Brief China: Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps and more

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.