In this briefing:
- Chinese Telcos: Rising Capex Expectations a Risk. Downgrade China Mob and China Tel to Neutral.
- Weekly Oil Views: Oil Weighs Mixed Economic Sentiment, with Wary Eye on Venezuela
- How Worried Should You Be About China?
- The GER Weekly EVENTS Wrap: Pinduoduo, Softbank, Healthscope, M1, and Near-Term M&A Catalysts
- TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm
1. Chinese Telcos: Rising Capex Expectations a Risk. Downgrade China Mob and China Tel to Neutral.
We have been positive on the Chinese telcos, in part due to our thesis that peak 5G capex expectations were too high for China Mobile. That has largely played out as capex expectations have come down and the stock has performed well. The telcos see a steady state approach to 5G capex as the best way forward given the lack of a current business case. However, there are larger forces at work which imply higher capex – the need to support Huawei/ZTE (763 HK) given the moves against Chinese equipment manufacturers internationally, and the likelihood of economic stimulus packages.
We have downgraded China Mobile (941 HK) and China Telecom (728 HK) to Neutral as the risk now is that capex expectations start to rise again. China Unicom (762 HK) remains a BUY as it trades at a much lower multiple. We reiterate our preference for China Tower (788 HK) which is exposed positively to rising telecom capex.
We have increased our 2020 capex expectations for Chinese Telcos. China Mobile most affected (RMB bn)
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2. Weekly Oil Views: Oil Weighs Mixed Economic Sentiment, with Wary Eye on Venezuela
The price rally in crude stalled last week, amid mixed messages from Trump administration officials about the prospects of the US and China being able to end their trade war soon.
Investors swayed by the barrage of overly optimistic soundbites from Washington and Beijing since the January 7-9 mid-level negotiations got a reality check from analysts as well as officials pointing to the dispute over China’s intellectual property rights violations, which remains a major sticking point.
The International Monetary Fund cut its forecast for 2019 global economic growth to 3.5%, the second downward revision in three months.
OPEC member Venezuela descended into a major political crisis, with opposition leader Juan Guaido mounting a major challenge to President Nicolas Maduro’s administration, but an oil market still under a cloud of bearishness from weak global economic sentiment all but shrugged it off. The outcome of the standoff is highly unpredictable. For the oil market, a lot would depend on how smooth any handover of power is and how it affects the already plummeting Venezuelan crude production.
The fourth-quarter 2018 earnings of major oilfield service provider Halliburton Co (HAL US) and Schlumberger Ltd (SLB US) offer important clues to the health of the US shale industry, where activity took a hit amidst the downward spiral in oil prices in Q4.
The latest data on the positions of the various categories of traders in Brent futures shows that not only do speculative bulls remain on the sidelines, but the so-called non-commercial players actually raised their bearish bets on crude prices in the week to January 22.
3. How Worried Should You Be About China?
For investors, China is becoming the elephant in the room. The country accounts for roughly one-third of global GDP growth, and its economic growth rate is decelerating. Ken Rogoff believes China is hitting the debt wall:
Harvard professor Ken Rogoff said the key policy instruments of the Communist Party are losing traction and the country has exhausted its credit-driven growth model. This is rapidly becoming the greatest single threat to the global financial system.
“People have this stupefying belief that China is different from everywhere else and can grow to the moon,” said Professor Rogoff, a former chief economist at the International Monetary Fund.
“China can’t just keep creating credit. They are in a serious growth recession and the trade war is kicking them on the way down,” he told UK’s The Daily Telegraph, speaking before the World Economic Forum in Davos.
“There will have to be a de facto nationalisation of large parts of the economy. I fear this really could be ‘it’ at last and they are going to have their own kind of Minsky moment,” he said.
How worried should we be about China?
Our base-case scenario is no crash in 2019. The limited stimulus package announced by Beijing will have some effect, and it will likely buy the country another two or three quarters of growth. At the same time, China is desperate to reach a trade agreement with the U.S.
The Trump administration has also shown that it is highly sensitive to stock market movement, and it is also eager to reach an agreement. As one simple example, after stock prices weakened on January 22, National Economic Council director Larry Kudlow appeared on CNBC to sooth markets and deny reports that a planned meeting between Chinese and American negotiators had been canceled. This is a signal that American negotiators are sensitive to pressure from Wall Street to make an agreement.
Expect difficult negotiations to last right up to the March 1 deadline, but a limited deal to be signed. But that will not be the end of the story. The next battle will be over review, enforcement and verification of reform initiatives.
On the other hand, the fundamental nature of the Sino-American relationship is changing. Years of negotiation with past administrations have led to a sense of promise fatigue from both sides of the aisle. A consensus is emerging that China is becoming a strategic competitor. Cold War 2.0 has begun, and 2020 will be a difficult year for U.S.-China relations as aspiring candidates will try to show how tough they are on China.
Apocalypse Not Yet, but be wary.
4. The GER Weekly EVENTS Wrap: Pinduoduo, Softbank, Healthscope, M1, and Near-Term M&A Catalysts
In this version of the GER weekly events wrap, we assess the recent lock-up expiry for Pinduoduo (PDD US) which may have led to a short squeeze. Secondly, we assess the debt tender for Softbank Group (9984 JP) which may be supporting the equity. Finally, we provide updates on bids for M1 Ltd (M1 SP) and Healthscope Ltd (HSO AU) as well as update a list of upcoming M&A and equity bottom-up catalysts.
The rest of our event-driven research can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
5. TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm
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Tracking Traffic/Containers & Air Cargo is the hub for all of our research on container shipping and air cargo, featuring analysis of monthly industry data, notes from our conversations with industry participants, and links to recent company and thematic pieces.
Tracking Traffic/Containers & Air Cargo aims to highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. This month’s note includes data from about twenty different sources.
In this issue readers will find:
- An analysis of December container shipping rates: Our proprietary index suggests average container shipping rates firmed again in December. Firmer rates in Q418, combined with a moderation in fuel prices, probably lifted carrier margins in the period, and this improvement is likely to spill over into Q119.
- A look at December air cargo activity, which slumped, again: The five Asia-based airlines we track reported a ~2% Y/Y decline in air cargo handled. After growing by a healthy +6.3% Y/Y in H118, air cargo demand at these five carriers has shown a consistent monthly decline, growing by just 1% in Q418 and shrinking slightly in November and December.
- For container carriers and airlines, fuel price increases have continued to moderate. As of mid-January, the price of bunker fuel was up just 4% Y/Y, and the price of jet fuel had declined by around 7%. Throughout much of 2018, fuel prices had risen 20-40% Y/Y, or more.
- Japanese carriers’ December quarter earnings on the horizon: We will soon find out whether improving conditions in container shipping showed up in the carriers’ P&Ls, as the three major Japanese shipping companies are set to report December quarter results at the break on January 31.
Although slowing demand growth is unlikely to generate impressive top-line improvements, firmer pricing combined with lower fuel costs should support an ongoing improvement in profitability for container carriers in the near-term. Meanwhile, the slump in air cargo demand has not yet hit air cargo yields, but it’s becoming clearer that an economic slowdown is hurting demand for this relatively expensive mode of transport.
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