China

In this briefing:

1. Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium
2. The Empowerment
3. Puregold Price Club: Steady Grower with Provincial Expansion Story
4. The Pros and Cons of Whether We Will See A Deal
5. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

1. Guangxin Reloads A Peculiar Low-Ball Offer For Xingfa Aluminium

Xingfa Aluminium (98 HK) has announced its major shareholder, Guangxin Aluminium (a wholly-owned Guangdong SASAC vehicle), has acquired 5,000 shares, lifting its stake to 30.001%, triggering a mandatory general offer. The offer price is $5.60, a premium of just 2.94% to last close.

Guangxin, together with certain management of Xingfa, attempted to take Xingfa private at $3.70/share back in 1H17. That scheme failed comprehensively, which was a good outcome for minorities as FY17 net income increased 28%. 1H18 profit was also a 25% improvement over the corresponding period.

The offer price is in line to where Xingfa traded last October and 23% below the recent peak back in mid-June 2018. It is also 37% below where China Lesso Group Holdings (2128 HK) acquired its 26.3% stake in April last year.

At a guess, this low-ball offer provides an exit for large(r) investor with regards to Xingfa’s low liquidity. But no irrevocables have been given and the Offer remains conditional on Guangxin holding 50% of the voting votes.

As expected, Xingfa is currently trading 1.4% through terms. For those interested in small-cap, illiquid stocks, I would buy around these levels to play the back-end, or the (remote) possibility of a bump. The offer has not been declared final.

2. The Empowerment

Starbucks’ growth story in China faces a new threat: WeWork Go. U.S. dollar stores face rising threat of substitutes from healthcare insurers. Uber Freight’s new Yelp-like Facility Ratings raises bar further for trucking brokerage firms.

• U.S. Dollar Stores: Dollar Tree and Dollar General will face a rising threat of substitutes as healthcare insurers like Health Care Service Corp. launch subsidized meal delivery services to low-income consumers living in food deserts as a preventative healthcare measure.
• Trucking Brokerage Firms: Uber Freight’s new Yelp-like Facility Ratings feature raises the bar further for trucking brokerage firms by providing its drivers with a new level of empowerment and transparency.
• Starbucks: Starbucks’ growth story in China faces a new threat with the launch of WeWork Go which offers the public free coffee and pay-as-you-go access to WeWork’s locations.

I was thrilled to learn that Google just launched a new feature called Live Transcribe as it will empower deaf people, like my brother, by transcribing audio in real time. I’m also excited to order Casper’s new Glow Light for my kids to help them fall asleep better and wake up. It’s exciting to see Aetna partner with Apple on a new health-tracking and motivation app as it could be really valuable to help people engage in healthy behaviours. It’s also very encouraging to see health insurers like Health Care Service Corp. try to help low-income consumers living in food deserts by offering them subsidized health meal delivery services. While Uber Freight is looking to empower its drivers through its new Yelp-like feature for shipping and receiving facilities, Amazon is empowering its sellers with its Amazon Live Creator app which enables them to livestream for free on its platform to promote their products. And even Foot Locker seems to be gaining a social conscience with its new community-driven mission “to inspire and empower youth culture”, which coincides with its $100M strategic investment in the sneaker resale marketplace GOAT Group.

3. Puregold Price Club: Steady Grower with Provincial Expansion Story

• Conference call with the IR of Puregold Price Club (PGOLD PM) reveals that SSSG grew healthily at 6.5% YoY in 9M18, thanks to personal income tax cut.
• The bigger growth driver is provincial expansion (outside Metro Manila), which would allow PGOLD to achieve mid-teen sales growth.
• There has been little to no sales impact from e-commerce as e-commerce penetration in Philippines is lagging even in the ASEAN context. 
• PGOLD trades at 18.3x 2019E PE, a 15% discount to peers average of 21.6x

4. The Pros and Cons of Whether We Will See A Deal

There is rising discussion about the probability of whether we will see a deal between the US and China to prevent a full blow trade war by March 1.  We wanted to give you our assessment and its many layers.

5. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging  up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.

Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.

The detailed report below includes:

1. Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
2. Understanding Fast fashion
3. Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
4. Environmental issues in Asia due to Fast fashion
5. Sustainable clothing – an emerging trend, and what can turn it mainstream

6. Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis

7. Sustainability & 13 leading fast Fashion players – how future ready are they?

In this briefing:

1. The Art of the Deal Meets the Art of the Possible

1. The Art of the Deal Meets the Art of the Possible

In his 2019 State of the Union address, President Trump said he was seeking “real structural change” to China’s economy:

I have great respect for President Xi, and we are now working on a new trade deal with China. But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.

