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Dare to dream
Author(s): William TNG, CFA +65 6210 8676, Roy CHEN
▊ Our China strategist recently highlighted media reports speculating that after the Shenzhen-HK Stock Connect, the Chinese government may consider a China-Singapore Stock Connect programme. If a connect materialises, the liquidity effect will be a boon to SGX-listed China enterprises as well as the wider spectrum of big- and small-cap offerings. One should, however, be aware that a connect requires inter-government involvement. Among SGX-listed China enterprises, two catch our attention and appear to differ from the many S-chips that eventually run into trouble: toll road operator China Merchants and Tianjin Zhongxin, a popular pharmacy company in China. Under a stock connect scenario, Tianjin will re-rate higher just based on price arbitrage alone. Its listed S-shares are at a 60% discount to the A-shares. Only a crash in the A-share market can negate this.
Tianjin Zhongxin Pharma
Tianjin Zhongxin’s S-shares trade at over 60% discount to the A-shares. The company’s flagship product, Su Xiao Jiu Xin Wan, is a household name for the treatment of cardiovascular ailments in China. The company has a track record of paying dividends and the balance sheet will turn net cash after the completion of a proposed A-share placement at Rmb12.83/share (US$2.06/share), a 94% premium over the then S-share price. Given that core EPS growth is in the low teens range, the stock is trading at 15.3x CY16 P/E, a 41% discount to the CN/HK-listed peer average of 26.0x. We have an Add and US$1.45 target price on the company and are the only broker to cover this name.
China Merchants Holdings
China Merchants sports a proven track record of acquisitive growth. We believe the company has the capacity to take on acquisition(s) worth HK$1.5bn-2.5bn, funded by internal cash and debt. China Merchants is also a good dividend play and prospective yields are currently 5.9%. We have an Add call and target price of S$1.16 on the company.
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Previous [ Smallcap-pedia ] reports:
19/3/15 MAL Smallcap-pedia There is still value here
12/3/15 CHN/HKG Smallcap-pedia Through the looking glass #8
6/3/15 CHN/HKG Smallcap-pedia Through the looking glass #7
(14-04-2015, 09:04 AM)gutman Wrote: I think this is only the beginning as the Chinese Government achieves a few objectives through a vibrant stock market. They are encouraging more vibrancy as can been seen through recent allowing of more trading accounts per person.
They have done the Shanghai-HK exchange link, and soon will be replicating it to the Shenzheng-HK, and perhaps to more cities once the first is seen to be successful. The next step could be a link with another country (Singapore?)
This ultimately leads to a free-flow of the RMB, thereby achieving an objective of internationalising the RMB. And we have the “一带一路”， and the Asian Infrastructure Investment Bank too.
Yes, this year will be China's.
hi gutman,
Thanks for the replies (including specuvestor's).
While the intent of policy making is frequently in clear sight and done in good faith, I suspect future or secondary effects are less clear and harder to discern. For example, no1 would argue that the Fed's interest rate cuts after 9/11 or China's massive infrastructure stimulus during GCF2008 were done in good faith.
No surprises that all those whom have similar thoughts as you, are the ones buying up in the last few months (and laughing to the bank)
With regards to the internationalization of the RMB and opening up of capital markets, i thought the main reason that China managed to escape relatively unscath and (most probably) engineer a soft landing on its property/shadowing banking would be the fact that it is a closed market, with RMB unconvertible. In time to come, the cocktail of credit and hot foreign liquidity could be toxic, now that pendulum has been loaded (in Howard Marks' terms) and is primed for larger swings.
Sceptics believe they see a Japan in the making. Nay, i think they have learnt those lessons but they should be caught surprised with what will hit.
15-04-2015, 12:41 PM (This post was last modified: 15-04-2015, 01:05 PM by specuvestor.)
China has to internationalise the RMB because it has become too big an economy to use another country's currency for trade. The USD4tr reserve is making the creditor more fearful then the debtor for say a 10% depreciation of USD. It makes more sense to keep in RMB and control his own destiny then rely on US Fed.
