Founder of Antler Capital

Stanley Tsai, CFA

Macroeconomics

Industrial profits round out the macro data releases for the month. Overall, the numbers are in line with expectations, but if we look past the impact of commodity price dislocations, earnings outlook is decidedly less sanguine (Exhibit 1).
Headline industrial earnings reinforce the trends in PPI we saw earlier in the month. The 20% two-year CAGR in May was driven mainly by higher factory gate prices. Unit sales growth remained anemic and reflects weaker-than-expected infrastructure capex, exports and consumer spending. 
The upstream resource extraction industry continued to benefit from the commodities boom. Profitability gains from price hikes have more than offset low transaction volumes. This significant distortion has prompted Beijing's recent interventions. We believe margins may have topped out for the upstream producers and we will be looking at progressively tougher comps ahead.
The midstream refiners and equipment manufacturers vary in their ability to pass on price hikes to their customers. Earnings growth slowed for ferrous metals and accelerated for non-ferrous metals for this reason. In any case, margins have risen to a recent high for the sector as a whole and are set to narrow. Equipment producers have led the retreat thus far.
The logical pecking order going forward would seem to be downstream &gt; midstream &gt; upstream. We believe there is a strong case for cyclicals and discretionaries as input prices ease. And more earnings upgrades may be in the works following in Li Ning <a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">(2331 HK)</a>'s footsteps. CPI still looks benign for the time being, but we would keep an eye out for a rebound in food prices. The recent recovery in pork prices - coupled with an unusually dry season globally - could make for a nasty surprise.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 100%;">Exhibit 1: Monthly Industrial Profits by Sector | % ∆ y/y </td>
</tr>
<tr>
<td style="width: 100%;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/215/821/original/image_984775689201624923389813.png?1624923389" class="editor-image img-responsive" data-smartkarma-image-id="215821"></figure>
Note: Growth rates = 2Y CAGR
Source: National Bureau of Statistics, Our analysis
</td>
</tr>
</tbody>
</table>
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<a href="https://www.smartkarma.com/insights/china-properties-like-clockwork-real-estate-investments-haven-t-skipped-a-beat" target="_blank" data-smartkarma-citation="insights:53590" rel="noopener">China Properties: Like Clockwork, Real Estate Investments Haven't Skipped a Beat</a> </li>
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<a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a> </li>
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Industrial profits round out the macro data releases for the month. Overall, the numbers are in line with expectations, but if we look past the impact of commodity price dislocations, earnings outlook is decidedly less sanguine (Exhibit 1).
Headline industrial earnings reinforce the trends in PPI we saw earlier in the month. The 20% two-year CAGR in May was driven mainly by higher factory gate prices. Unit sales growth remained anemic and reflects weaker-than-expected infrastructure capex, exports and consumer spending. 
The upstream resource extraction industry continued to benefit from the commodities boom. Profitability gains from price hikes have more than offset low transaction volumes. This significant distortion has prompted Beijing's recent interventions. We believe margins may have topped out for the upstream producers and we will be looking at progressively tougher comps ahead.
The midstream refiners and equipment manufacturers vary in their ability to pass on price hikes to their customers. Earnings growth slowed for ferrous metals and accelerated for non-ferrous metals for this reason. In any case, margins have risen to a recent high for the sector as a whole and are set to narrow. Equipment producers have led the retreat thus far.
The logical pecking order going forward would seem to be downstream &gt; midstream &gt; upstream. We believe there is a strong case for cyclicals and discretionaries as input prices ease. And more earnings upgrades may be in the works following in Li Ning (2331 HK)'s footsteps. CPI still looks benign for the time being, but we would keep an eye out for a rebound in food prices. The recent recovery in pork prices - coupled with an unusually dry season globally - could make for a nasty surprise.