In the next breath, he referred to the reboot of NAFTA, which only yielded minor changes:

Another historic trade blunder was the catastrophe known as NAFTA. I have met the men and women of Michigan, Ohio, Pennsylvania, Indiana, New Hampshire, and many other states whose dreams were shattered by the signing of NAFTA. For years, politicians promised them they would renegotiate for a better deal, but no one ever tried, until now.

Our new U.S.-Mexico-Canada Agreement, the USMCA, will replace NAFTA and deliver for American workers like they haven’t had delivered to for a long time. I hope you can pass the USMCA into law so that we can bring back our manufacturing jobs in even greater numbers, expand American agriculture, protect intellectual property, and ensure that more cars are proudly stamped with our four beautiful words: “Made in the USA.

It is said that politics is the art of the possible. Here is where the Art of the Deal meets the art of the possible. Expect either the March 1 deadline to be extended or a deal to be made where both sides commit to further discussions on intellectual property protection and structural reforms.

Everybody wins. The Trump administration demonstrates a mastery of the Art of the Deal. China can temporarily take the tail-risk of additional tariffs and trade war off the table.

In this briefing:

1. The Empowerment
2. Puregold Price Club: Steady Grower with Provincial Expansion Story
3. The Pros and Cons of Whether We Will See A Deal
4. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware
5. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

1. The Empowerment

Starbucks’ growth story in China faces a new threat: WeWork Go. U.S. dollar stores face rising threat of substitutes from healthcare insurers. Uber Freight’s new Yelp-like Facility Ratings raises bar further for trucking brokerage firms.

• U.S. Dollar Stores: Dollar Tree and Dollar General will face a rising threat of substitutes as healthcare insurers like Health Care Service Corp. launch subsidized meal delivery services to low-income consumers living in food deserts as a preventative healthcare measure.
• Trucking Brokerage Firms: Uber Freight’s new Yelp-like Facility Ratings feature raises the bar further for trucking brokerage firms by providing its drivers with a new level of empowerment and transparency.
• Starbucks: Starbucks’ growth story in China faces a new threat with the launch of WeWork Go which offers the public free coffee and pay-as-you-go access to WeWork’s locations.

I was thrilled to learn that Google just launched a new feature called Live Transcribe as it will empower deaf people, like my brother, by transcribing audio in real time. I’m also excited to order Casper’s new Glow Light for my kids to help them fall asleep better and wake up. It’s exciting to see Aetna partner with Apple on a new health-tracking and motivation app as it could be really valuable to help people engage in healthy behaviours. It’s also very encouraging to see health insurers like Health Care Service Corp. try to help low-income consumers living in food deserts by offering them subsidized health meal delivery services. While Uber Freight is looking to empower its drivers through its new Yelp-like feature for shipping and receiving facilities, Amazon is empowering its sellers with its Amazon Live Creator app which enables them to livestream for free on its platform to promote their products. And even Foot Locker seems to be gaining a social conscience with its new community-driven mission “to inspire and empower youth culture”, which coincides with its $100M strategic investment in the sneaker resale marketplace GOAT Group.

2. Puregold Price Club: Steady Grower with Provincial Expansion Story

• Conference call with the IR of Puregold Price Club (PGOLD PM) reveals that SSSG grew healthily at 6.5% YoY in 9M18, thanks to personal income tax cut.
• The bigger growth driver is provincial expansion (outside Metro Manila), which would allow PGOLD to achieve mid-teen sales growth.
• There has been little to no sales impact from e-commerce as e-commerce penetration in Philippines is lagging even in the ASEAN context. 
• PGOLD trades at 18.3x 2019E PE, a 15% discount to peers average of 21.6x

3. The Pros and Cons of Whether We Will See A Deal

There is rising discussion about the probability of whether we will see a deal between the US and China to prevent a full blow trade war by March 1.  We wanted to give you our assessment and its many layers.

4. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging  up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.

Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.

The detailed report below includes:

1. Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
2. Understanding Fast fashion
3. Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
4. Environmental issues in Asia due to Fast fashion
5. Sustainable clothing – an emerging trend, and what can turn it mainstream

6. Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis

7. Sustainability & 13 leading fast Fashion players – how future ready are they?

5. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

We see oil exploration making a comeback in 2019, as drilling spending sees an increase and on the back of encouraging well results year to date. Already in 2019 there have been 4 high impact discoveries in the UK, South Africa and Guyana. Given the need of companies, especially the majors, to replenish their portfolios, there will still be a number of frontier, high impact wells being drilled. The areas where we see material exploration wells being drilled this year are Guyana, US GoM, Mexico, Brazil the Eastern Mediterranean and West Africa.

If there is some exploration success, the pure-play exploration companies will be good performers, especially those that have exposure to several wells that could be material relative to their size. A pick up in drilling will also be positive for the offshore drilling companies and seismic names. We look at the merits and pitfalls of investing in exploration, performance in 2018, outlook for 2019, the debate over exploring for resource versus buying it, how the economics of exploration have improved and the impact of the time value of money. 

