since March 2007.
My point is that investors have to be extremely cautious when it comes to
NASDAQ listed China stocks.
For upcoming earnings releases for May, see table on bottom of page.
Wish you successful investing,