Size does matter. At that size the downside is becoming bigger than the upside for a quasi pegged RMB with closed accounts
And I agree that the Chinese government for some reason or other in terms of political leadership have been able to learn very well from other people's mistakes. There are short term fluctuations and missteps but big picture they have managed very well. I actually think the soft landing for property has mostly been done but policy unlikely to reverse in a big way to create demand.
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward
(14-04-2015, 09:04 AM)gutman Wrote: I think this is only the beginning as the Chinese Government achieves a few objectives through a vibrant stock market. They are encouraging more vibrancy as can been seen through recent allowing of more trading accounts per person.
They have done the Shanghai-HK exchange link, and soon will be replicating it to the Shenzheng-HK, and perhaps to more cities once the first is seen to be successful. The next step could be a link with another country (Singapore?)
This ultimately leads to a free-flow of the RMB, thereby achieving an objective of internationalising the RMB. And we have the “一带一路”， and the Asian Infrastructure Investment Bank too.
Yes, this year will be China's.
hi gutman,
Thanks for the replies (including specuvestor's).
While the intent of policy making is frequently in clear sight and done in good faith, I suspect future or secondary effects are less clear and harder to discern. For example, no1 would argue that the Fed's interest rate cuts after 9/11 or China's massive infrastructure stimulus during GCF2008 were done in good faith.
No surprises that all those whom have similar thoughts as you, are the ones buying up in the last few months (and laughing to the bank)
With regards to the internationalization of the RMB and opening up of capital markets, i thought the main reason that China managed to escape relatively unscath and (most probably) engineer a soft landing on its property/shadowing banking would be the fact that it is a closed market, with RMB unconvertible. In time to come, the cocktail of credit and hot foreign liquidity could be toxic, now that pendulum has been loaded (in Howard Marks' terms) and is primed for larger swings.
Sceptics believe they see a Japan in the making. Nay, i think they have learnt those lessons but they should be caught surprised with what will hit.
Thanks Weijian.
China's Stimulus in 2008
I agree, that the side effects of certain policies are often underestimated. China's 4 trillion yuan stimulus in 2008 has indeed led to excess liquidity which has fuelled their property market to unsustainable level. Instead of using those money to increase productivity and do more R&D works, those corporations, especially the big ones, took the faster route of making money by moving into property development and money lending.
They missed the opportunity to use the crisis to strengthen their SMEs, which would have produced a stronger real economy today (relative to virtual economy of properties and equities).
Local governments in China launched their own stimulus at the time with about 13 trillion yuan in investments, according to Pimco.
The huge stimulus has also left excess capacity in steel, aluminium, cement etc, which is still a problem today.
China's “一带一路” or the New Silk Road Project，the Silk Road Infrastructure Fund and the Asian Infrastructure Investment Bank
The current moves by China, appeared different. As you have correctly mentioned, they have learned their lessons, whether on the stimulus, or the need to hold USD foreign reserves.
Today, it is about realizing the "China Dream", as mentioned by President Xi Jinping. One strategy is to internationalize their currency, to get the world to recognize and accept the RMB as a trading currency and even a reserve currency. China has been doing this gradually for the past few years, through Hong Kong and through their trades around the world. Today more than 18% of China's export is settled in RMB. The development of multiple offshore centers in Hong Kong, Taiwan, Singapore and London are all meant to serve this purpose. So are the stock exchange links. Co-incidentally, there was a rumour yesterday about China-Singapore stock exchange link http://blogs.wsj.com/moneybeat/2015/04/1...k-connect/ ...and I was just casually mentioning about it yesterday before learning about this rumour this morning.