In this briefing:

1. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized
2. China’s Nominal Vs. Real GDP – Accelerated Growth

1. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized

We mentioned in our previous note prior to the listing of Maoyan Entertainment on Feb 4th that Chinese New Year (CNY) Box office from the two movies, namely Pegasus and The New King of Comedy that the company invested could be a catalyst post listing. However, our analysis of CNY box office data suggests although Pegasus reported box office revenues slightly north of RMB 1bn, it is far behind the number one movie, The Wandering Earth’s RMB 2bn box office. In addition to the company-specific movie investment, the overall box office for the CNY holiday has been disappointing, suggesting a challenging year for the movie industry in 2019. 

• Entertainment Plus (猫眼娱乐) IPO: The Engineered Movie Ticketing Leader that Runs Out of Steam (Part 1)
• Entertainment Plus (猫眼娱乐) IPO: The Coming Regulatory Bang Isn’t That Bad (Part 2)
• Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
• Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst

2. China’s Nominal Vs. Real GDP – Accelerated Growth

When China’s fourth quarter GDP numbers were released in January, predictably, Bloomberg led with “China posts weakest growth since 2009” headline. The fact that the number was still 6.4% YoY, good by almost all standards, was given little attention. Being fickle, we immediately turned to the nominal GDP series – which the media continue to ignore completely – only to find that, on a quarterly annualised basis, the fourth quarter marked an acceleration in growth, from 8.5% annualised in 3Q18 to 9.3% annualised in 4Q18 (YoY it dipped to 9.2% from 9.5% in the third quarter).

In this briefing:

1. Puregold Price Club: Steady Grower with Provincial Expansion Story
2. The Pros and Cons of Whether We Will See A Deal
3. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware
4. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps
5. The Art of the Deal Meets the Art of the Possible

1. Puregold Price Club: Steady Grower with Provincial Expansion Story

• Conference call with the IR of Puregold Price Club (PGOLD PM) reveals that SSSG grew healthily at 6.5% YoY in 9M18, thanks to personal income tax cut.
• The bigger growth driver is provincial expansion (outside Metro Manila), which would allow PGOLD to achieve mid-teen sales growth.
• There has been little to no sales impact from e-commerce as e-commerce penetration in Philippines is lagging even in the ASEAN context. 
• PGOLD trades at 18.3x 2019E PE, a 15% discount to peers average of 21.6x

2. The Pros and Cons of Whether We Will See A Deal

There is rising discussion about the probability of whether we will see a deal between the US and China to prevent a full blow trade war by March 1.  We wanted to give you our assessment and its many layers.

3. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging  up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.

Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.

The detailed report below includes:

1. Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
2. Understanding Fast fashion
3. Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
4. Environmental issues in Asia due to Fast fashion
5. Sustainable clothing – an emerging trend, and what can turn it mainstream

6. Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis

7. Sustainability & 13 leading fast Fashion players – how future ready are they?

4. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

We see oil exploration making a comeback in 2019, as drilling spending sees an increase and on the back of encouraging well results year to date. Already in 2019 there have been 4 high impact discoveries in the UK, South Africa and Guyana. Given the need of companies, especially the majors, to replenish their portfolios, there will still be a number of frontier, high impact wells being drilled. The areas where we see material exploration wells being drilled this year are Guyana, US GoM, Mexico, Brazil the Eastern Mediterranean and West Africa.

If there is some exploration success, the pure-play exploration companies will be good performers, especially those that have exposure to several wells that could be material relative to their size. A pick up in drilling will also be positive for the offshore drilling companies and seismic names. We look at the merits and pitfalls of investing in exploration, performance in 2018, outlook for 2019, the debate over exploring for resource versus buying it, how the economics of exploration have improved and the impact of the time value of money. 

5. The Art of the Deal Meets the Art of the Possible

In his 2019 State of the Union address, President Trump said he was seeking “real structural change” to China’s economy:

I have great respect for President Xi, and we are now working on a new trade deal with China. But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.

In the next breath, he referred to the reboot of NAFTA, which only yielded minor changes:

Another historic trade blunder was the catastrophe known as NAFTA. I have met the men and women of Michigan, Ohio, Pennsylvania, Indiana, New Hampshire, and many other states whose dreams were shattered by the signing of NAFTA. For years, politicians promised them they would renegotiate for a better deal, but no one ever tried, until now.

Our new U.S.-Mexico-Canada Agreement, the USMCA, will replace NAFTA and deliver for American workers like they haven’t had delivered to for a long time. I hope you can pass the USMCA into law so that we can bring back our manufacturing jobs in even greater numbers, expand American agriculture, protect intellectual property, and ensure that more cars are proudly stamped with our four beautiful words: “Made in the USA.

