Daily China: Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets and more

In this briefing:

1. Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets
2. Healius And The (Likely) First Salvo
3. Big Banks – A Crisis of Investor Confidence
4. Chinese Market Sentiment at a Crossroad
5. TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge

1. Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets

It has been anything but a happy start to 2019 for the stock markets, which remained under pressure as trading resumed in the new year. A clutch of weak manufacturing data for December – from China to the eurozone and the US – soured the mood for investors through last week. 

That was followed by a rare revenue warning from Apple Inc (AAPL US) , citing slowing sales in China, which drew fresh attention to the vulnerability of American companies from the bitter trade war between the world’s two largest economies. The only assets that seemed to be in favour were the safe havens such as Gold (GOLD COMDTY) and the Japanese yen. 

Beijing provided the first major lift to market sentiment on Friday, by lowering the reserve requirement ratio for Chinese banks, in a bid to inject more cash into the system. US Fed Chairman Jerome Powell signalling a “patient” approach to monetary policy in a panel discussion in Atlanta later in the day and a strong US jobs report for December completed the trinity of factors that closed the week with a rally in stock markets as well as crude. 

Brent and WTI closed nearly 2% higher on the day, just above $57 and just under $48 respectively. Sentiment in the oil market was boosted by initial surveys showing a surprisingly large drop in OPEC production in December.

OPEC/non-OPEC cuts of 1.2 million b/d took effect on January 1 and should yield results in the coming weeks, but we expect crude to remain largely beholden to the twists and turns in the global economy. Just as in the broader financial markets, so in the oil markets, all eyes will now turn to the high-level trade negotiations between the US and China, due to be held in Beijing over January 7-8.  

2. Healius And The (Likely) First Salvo

Healius (HLS AU) (until last month known as Primary Health Care Limited), a leading owner of general practice clinics and pathology centres in Australia, announced an unsolicited and conditional proposal (including DD) from Jangho Group Co Ltd A (601886 CH) at A$3.25/share (~10x FY19 EV/EBITDA) in a A$2.0bn deal.  Jangho currently holds a 15.9% stake in Healius and has been on the shareholder register for two years.

The Offer price translates to a 33.2% premium to the undisturbed price but below the 12-month high of A$4.09 in March 2018. Optically and when referenced to closest peer Sonic Healthcare (SHL AU), the offer price appears light.

Reflecting the long laundry list of conditions attached to this indicative offer, such as securing debt financing and various regulatory approvals in China and Australia, notably data security, this indicative deal is trading wide at a gross/annualized spread of 25%/47%, assuming a deal completion date in early August.

This proposal does, however, indicate Healius was probably oversold.

This morning, Healius’ board rejected the proposal as it was considered opportunistic and fundamentally undervalued the company.

3. Big Banks – A Crisis of Investor Confidence

We analyse the holdings of the world’s largest banks by the 255 global equity funds in our analysis. For each region (America/EMEA/Asia), we have selected the 6 largest banks by total assets, as defined by the S&P Global Market Intelligence Report, 2018.

We find that overall, holdings in these banks are on the decline, and in some cases, investor flight has been acute.  Only 2 of the 18 banks are held overweight by global investors, with Citigroup Inc (C US) and Bnp Paribas (BNP FP) seeing the biggest exodus through 2018.

4. Chinese Market Sentiment at a Crossroad

Chinese equities face a crossroad to start the year as the market mulls a more serious phase in the structural decline in China’s economy balanced against renewed efforts to stimulate growth in 2019.  The US-China trade dispute and broader US policy shift to contain China’s economic ambitions in high tech industries have contributed to fears of a Chinese led global economic downturn.  But these concerns may ease as China and the US progress through trade negotiations restarted amidst a truce on tariff policy through 1-March.  The AUD and copper prices have been highly correlated with Chinese equities over the last year, highlighting the broader market implications of trade talks this week and renewed Chinese efforts to restore economic confidence.

5. TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge

A year ago we began publishing Tracking Traffic/Chinese Tourism as the hub for all of our research on China’s tourism sector. This monthly report features analysis of Chinese tourism data, notes from our conversations with industry participants, and links to recent company news and thematic pieces. Our aim is to highlight important trends in China’s tourism sector (and changes to those trends).

In this issue readers can find:

Although we remain positive on the long-term growth of Chinese tourism, it’s clear that near-term demand has weakened substantially. We continue to take a negative view of travel intermediaries like Ctrip, which face intensifying competition from many sources. We are more positive on the prospects of actual owners of Chinese travel and tourism assets, like hotel chain Huazhu Group (HTHT US) and Air China Ltd (H) (753 HK).