However, they have to approach this carefully, knowing that US is likely to find all ways to prevent this from happening. US has successfully stopped the Euros from doing so. The supremacy of the USD cannot be challenged, as this is the core interest of US. (We can talk about this in a separate topic)
China's recent “一带一路” or the New Silk Road Project，the Silk Road Infrastructure Fund (SRIF) and the Asian Infrastructure Investment Bank (AIIB), are excellent strategies that have caught many by surprised. The New Silk Road Project aims to help those countries along the road to develop their infrastructures. However it would also help China soaked up those excess capacity like excess steels, which they can use in those infrastructure projects. The SRIF and AIIB would help them use their foreign reserve more efficiently, then buying US bonds and at the same time get more involved internationally. At the same time, they would likely push for the yuan to be included in a basket of currencies used to denominate and settle loans from the AIIB. Very smart.
I think this may even put a brake to what US is trying to do, namely their rate rise, as well as their pivot to Asia. US may have to go back to the drawing board. (Again, I would not dwell into this as it would be another lengthy piece) I suspect maybe we will not see a rate rise this year. I could be wrong.
The restructuring that is currently on-going in China, aims to stem out some of the problems associated with provincial debts, corruption, shadow banking, and many others.
I think the Chinese knows what it takes to realize the Chinese Dream and they are pursuing it systematically. Sure there will problems, whether internally or externally, but I don't think they can be stopped.
17-04-2015, 05:11 PM (This post was last modified: 17-04-2015, 05:12 PM by BlueKelah.)
GOOGLE translated the above :
6,000,000 new investors running for admission, official media after another vocal care market "little meat"
YAN Xiao-butterfly surging News Reporter
2015-04-17 16:01
April 14, 2015, Chongqing, waiting to open an account in a long queue of people waiting. Oriental IC Figure Above 4,000 points, in addition to shouting bull fineness is enough, Xinhua, People's Daily and other official media collective prevent risks caused by new investors, remain calm, prudent investment.
Since late last year, and the stock market rose corresponding to the number of new A-share accounts accounts successive highs. According to statistics, since entering the Year of the Goat, nearly six million new investors, "running" into the market. Guotai Junan new customer analysis report shows that between December 1, 2014 to March 2015 31, 80, 90, 7 to "little meat" investors accounted for the total number of accounts.
Faced with "little meat" investors running for admission, in addition to official media bursts of text to be more meticulous care, the matter is to allow the Commission Chairman Xiao Gang "worrying."
April 16, Commission Chairman Xiao Gang thousand word essays in the People's Daily article to talk about the stock market, "remind" the new investors to participate in equity investment to remain rational, calm, and never can be affected, "would rather buy the wrong, not to be missed", etc. misleading view, to fully assess the risk of stock market investment, prudent investment and capabilities, do not follow suit, not blind obedience.
Xiao Gang said, adding that since the second half of last year, China's stock market continued to show a rising trend, many new investors are entering the account. New investors in the stock market and some people on the stock market ups and downs of the lack of experience and feelings, the stock market investment risk and the lack of sufficient knowledge vigilance.
Not only is Xiao Gang. From mid-April, Xinhua launched the "new investors, Hello," a series of reports, more bursts of text to remind "little meat" investors, the stock market have a certain wariness.
Xinhua articles above topics were: "The stock market is an effective way to share the investment capital dividend," and "we must first learn to learn to make money market risk management," "effective choice to outperform the market to establish the value of the investment philosophy," "Do not Let the stock market rose and then fell about our lives, "" development of the motherland, and investors have a good return. "
Xinhua said, "We want to remind the new investors, history has repeatedly proved that stock market investment is not one or two days, a year or two years, is the life of the investment round run. The idea to establish the value of the investment is long-term outperform Market effective choice. "
One article suggested that invest in stocks is a valid path to the capital share dividend, the stock market to make money first learn to learn risk management, effective choice outperforming the market value of the investment is to establish the reason, can not "let the ups and downs of the stock market about our lives."