It is said that politics is the art of the possible. Here is where the Art of the Deal meets the art of the possible. Expect either the March 1 deadline to be extended or a deal to be made where both sides commit to further discussions on intellectual property protection and structural reforms.

Everybody wins. The Trump administration demonstrates a mastery of the Art of the Deal. China can temporarily take the tail-risk of additional tariffs and trade war off the table.

In this briefing:

1. Hansoh Pharma IPO Preview: A Decent Story Tarnished by a Huge Pre-IPO Dividend

1. Hansoh Pharma IPO Preview: A Decent Story Tarnished by a Huge Pre-IPO Dividend

Hansoh Pharmaceutical (HANSOH HK) claims to be one of the few R&D driven Chinese pharmaceutical companies. According to press reports, Hansoh aims to launch its Hong Kong IPO to raise $1 billion this month. Over the track record period, Hansoh’s financial performance shows accelerating revenue growth, relatively stable margins and solid cash generation.

In this briefing:

1. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware
2. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps
3. The Art of the Deal Meets the Art of the Possible
4. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized
5. China’s Nominal Vs. Real GDP – Accelerated Growth

1. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging  up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.

Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.

The detailed report below includes:

1. Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
2. Understanding Fast fashion
3. Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
4. Environmental issues in Asia due to Fast fashion
5. Sustainable clothing – an emerging trend, and what can turn it mainstream

6. Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis

7. Sustainability & 13 leading fast Fashion players – how future ready are they?

2. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

We see oil exploration making a comeback in 2019, as drilling spending sees an increase and on the back of encouraging well results year to date. Already in 2019 there have been 4 high impact discoveries in the UK, South Africa and Guyana. Given the need of companies, especially the majors, to replenish their portfolios, there will still be a number of frontier, high impact wells being drilled. The areas where we see material exploration wells being drilled this year are Guyana, US GoM, Mexico, Brazil the Eastern Mediterranean and West Africa.

If there is some exploration success, the pure-play exploration companies will be good performers, especially those that have exposure to several wells that could be material relative to their size. A pick up in drilling will also be positive for the offshore drilling companies and seismic names. We look at the merits and pitfalls of investing in exploration, performance in 2018, outlook for 2019, the debate over exploring for resource versus buying it, how the economics of exploration have improved and the impact of the time value of money. 

3. The Art of the Deal Meets the Art of the Possible

In his 2019 State of the Union address, President Trump said he was seeking “real structural change” to China’s economy:

I have great respect for President Xi, and we are now working on a new trade deal with China. But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.

In the next breath, he referred to the reboot of NAFTA, which only yielded minor changes:

Another historic trade blunder was the catastrophe known as NAFTA. I have met the men and women of Michigan, Ohio, Pennsylvania, Indiana, New Hampshire, and many other states whose dreams were shattered by the signing of NAFTA. For years, politicians promised them they would renegotiate for a better deal, but no one ever tried, until now.

Our new U.S.-Mexico-Canada Agreement, the USMCA, will replace NAFTA and deliver for American workers like they haven’t had delivered to for a long time. I hope you can pass the USMCA into law so that we can bring back our manufacturing jobs in even greater numbers, expand American agriculture, protect intellectual property, and ensure that more cars are proudly stamped with our four beautiful words: “Made in the USA.

It is said that politics is the art of the possible. Here is where the Art of the Deal meets the art of the possible. Expect either the March 1 deadline to be extended or a deal to be made where both sides commit to further discussions on intellectual property protection and structural reforms.

Everybody wins. The Trump administration demonstrates a mastery of the Art of the Deal. China can temporarily take the tail-risk of additional tariffs and trade war off the table.

4. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized

We mentioned in our previous note prior to the listing of Maoyan Entertainment on Feb 4th that Chinese New Year (CNY) Box office from the two movies, namely Pegasus and The New King of Comedy that the company invested could be a catalyst post listing. However, our analysis of CNY box office data suggests although Pegasus reported box office revenues slightly north of RMB 1bn, it is far behind the number one movie, The Wandering Earth’s RMB 2bn box office. In addition to the company-specific movie investment, the overall box office for the CNY holiday has been disappointing, suggesting a challenging year for the movie industry in 2019. 