Exhibit 1: Monthly Industrial Profits by Sector | % ∆ y/y 




Note: Growth rates = 2Y CAGR
Source: National Bureau of Statistics, Our analysis




Related Insights

China Financials: Silver Linings Playbook

China Properties: Like Clockwork, Real Estate Investments Haven't Skipped a Beat 

China Macro: PPI Peaks, while CPI Eases Tightening Fears 

China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 

China Macro: Exports Disappoint, but It's Still Early in the Game 


China Macro: Profits Flowing Gently Down the Stream

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Equity Bottom-Up

Last Friday, the company announced a profit alert with revenue grew 60% and NPAT RMB 1.8 billion or 163% higher YoY citing improvement in operating margin. This could come not only from a discipline operating expenses management but also an improved product mix; margin from online sales is higher than from retail. There will be some sellers today to book some profit from yesterday's gain but long-term investors should hold on to this as the nationalistic pattern may last longer than the first half of 2021 especially when the US is still making taking a hard stand on the Xinjiang issue, now moving from the cotton to solar panel, therefore, driving a higher revenue to <a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">Li Ning Co Ltd (2331 HK)</a> .<div class="content-highlight">Li Ning's valuation and share price may sound expensive but the appeal of an online focus business with higher profitability and leaner capital structure compared to its peers warrant some premium. </div>

Last Friday, the company announced a profit alert with revenue grew 60% and NPAT RMB 1.8 billion or 163% higher YoY citing improvement in operating margin. This could come not only from a discipline operating expenses management but also an improved product mix; margin from online sales is higher than from retail. There will be some sellers today to book some profit from yesterday's gain but long-term investors should hold on to this as the nationalistic pattern may last longer than the first half of 2021 especially when the US is still making taking a hard stand on the Xinjiang issue, now moving from the cotton to solar panel, therefore, driving a higher revenue to Li Ning Co Ltd (2331 HK) .Li Ning's valuation and share price may sound expensive but the appeal of an online focus business with higher profitability and leaner capital structure compared to its peers warrant some premium. 

Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Thematic (Sector/Industry)

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity indices. Companies mentioned this week:<a href="https://www.smartkarma.com/entities/saudi-aramco" target="_blank" data-smartkarma-citation="entities:27317:1" rel="noopener">Saudi Aramco (ARAMCO AB)</a>, <a href="https://www.smartkarma.com/entities/hyundai-motor-co" target="_blank" data-smartkarma-citation="entities:155:1" rel="noopener">Hyundai Motor Co (005380 KS)</a>, GlobalFoundries, <a href="https://www.smartkarma.com/entities/samsung-electronics-co-ltd" target="_blank" data-smartkarma-citation="entities:191:1" rel="noopener">Samsung Electronics (005930 KS)</a>, <a href="https://www.smartkarma.com/entities/e-mart-inc" target="_blank" data-smartkarma-citation="entities:6993:1" rel="noopener">E Mart Inc (139480 KS)</a>

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity indices. Companies mentioned this week:Saudi Aramco (ARAMCO AB), Hyundai Motor Co (005380 KS), GlobalFoundries, Samsung Electronics (005930 KS), E Mart Inc (139480 KS)

Global Emerging Markets Weekly: 25 June 2021

HK/China Equity Long-Short

Osbert Tang, CFA

We view the FY21 (Year end Mar) result of <a href="https://www.smartkarma.com/entities/china-dongxiang-group-co" target="_blank" data-smartkarma-citation="entities:1068:1" rel="noopener">China Dongxiang Group Co (3818 HK)</a> positively, despite a dividend payout ratio which is lower than expected. As we wrote in <a href="https://www.smartkarma.com/insights/china-dongxiang-3818-hk-what-can-we-expect-from-the-final-result" target="_blank" data-smartkarma-citation="insights:53174" rel="noopener">China Dongxiang (3818 HK): What Can We Expect from the Final Result?</a>, its sportswear business in China has recorded good turnaround, with gross profit soared 46.3% YoY and 27.9% HoH. Meanwhile, its investment business also registered an income of Rmb2.1bn for full-year, or Rmb759.7m for 2H21, up 88.7% YoY.Going forward, we expect CNDX's strategy to bring about further improvement in its sportswear business in China. It has also disclosed more names of listed equity that it hold both directly and indirectly and they are all of good quality, in our view. The stock is trading on 47% discount to book value which made up of 14% of net cash, 73% of investment portfolio and 13% of other net assets. Frankly, we think such valuation is too depressed and believe there is more upside room even after a 52% rally in share price YTD.