The second highest level last week (April 7 to April 10), the Shanghai and Shenzhen stock of new accounts 1,684,100, an increase of 7.78% ring continuously maintained at 1.5 million over three weeks, since for statistical . Informed sources (www.thepaper.cn) told reporters surging News, April 13 and 14, two days, a total of 112 million people accounts, accounts, almost equal to 1.68 million last week, the "new high" is constantly being refreshed .
In addition to the high number of accounts opened innovation, new funds into the stock market to bring new investors can not be underestimated. April 16, the latest data from China Securities Investor Protection Fund's show last week, the A-share stock funds into account net 273 billion yuan. Time for three consecutive weeks since March in the next ten days since, there have been 474.8 billion yuan of funds through securities transfer from the bank "move" to the stock market.
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Chinese property will continue downtrend and crash, too much of a bubble already, if you think soft-landing you aint seen nothing yet.. Empty ghost cities with no rental return = no fundamentals = crash. Good example are the ghost cities in Spain.
Usually this big crash will happen after stock market crash. As share prices tumble, savings disappear and overleveraged people kena margin call they will have to sell their other assets, which mainly would be property, car and jewelry/gold.
Japan 1990's repeat coming again soon. All the elements are there and cooking : overheated economic activity, massive credit expansion, over-confidence and speculation in asset and stock prices, excessive monetary easing policy.
When you goreng the pisang until hot hot what happens? Your hand kena burn...
Finally,the banker is calling the shots... always on a Friday for fears to calm somewhat over the weekend... anyway, with the mkt red hot and highly inefficient as a casino in China, a year long rally will certainly transfer wealth from the greedy and innocent to those in control and scheming... perhaps this is a by product of anti-corruption drive in China...
China Futures Tumble on Trust Curbs, Expansion of Short Selling
by Kyoungwha Kim
7:09 PM SGT
April 17, 2015
Photographer: Qilai Shen/Bloomberg
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U.S. Stock-Index Futures Decline on China Short-Selling Move
European Stocks Extend First Week of Losses This Month
Chinese stock-index futures tumbled after regulators clamped down on the use of shadow financing for equity purchases and increased the supply of shares available for short sellers.
FTSE China A50 Index futures for April delivery tumbled 5.2 percent in Singapore at 7:43 p.m. local time, while contracts on the Hang Seng China Enterprises Index lost 3.9 percent. Regulators banned the margin-trading businesses of brokerages from using so-called umbrella trusts and allowed fund managers to lend shares to short sellers, statements on Friday showed.
Investors have used umbrella trusts, which allow for more leverage than brokerage financing, to ramp up wagers on Chinese stocks after monetary stimulus sparked a world-beating rally in the nation's benchmark equity gauge. Permitting mutual funds to lend their holdings to short sellers would make it easier for bearish traders to bet on a retreat after the Shanghai Composite Index closed at a seven-year high on Friday.
“The surge recently has been a little too fast for the regulator’s comfort,” said Hao Hong, the chief China strategist at Bocom International Holdings Co. in Hong Kong. “The market should consolidate, as it is overbought and part of the market is overvalued.”
The Shanghai Composite, which more than doubled in the past 12 months, trades for 21.1 times reported earnings, the highest since April 2010 and more than double last year’s low, according to data compiled by Bloomberg. The MSCI Emerging Markets Index is valued at 13.7 times.
Trust Investments
China’s trusts boosted their investments in equities by 28 percent to 552 billion yuan ($89.1 billion) in the fourth quarter. The higher leverage allowed by the products exposes individuals to larger losses in the event of stock-market drops, which can be exaggerated as investors scramble to repay debt during a selloff.
In umbrella trusts, private investors take up the junior tranche, while cash from trusts and banks’ wealth-management products form the senior tranches. The latter receive fixed returns while the former take the rest, so private investors are effectively borrowing from trusts and banks.
Margin debt on the Shanghai Stock Exchange climbed to a record 1.16 trillion yuan on Thursday. In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest. The loans are backed by the investors’ equity holdings, meaning that they may be compelled to sell when prices fall to repay their debt.