• Entertainment Plus (猫眼娱乐) IPO: The Engineered Movie Ticketing Leader that Runs Out of Steam (Part 1)
• Entertainment Plus (猫眼娱乐) IPO: The Coming Regulatory Bang Isn’t That Bad (Part 2)
• Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
• Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst

5. China’s Nominal Vs. Real GDP – Accelerated Growth

When China’s fourth quarter GDP numbers were released in January, predictably, Bloomberg led with “China posts weakest growth since 2009” headline. The fact that the number was still 6.4% YoY, good by almost all standards, was given little attention. Being fickle, we immediately turned to the nominal GDP series – which the media continue to ignore completely – only to find that, on a quarterly annualised basis, the fourth quarter marked an acceleration in growth, from 8.5% annualised in 3Q18 to 9.3% annualised in 4Q18 (YoY it dipped to 9.2% from 9.5% in the third quarter).

In this briefing:

1. Hansoh Pharma IPO Preview: A Decent Story Tarnished by a Huge Pre-IPO Dividend
2. Baltic Dry – It’s That Time of Year. Again. [2019 Version]

1. Hansoh Pharma IPO Preview: A Decent Story Tarnished by a Huge Pre-IPO Dividend

Hansoh Pharmaceutical (HANSOH HK) claims to be one of the few R&D driven Chinese pharmaceutical companies. According to press reports, Hansoh aims to launch its Hong Kong IPO to raise $1 billion this month. Over the track record period, Hansoh’s financial performance shows accelerating revenue growth, relatively stable margins and solid cash generation.

2. Baltic Dry – It’s That Time of Year. Again. [2019 Version]

This insight starts with a bit of history. It is entirely extraneous to the data, but I think the history is kind of fun (iron ore, Baltic Dry, and shipping has been a ‘hobby’ of mine for years). If you want to get right to the data, go to the Thin Red Line.

On the 24th of May, 1744, an announcement appeared in The Daily Post (The Daily Poſt) that the Virginia and Maryland coffee house in Threadneedle Street, London (just east of the Bank of England) had changed its name to Virginia and Baltick Coffee House.

This is to give notice that the House, late the Virginia and Maryland Coffee-house in Threadneedle Street, near the Royal Exchange, is now open’d by the Name of the Virginia & Baltick Coffee-house, where all Foreign and Domestick News are taken in ; and all Letters or Parcels, directed to Merchants or Captains in the Virginia or Baltick Trade will be carefully deliver’d according as directed, and the best Attendance given, by Reynallds and Winboult. 

Note, Punch made in any Quantity, in the greatest Perfection, without Adulteration, which is seldom found in any of the most noted Houses ; also Brandy, Rum, and Arrack (neat as imported) are sold in the Vaults under the Coffee-House, at the lowest Prices; where all Customers, we have had the Favour of serving at our late Warehouse in Leadenhall Street, we hope will continue to send their Orders as above.

We have receiv’d Advice, that Several Bags of Letters and Parcels are coming which are directed to be left at the above Coffee-House 

This was perhaps because Virginia and Maryland as a name was slightly redundant. Virginia and Maryland are next to each other (if you dropped cargo in Baltimore, you went past Virginia to get there). It was perhaps because trade with Russia and Baltic countries in tallow (from Russia) used to make candles and soap [more candles than soap as Georgian England was still under the idea bathing might invite the plague to enter the pores], flax, hemp (both from modern-day Estonia and Latvia, and Russia), and other goods was fast climbing after The Muscovy Company (originally founded as The Merchant Adventurers to New Lands in 1551 to look for a northeast passage to China) lost its monopoly (enjoyed since 1555) on English trade with Russia in 1698 (though the company’s activities had been somewhat or at times largely curtailed for 50 years after the execution of Charles I of England in 1648). 

In any case, the new name more accurately represented the business interests of those who congregated there.

The Virginia & Baltick was the place to source North Atlantic and Baltic cargoes, and cargoes rose in volume dramatically from the mid 1700s through the mid 1800s, with a drop only in the early 1810s.

In 1810, the Virginia & Baltick took over the premises of a nearby establishment called the Antwerp Tavern – also on Threadneedle – which was a considerably larger building (in the Hearth Tax (an annual levy of two shillings per annum, to make up the shortfall of ale and beer taxes paid to the sovereign) returns of 1662 it was noted as having 18 hearths). It was renamed the Baltic Coffee House then (it was also periodically the meeting place of the Albion Lodge of Masons). 

Long since replaced, as far as I can tell it was located on the SE corner of Threadneedle and the alley behind the Royal Exchange. By 1823, the wild speculations in commodities and the laxity of theretofore informal arrangements on the Second Floor made it imperative for the senior tallow chandlers, soapmakers, and cargo brokers to form a Member’s Club (limited to 300). Rules were established (they are below in the Appendix).

In 1857, the Virginia & Baltick established a company, The Baltic Company Limited, and arrangements were made to take over the lease of the South Sea House (original home to the South Sea Company) at the end of Threadneedle Street. In 1900, the Baltic Exchange was incorporated as a private limited company – the Baltic Mercantile And Shipping Exchange, Limited. and took over the London Shipping Exchange. In 1903, the company established its own purpose-built premises in St. Mary’s Axe. In 1992, an IRA bomb demolished 30 St. Mary’s Axe and a few years later, permanent premises were found at 38 St. Mary’s Axe. 

