In this briefing:
- Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
- HK Connect Discovery Weekly: CRRC, Car Inc/UCar (2019-01-25)
- 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?
1. Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
Ebang (EBANG HK) is a Chinese designer of bitcoin mining machines which are sold under the Ebit brand. Ebang refiled its draft prospectus with HKEX on 20 December 2018, but the IPO plans of cryptocurrency related companies are in a state of flux. Last week, the CEO of the Hong Kong Exchanges and Clearing, said that companies seeking to go public in Hong Kong should show consistency in their business models, in response to questions about the IPO applications of Bitmain Technologies Ltd (1374554D CH), Canaan Inc. (CANAAN HK) and Ebang.
While 1H18 results were strong, Ebang cautions that it experienced significant decreases in revenue and gross profit for 3Q18 compared to 2Q18. In the absence of any 3Q18 financial metrics, we scrutinised the financial accounts to find clues on the extent of the slowdown. Our analysis of the financial accounts’ leading indicators points to a rapid slowdown.
2. HK Connect Discovery Weekly: CRRC, Car Inc/UCar (2019-01-25)
In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this week’s HK Connect Discovery, we highlight that CRRC’s outflow coincides with media reports that highlight the risks of China’s investment in high-speed railway. We also see a very substantial southbound flow into Car Inc.
3. 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)
4. 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.
5. 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.
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