Brief China: China Risun (中国旭阳) IPO Quick Note: Past the Peak of Coking Cycle and more

In this briefing:

1. China Risun (中国旭阳) IPO Quick Note: Past the Peak of Coking Cycle
2. China Housing: Early Indicators For Sales Volumes In 2019
3. Memory Chips and the Elasticity Myth
4. Dexin China (德信中国) Post IPO – Poor Trading Liquidity, Top Ten Placees Hold 76% of IPO Shares
5. Precipitous Deceleration Implies 2019 Is a Year of Stress, Despite Help from US$ Weakness

1. China Risun (中国旭阳) IPO Quick Note: Past the Peak of Coking Cycle

China Risun, a leading coking coal refining player in China, is seeking up to USD 243 million via a listing in Hong Kong. In this insight, we will discuss the following topics:

• Company’s business and the value chain of coking coal
• Industry backdrop of the coking coal processing industry in China
• Shareholders and investors
• Thoughts on valuation

2. China Housing: Early Indicators For Sales Volumes In 2019

China housing markets start 2019 off a record high base in 2018 in terms of new home sales volumes. With the official NBS January-February data at the national level only expected to be published mid-March, we take a brief look at the early indicators for January-February in the weekly data to February 24 and January data for some major cities and average contract sales for select developers.

3. Memory Chips and the Elasticity Myth

During recent earnings calls memory chip makers have postulated that the market will return to higher margins once price elasticity causes demand to increase.  This popular myth needs to be treated with great skepticism since, as this Insight will reveal, short-term price elasticity has a negligible impact upon memory chip sales if it has any impact at all.

4. Dexin China (德信中国) Post IPO – Poor Trading Liquidity, Top Ten Placees Hold 76% of IPO Shares

Dexin China Holdings (2019 HK) raised US$189m in at HK$2.80 per share, at the mid-point of its IPO price range. We have previously covered the IPO in:

• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing
• Dexin China (德信中国) IPO Review – Key Issues Remain but 9M Results Showed Strong Growth.

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

5. Precipitous Deceleration Implies 2019 Is a Year of Stress, Despite Help from US$ Weakness

China has won the trade war so far, with China’s exports to the US rising 11.3% YoY in 2018, while its imports from the US rose just 0.7% YoY. For the latest two months (Dec18-Jan19), China’s exports to the US declined 3% YoY, but its imports from the US declined a precipitous 38.5% YoY. (The logic is obvious: less than half of China’s exports to the US carry tariffs, while over 80% of US exports to China must pay large import tariffs). Luckily for China, US President Trump has still allowed the March 1st deadline to be extended. That, combined with a weak US$ (and a far more dovish US Federal Reserve than 3 months ago) have taken pressure off the stressed Chinese economy. That any US-China trade deal will result in a stronger RMB takes further pressure off China, which otherwise saw net capital and services/income outflows of US$105bn in Nov18-Jan19 even amid the weakening of the US$ (numbers that would have been worse if the US$ had stayed strong, inducing larger capital outflows). 

The stress is most evident in domestic demand, with China’s imports down 4.5% YoY in the latest two months. China’s car sales declined 6% YoY in 2018, the first yearly decline since 1990, with car sales down 16.7% YoY in 4Q 2018 and down 19% YoY in December, with Chinese car brands’ sales declining 22% YoY in January 2019 (while total passenger car sales fell 17.7% YoY). This was a climactic reversal, as China’s car output had grown 20-fold between 1995 and 2017. The PBOC has responded with 350bp of cuts in banks’ RRR (to 13.5% by , from 17% a year ago), in a move to boost the money-multiplier (but with a modest impact on M2 and loan growth). 

China’s total social financing (TSF) rose by a record RMB4.64tn in January 2019, betraying signs that policy makers were panicking, hence turning on the shadow lending taps anew. Although TSF rose less in 2018 than in either 2016 or 2017, it rose more in 2H 2018 than in 2H 2017, responding to the monetary easing in 2H 2018. Despite a year of persistent and aggressive monetary easing, China’s M2 had grown a modest 8.1% YoY in 2018, up only marginally from 8% YoY at the end of October and November 2018; in January 2019, M2 accelerated to 8.4% YoY growth in response to the latest RRR cuts. FAI (fixed asset investment) slumped to just 2.5% YoY growth in May and July 2018, but then rebounded in the rest of 2018 (growing 5.9% YoY for the whole year). Opening the spigot of shadow lending involves the last throw of the dice: Premier Li Keqiang is among leading critics of this policy approach. For now, both the possibility of a trade deal and the weakness of the US$ are near-term positives that will buoy China. But the only remaining factor consistently buoying China’s growth is exports: so China will perforce need to make significant concessions in the final trade negotiations. If it does not, the positive scenario will rapidly deteriorate, and China’s high-wire act will collapse.  We are cautiously bullish on China in the near-term (3-month horizon), but remain negative on a longer-term (9 months and longer) view.