Monday, July 29, 2013

Weekend Comment Jul 26: China's next investment wave

THE CHINESE GOVERNMENT is working hard to arrest the slide in its economic growth. HSBC’s Flash China Manufacturing PMI for the month of July fell to an 11-month low, signalling marked downside pressures to growth. On June 24, its State Council announced three new measures: tax cuts for small enterprises, support for international trade and investments into the nation’s railway infrastructure. This means there may be benefits for the locally-listed China companies or so-called S-chips.

From Aug 1, the government will temporarily waive value added and business tax for companies with monthly sales of less than RMB20,000 ($4,117). It will also study the possibility of long-term tax cut measures.
The State Council estimates that more than six million micro- and small-enterprises (MSEs) will benefit from this policy. As current tax rates for MSEs are about 3%, this tax cut will cost about RMB20 billion a year, so the direct impact on the Chinese economy should be quite small, says a Bank of America Merrill Lynch (BAML) report. However, the report goes on to add that labour-intensive MSEs have complained extensively about their high tax burdens. “So we believe that this tax cut will mainly serve to support employment and boost confidence,” it adds.

To support trade, and in particular exports, which have slumped in recent months, the State Council has announced several new initiatives. It is quickening reforms on simplifying customs procedures for exports and slashing custom-related fees. It will, for instance, temporarily waive examination fees for exports. Financial institutions are also being encouraged to support profitable exporters with orders. The government is also working to cut export taxes to zero for service exports. And, it intends to maintain the RMB exchange rate stability at an “appropriate equilibrium level”. BAML believes that this means that the People’s Bank of China, the country’s central bank, won't allow the RMB to appreciate from its current levels, though it could also prevent depreciation for fear of capital outflows or a row with the US.

Boosts to trade could be positive for Hutchison Port Holdings Trust (HPHT), a container port business trust. Its portfolio consists of interests in deep-water container port assets located in Hong Kong and Shenzhen, China – two of the world’s busiest container port cities. Units of HPHT took a hit earlier this year following a strike by some workers. But they may yet recover if export reforms help increase traffic at China’s ports.

Perhaps the most exciting development for local investors is the reform in railway investment. The State Council intends to set up railway development funds in which the government will act as the cornerstone investor while attempting to attract private investments. Also, inter-city railways, urban transit railways and commodity-transport railways will be liberalised for investments by local governments and the private sector. Railway investment will also be supported with land development, a move that BAML likens to Hong Kong’s model of funding investments in mass transit with funds from property development. Finally, the government is speeding up work to ensure that its planned railway investments for the 12th Five Year Plan are completed on time.

One likely beneficiary is Midas Holdings, which makes aluminium alloy extrusion profiles for trains. After a major railway accident in China in 2011, the company’s revenue and share price slumped. It has recently announced a string of contracts, the latest being a July 3 win to supply RMB44.3 million worth of extrusion profiles for 264 train cars to the Changchun Metro in China. The contract is expected to have a positive impact on the company’s financial performance for FY2013 to FY2015. This brings its year-to-date contract wins to RMB423.2 million. The stock has returned 41.1% over the past year.

But other sectors could see benefits too. BAML’s report lists social housing and other forms of infrastructure such as urban sewage, broadband and 4G are saliently in need. The biggest real estate developers listed here with significant operations in China are Hongkong Land Holdings, Keppel Land and Yanlord Land Group. None of them are involved in social housing, however. Bigger beneficiaries may be the likes of Hyflux, which treats water and wastewater with its membrane systems. Other treatment companies with operations in China include Sound Global and United Envirotech.

If all goes according to plan, HSBC says these measures will also help to buffer general demand and employment slowdown. “These targeted measures should boost confidence and reduce downside risks to growth,” the bank says in a report. That should produce a general lift for consumption-related stocks with operations in China.

One possible play on this theme is Wilmar International, which is the largest supplier of cooking oil in China. The stock is currently trading at just 11.7 times estimated earnings for FY2013. Analysts say this depressed valuation is due partly to the slump in commodity prices and concerns over China’s slowing economic growth. Any pick-up in consumer confidence and consumption should subsequently be positive for Wilmar too.

The other large-cap consumer play is CapitaRetail China Trust, a real estate investment trust with a portfolio of nine income-producing shopping malls in China. Its distributable income rose 7.5% in 2Q2013 thanks to strong rental reversion. The trust has announced plans to grow its mall portfolio with a conditional call option agreement to acquire another income producing property: Grand Canyon Mall in Beijing.

S-chips have underperformed the broader Straits Times Index this year. The FTSE ST China Index is down 2.2% while the FTSE ST China Top Index is down 3.8%. The STI, on the other hand, is up 2.2%. Analysts think this underperformance is unlikely to reverse itself soon as China’s growth remains on an uncertain footing. But the country’s leaders appear determined to maintain a floor on China’s GDP growth. And if growth rebounds, these stocks could take off.

Publish date:26/07/13

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Warren E. Buffett(沃伦•巴菲特)
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别人贪婪时我恐惧, 别人恐惧时我贪婪
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