In this briefing:
- China Tobacco International (IPO): The Monopolist Will Not Recover
- RRR Rate Cut in China
- FX Reserves in China
- Healius (HLS AU): Bid Rejection Provides Option Value
- Ten Years On – Asia Outperforms Advanced Economies
1. China Tobacco International (IPO): The Monopolist Will Not Recover
- China Tobacco International (HK) Co. Ltd. plans to go public on the Hong Kong Stock Exchange.
- The state-owned company holds monopolistic positions in tobacco leaf export, tobacco leaf import, and cigarette export.
- Both revenue growth and margins declined year-over-year in the first three quarters of 2018.
- We believe the China cigarette market will not recover, as all signals suggest weak demand.
2. RRR Rate Cut in China
The big news in Chinese finance was the PBOC announcing Friday that it was cutting the RRR rate. Rather than what you can read in the press, we want to focus on a variety of factors which may not be as widely recognized.
3. FX Reserves in China
FX reserves are up by about 10 billion dollars, which against a back drop of the size of FX and the Chinese economy is basically no change. They have been oddly flat over the past two years. Yet, the noise is really just that, the FX increase is so small that we believe it is a non-starter.
4. Healius (HLS AU): Bid Rejection Provides Option Value
Healius (HLS AU), formerly known as Primary Health Care (PRY AU), is a leading Australian owner of GP clinics and pathology centres. Healius just took four days to reject Jangho Group Co Ltd A (601886 CH)’s 3 January 2018 proposal of A$3.25 cash per share as it “is opportunistic and fundamentally undervalues Healius.”
We believe that rejection of Jangho’s proposal provides shareholders with option value. If Healius’ growth initiatives generate value, we believe that the shares will be worth more than Jangho’s proposal. If Healius’ growth initiatives stall and the shares slide, we believe that Jangho will once again table a proposal.
5. Ten Years On – Asia Outperforms Advanced Economies
You might be surprised to learn that in the ten years to 2017 Asia has outperformed advanced economies. Despite extraordinary monetary and fiscal stimulus and the damaging dollar-demand deflationary policies of the ECB, BoJ and BoE, the region is 188% larger in US dollar terms compared with 2007 while US dollar GDP per capita income is 170% higher. The parallel numbers for the advanced countries – the US, euro-area and Japan combined- are 19% and 13%. Asian stock markets have underperformed since 2010 but we believe that investors are still to fully acknowledge Asia’s strong growth fundamentals. Combined with cheap valuations there is significant upside for Asian equity markets.
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