In 1985, the Baltic Exchange first calculated its Baltic Freight Index (now the Baltic Dry Index) as an “assessment” of conditions and charter rates amongst a panel of independent ship brokers across nearly two-dozen specific routes (all routes reported have year-round fixtures – not seasonal routes like the Great Lakes) and ship sizes (and since July 1, 2009 is an average of Handysize, Supramax, Panamax, and Capesize Timecharter averages), the data for which is then verified and averaged by the Exchange, and disseminated to members. The route specifics are quite detailed and require “massaging” in order to get normalized data from the specified delivery item (for Capesize Route C2, it is a 180kmt DWT ship on 18.2m SSW draft, max age 10yrs, LOA 290m, beam 45m, TPC 121, 198kcbm grain, 14 knots laden, 15 knots ballast on 62mt fuel oil (380cst) no diesel at sea with the route details as below). 

There are audits of the brokers, and no shipbrokers are allowed to have “money in the market.” A full index methodology document is available for those who care for it (message me for the PDF). 

It’s That Time Of Year, Again.

The Baltic Dry Index (BDIY INDEX) is an indicator published by The Baltic Exchange, in London, first distributed in 1985 and something which gained popularity as a tool for equity investors to “see” the bulk market in the early 2000s. 

The index has changed somewhat over the years with the current calculation starting in 2009. It is currently calculated as an average of the Capesize, Panamax, Supramax, and Handysize TimeCharter averages, with a slightly complicated weighting system across a variety of routes. An example for Capesize is in the Appendix (below the Rules & Regulations of the Baltic Coffee House of 1823). Most of the routes have a very heavy weighting to Asia. 75% of the weights of Capesize, Panamax, and Supramax have an Asia or Trans-Pacific end of leg to them (Handysize is 50% Asia end, 50% Europe end). 

The increased interest on the part of non-freight customers was because the advent of dramatic increases in raw materials imports to China in the early 2000s meant a significant squeeze on ship time. And because there is seasonality to China and its raw materials imports, more seasonality started showing up in the Baltic Dry Index.

Generically, when raw material pricing goes up because raw material demand goes up, bulker rates go up. When raw material pricing goes up because of natural disaster-induced shortages, the effect can be mixed. For example, if for whatever reason iron ore could not be shipped from Australia to China for a period, shipping costs might rise dramatically (if the materials themselves existed to be exported from elsewhere) simply because of greater ship time to export from say Tubarao to China than from Western Australia to China. Right now, the China-based cost to ship a tonne of iron ore from WA to China is less than US$5 while from Tubarao it is $13. If a serious Brazil export drop were to occur, iron ore would go up in price because of the near-term scarcity, but freight prices might not go up that much because the change in time per tonne required to ship would drop (though they might go up on a scarcity of appropriate ships).

In any case, that China seasonality has another very interesting and over-riding characteristic.

And it has to do with Chinese New Year.

In this briefing:

1. Baltic Dry – It’s That Time of Year. Again. [2019 Version]

1. Baltic Dry – It’s That Time of Year. Again. [2019 Version]

This insight starts with a bit of history. It is entirely extraneous to the data, but I think the history is kind of fun (iron ore, Baltic Dry, and shipping has been a ‘hobby’ of mine for years). If you want to get right to the data, go to the Thin Red Line.

On the 24th of May, 1744, an announcement appeared in The Daily Post (The Daily Poſt) that the Virginia and Maryland coffee house in Threadneedle Street, London (just east of the Bank of England) had changed its name to Virginia and Baltick Coffee House.

This is to give notice that the House, late the Virginia and Maryland Coffee-house in Threadneedle Street, near the Royal Exchange, is now open’d by the Name of the Virginia & Baltick Coffee-house, where all Foreign and Domestick News are taken in ; and all Letters or Parcels, directed to Merchants or Captains in the Virginia or Baltick Trade will be carefully deliver’d according as directed, and the best Attendance given, by Reynallds and Winboult. 

Note, Punch made in any Quantity, in the greatest Perfection, without Adulteration, which is seldom found in any of the most noted Houses ; also Brandy, Rum, and Arrack (neat as imported) are sold in the Vaults under the Coffee-House, at the lowest Prices; where all Customers, we have had the Favour of serving at our late Warehouse in Leadenhall Street, we hope will continue to send their Orders as above.