Short Sellers
Allowing funds to lend their stock holdings will expand the pool of equities available to short sellers, who have relied primarily on brokerages to supply them with the stock needed to execute the bearish bets.
While short selling on the Shanghai bourse climbed more than threefold in the past nine months and reached a record 7.46 billion yuan last week, the amount still pales in comparison to China’s $7.3 trillion market capitalization. The CSRC said Friday it also expanded the number of stocks available for short selling to 1,100.
Chinese investors have been piling into the equity market after the central bank cut interest rates twice since November and authorities from the China Securities Regulatory Commission to central bank Governor Zhou Xiaochuan endorsed the flow of funds into equities. China is trying to control credit expansion while protecting an economy that expanded 7.4 percent last year, the least in 24 years.
Mainland traders have opened a record 10.8 million new stock accounts this year, more than the total number for all of 2012 and 2013 combined, data from China Securities Depository and Clearing Co. show.
“The regulator is trying to reduce leverage,” said Lu Wenjie, a Shanghai-based analyst at UBS Group AG. “There could be a pull back in the market.”
looks like next week will be pretty bad for stocks. Euro, US and China all bad news... Perfect storm... Will be an exciting week. Maybe this year is sell in april and go away..
Selling one's holdings when you see things bounding up is hard to. The temptation is to try riding on the wave higher. On 10 Apr, I was grappling with that decision through lunch with classmates. After some thought, I decided to sell off China holdings. Have a plan and stick to the plan.
It may seem foolhardy to sell off the entire holding instead of in batches. That may be right if I look at that holding in isolation. However, as there is still exposure through other equity funds, it is always good to reduce exposure and take the nice profits.
18-04-2015, 12:19 AM (This post was last modified: 18-04-2015, 12:30 PM by specuvestor.)
They are intervening in the market's "free spirit" as discussed. Why is that a surprise
OTOH I vaguely remember Greenspan dont believe in intervening in the market's euphoria.
(14-04-2015, 09:57 AM)specuvestor Wrote: To be precise: China policy makers are not concerned about the stock markets. They are only concern if the local masses are affected. That is why they clamped down on the A-share leverage and margins few months back and not let it overblown. That's why they are not the same as other stock market bubbles where the dogma is to let "invisible hand" takes its course. I reckon some policies to that effect will be happening in HKSE.
The through train is not to excite the market. It is for internationalisation of RMB via gradual opening of Capital account. We have to know which is the horse and which is the cart. China A and H shares have room to run, but government don't want a bubble, so they will intervene. Execution will be key for investors because the big big picture is very clear.
But the stock markets are reflective of good policy making. Look at Indonesia as a case study when SBY just came on board, declining for first 2 years before roaring.
I think chinese property has more or less soft landed. I suspect volume will soon be picking up with stagnant prices. That will be forming the base to clear inventory and prices for next 6-12 months
That said i hope they learn from other nation's mistakes and continue to curb financing and put structural constraints for 2nd home ownership and investment properties
I'm not sure when property prices were tumbling a year ago was anyone expecting a stock market crash since stock market was almost dead back then
In general when policy makers are concern about leverage i am not so concern. It is when they or some newbie commentator start saying it is normal demand overwhelming supply that will worry me... Always sound the same superficially intelligent
Just recently someone told me the chinese internet euphoria is worse than the dot com. Statement like this is obvious he never been through the dot com, just as those who said GFC is going to be as bad as Great Depression has no idea...
(17-04-2015, 05:11 PM)BlueKelah Wrote: Chinese property will continue downtrend and crash, too much of a bubble already, if you think soft-landing you aint seen nothing yet.. Empty ghost cities with no rental return = no fundamentals = crash. Good example are the ghost cities in Spain.
Usually this big crash will happen after stock market crash. As share prices tumble, savings disappear and overleveraged people kena margin call they will have to sell their other assets, which mainly would be property, car and jewelry/gold.
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward
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