We view the FY21 (Year end Mar) result of China Dongxiang Group Co (3818 HK) positively, despite a dividend payout ratio which is lower than expected. As we wrote in China Dongxiang (3818 HK): What Can We Expect from the Final Result?, its sportswear business in China has recorded good turnaround, with gross profit soared 46.3% YoY and 27.9% HoH. Meanwhile, its investment business also registered an income of Rmb2.1bn for full-year, or Rmb759.7m for 2H21, up 88.7% YoY.Going forward, we expect CNDX's strategy to bring about further improvement in its sportswear business in China. It has also disclosed more names of listed equity that it hold both directly and indirectly and they are all of good quality, in our view. The stock is trading on 47% discount to book value which made up of 14% of net cash, 73% of investment portfolio and 13% of other net assets. Frankly, we think such valuation is too depressed and believe there is more upside room even after a 52% rally in share price YTD.

China Dongxiang (3818 HK): Lower-Than-Expected Dividends but Still A Marvelous FY21

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity indices. 
Companies mentioned this week:
<a href="https://www.smartkarma.com/entities/prosus-nv" target="_blank" data-smartkarma-citation="entities:28104:1" rel="noopener">Prosus (PRX NA)</a>, <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>, <a href="https://www.smartkarma.com/entities/baidu-inc-a55ca720-5968-48f0-8194-ac94390d065c" target="_blank" data-smartkarma-citation="entities:32212:1" rel="noopener">Baidu (9888 HK)</a>, <a href="https://www.smartkarma.com/entities/bytedance-technology" target="_blank" data-smartkarma-citation="entities:27936:1" rel="noopener">ByteDance (1460967D CH)</a>, <a href="https://www.smartkarma.com/entities/naver-corp" target="_blank" data-smartkarma-citation="entities:16029:1" rel="noopener">Naver Corp (035420 KS)</a>, <a href="https://www.smartkarma.com/entities/e-mart-inc" target="_blank" data-smartkarma-citation="entities:6993:1" rel="noopener">E Mart Inc (139480 KS)</a>

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity indices. 
Companies mentioned this week:
Prosus (PRX NA), Alibaba Group (9988 HK), Baidu (9888 HK), ByteDance (1460967D CH), Naver Corp (035420 KS), E Mart Inc (139480 KS) 

Global Emerging Markets Weekly: 18 June 2021

China

Li Ning Company Limited researches, designs, manufactures, distributes, and retails sports footwear, apparel and accessories for sport and leisure use.

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Li Ning (2331 HK)

China Macro: Profits Flowing Gently Down the Stream

Last month’s industrial profits were in line, but if we look past the impact of commodity price dislocations, earnings outlook is decidedly less...

Stanley Tsai, CFA

Li Ning (2331): Marching On

Li Ning's valuation and share price may sound expensive but the appeal of an online focus business with higher profitability and leaner capital...

Henry Soediarko

Global Emerging Markets Weekly: 25 June 2021

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity...

Wium Malan, CFA

China Dongxiang (3818 HK): Lower-Than-Expected Dividends but Still A Marvelous FY21

China Dongxiang has delivered impressive FY21 result with good recovery in sportswear and surge in investment income. At 47% discount to book...

Osbert Tang, CFA

Global Emerging Markets Weekly: 18 June 2021

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity...

Wium Malan, CFA

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