We have receiv’d Advice, that Several Bags of Letters and Parcels are coming which are directed to be left at the above Coffee-House 

This was perhaps because Virginia and Maryland as a name was slightly redundant. Virginia and Maryland are next to each other (if you dropped cargo in Baltimore, you went past Virginia to get there). It was perhaps because trade with Russia and Baltic countries in tallow (from Russia) used to make candles and soap [more candles than soap as Georgian England was still under the idea bathing might invite the plague to enter the pores], flax, hemp (both from modern-day Estonia and Latvia, and Russia), and other goods was fast climbing after The Muscovy Company (originally founded as The Merchant Adventurers to New Lands in 1551 to look for a northeast passage to China) lost its monopoly (enjoyed since 1555) on English trade with Russia in 1698 (though the company’s activities had been somewhat or at times largely curtailed for 50 years after the execution of Charles I of England in 1648). 

In any case, the new name more accurately represented the business interests of those who congregated there.

The Virginia & Baltick was the place to source North Atlantic and Baltic cargoes, and cargoes rose in volume dramatically from the mid 1700s through the mid 1800s, with a drop only in the early 1810s.

In 1810, the Virginia & Baltick took over the premises of a nearby establishment called the Antwerp Tavern – also on Threadneedle – which was a considerably larger building (in the Hearth Tax (an annual levy of two shillings per annum, to make up the shortfall of ale and beer taxes paid to the sovereign) returns of 1662 it was noted as having 18 hearths). It was renamed the Baltic Coffee House then (it was also periodically the meeting place of the Albion Lodge of Masons). 

Long since replaced, as far as I can tell it was located on the SE corner of Threadneedle and the alley behind the Royal Exchange. By 1823, the wild speculations in commodities and the laxity of theretofore informal arrangements on the Second Floor made it imperative for the senior tallow chandlers, soapmakers, and cargo brokers to form a Member’s Club (limited to 300). Rules were established (they are below in the Appendix).

In 1857, the Virginia & Baltick established a company, The Baltic Company Limited, and arrangements were made to take over the lease of the South Sea House (original home to the South Sea Company) at the end of Threadneedle Street. In 1900, the Baltic Exchange was incorporated as a private limited company – the Baltic Mercantile And Shipping Exchange, Limited. and took over the London Shipping Exchange. In 1903, the company established its own purpose-built premises in St. Mary’s Axe. In 1992, an IRA bomb demolished 30 St. Mary’s Axe and a few years later, permanent premises were found at 38 St. Mary’s Axe. 

In 1985, the Baltic Exchange first calculated its Baltic Freight Index (now the Baltic Dry Index) as an “assessment” of conditions and charter rates amongst a panel of independent ship brokers across nearly two-dozen specific routes (all routes reported have year-round fixtures – not seasonal routes like the Great Lakes) and ship sizes (and since July 1, 2009 is an average of Handysize, Supramax, Panamax, and Capesize Timecharter averages), the data for which is then verified and averaged by the Exchange, and disseminated to members. The route specifics are quite detailed and require “massaging” in order to get normalized data from the specified delivery item (for Capesize Route C2, it is a 180kmt DWT ship on 18.2m SSW draft, max age 10yrs, LOA 290m, beam 45m, TPC 121, 198kcbm grain, 14 knots laden, 15 knots ballast on 62mt fuel oil (380cst) no diesel at sea with the route details as below). 

There are audits of the brokers, and no shipbrokers are allowed to have “money in the market.” A full index methodology document is available for those who care for it (message me for the PDF). 

It’s That Time Of Year, Again.

The Baltic Dry Index (BDIY INDEX) is an indicator published by The Baltic Exchange, in London, first distributed in 1985 and something which gained popularity as a tool for equity investors to “see” the bulk market in the early 2000s. 

The index has changed somewhat over the years with the current calculation starting in 2009. It is currently calculated as an average of the Capesize, Panamax, Supramax, and Handysize TimeCharter averages, with a slightly complicated weighting system across a variety of routes. An example for Capesize is in the Appendix (below the Rules & Regulations of the Baltic Coffee House of 1823). Most of the routes have a very heavy weighting to Asia. 75% of the weights of Capesize, Panamax, and Supramax have an Asia or Trans-Pacific end of leg to them (Handysize is 50% Asia end, 50% Europe end). 

The increased interest on the part of non-freight customers was because the advent of dramatic increases in raw materials imports to China in the early 2000s meant a significant squeeze on ship time. And because there is seasonality to China and its raw materials imports, more seasonality started showing up in the Baltic Dry Index.

Generically, when raw material pricing goes up because raw material demand goes up, bulker rates go up. When raw material pricing goes up because of natural disaster-induced shortages, the effect can be mixed. For example, if for whatever reason iron ore could not be shipped from Australia to China for a period, shipping costs might rise dramatically (if the materials themselves existed to be exported from elsewhere) simply because of greater ship time to export from say Tubarao to China than from Western Australia to China. Right now, the China-based cost to ship a tonne of iron ore from WA to China is less than US$5 while from Tubarao it is $13. If a serious Brazil export drop were to occur, iron ore would go up in price because of the near-term scarcity, but freight prices might not go up that much because the change in time per tonne required to ship would drop (though they might go up on a scarcity of appropriate ships).

In any case, that China seasonality has another very interesting and over-riding characteristic.

And it has to do with Chinese New Year.

In this briefing:

1. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps
2. The Art of the Deal Meets the Art of the Possible
3. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized
4. China’s Nominal Vs. Real GDP – Accelerated Growth
5. Hansoh Pharma IPO Preview: A Decent Story Tarnished by a Huge Pre-IPO Dividend

1. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

We see oil exploration making a comeback in 2019, as drilling spending sees an increase and on the back of encouraging well results year to date. Already in 2019 there have been 4 high impact discoveries in the UK, South Africa and Guyana. Given the need of companies, especially the majors, to replenish their portfolios, there will still be a number of frontier, high impact wells being drilled. The areas where we see material exploration wells being drilled this year are Guyana, US GoM, Mexico, Brazil the Eastern Mediterranean and West Africa.

If there is some exploration success, the pure-play exploration companies will be good performers, especially those that have exposure to several wells that could be material relative to their size. A pick up in drilling will also be positive for the offshore drilling companies and seismic names. We look at the merits and pitfalls of investing in exploration, performance in 2018, outlook for 2019, the debate over exploring for resource versus buying it, how the economics of exploration have improved and the impact of the time value of money. 

2. The Art of the Deal Meets the Art of the Possible

In his 2019 State of the Union address, President Trump said he was seeking “real structural change” to China’s economy:

I have great respect for President Xi, and we are now working on a new trade deal with China. But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.

In the next breath, he referred to the reboot of NAFTA, which only yielded minor changes:

Another historic trade blunder was the catastrophe known as NAFTA. I have met the men and women of Michigan, Ohio, Pennsylvania, Indiana, New Hampshire, and many other states whose dreams were shattered by the signing of NAFTA. For years, politicians promised them they would renegotiate for a better deal, but no one ever tried, until now.

Our new U.S.-Mexico-Canada Agreement, the USMCA, will replace NAFTA and deliver for American workers like they haven’t had delivered to for a long time. I hope you can pass the USMCA into law so that we can bring back our manufacturing jobs in even greater numbers, expand American agriculture, protect intellectual property, and ensure that more cars are proudly stamped with our four beautiful words: “Made in the USA.

It is said that politics is the art of the possible. Here is where the Art of the Deal meets the art of the possible. Expect either the March 1 deadline to be extended or a deal to be made where both sides commit to further discussions on intellectual property protection and structural reforms.

Everybody wins. The Trump administration demonstrates a mastery of the Art of the Deal. China can temporarily take the tail-risk of additional tariffs and trade war off the table.

3. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized

We mentioned in our previous note prior to the listing of Maoyan Entertainment on Feb 4th that Chinese New Year (CNY) Box office from the two movies, namely Pegasus and The New King of Comedy that the company invested could be a catalyst post listing. However, our analysis of CNY box office data suggests although Pegasus reported box office revenues slightly north of RMB 1bn, it is far behind the number one movie, The Wandering Earth’s RMB 2bn box office. In addition to the company-specific movie investment, the overall box office for the CNY holiday has been disappointing, suggesting a challenging year for the movie industry in 2019. 

• Entertainment Plus (猫眼娱乐) IPO: The Engineered Movie Ticketing Leader that Runs Out of Steam (Part 1)
• Entertainment Plus (猫眼娱乐) IPO: The Coming Regulatory Bang Isn’t That Bad (Part 2)
• Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
• Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst

4. China’s Nominal Vs. Real GDP – Accelerated Growth

When China’s fourth quarter GDP numbers were released in January, predictably, Bloomberg led with “China posts weakest growth since 2009” headline. The fact that the number was still 6.4% YoY, good by almost all standards, was given little attention. Being fickle, we immediately turned to the nominal GDP series – which the media continue to ignore completely – only to find that, on a quarterly annualised basis, the fourth quarter marked an acceleration in growth, from 8.5% annualised in 3Q18 to 9.3% annualised in 4Q18 (YoY it dipped to 9.2% from 9.5% in the third quarter).

5. Hansoh Pharma IPO Preview: A Decent Story Tarnished by a Huge Pre-IPO Dividend

Hansoh Pharmaceutical (HANSOH HK) claims to be one of the few R&D driven Chinese pharmaceutical companies. According to press reports, Hansoh aims to launch its Hong Kong IPO to raise $1 billion this month. Over the track record period, Hansoh’s financial performance shows accelerating revenue growth, relatively stable margins and solid cash generation.