Selling a commodity for 75% of the value that you could have got for it just six months ago hardly seems to represent good business. But when you’re in the process of setting a vast market, it might do. Russian firm Uralkali OAO (URALL.LON, URKA.MCX) this week concluded a deal to sell 700,000 tons of potash, a compound most commonly used as a fertilizer, to Chinese National Agricultural Means of Production Group at US$305 a ton, 25% lower that the price it could have got under an existing deal with Belarus. Despite the lower price, the deal is a good one for analysts as it allows Uralkali to strengthen its position in the world’s largest potash market. “They [Uralkali] confirmed their leading position in China, by setting up a contract on the very good terms,” Konstantin Yuminov, a Moscow-based analyst for Raiffeisenbank said in an email. The deal also hedges against volatility in the potash market; the commodity surged from US$200 per ton in 2008 to nearly US$900 a year later and has fluctuated wildly since. “Not that they [investors] like the price, but they now see less risks due to lower pricing uncertainty. The China price sets a floor for the global market,” said Elena Sakhnova, an equity analyst for VTB Capital. Elena however has a “sell” rating on the stock as it looks expensive.
Lenovo goes back for more IBM
Selling PCs to global consumers helped propel Lenovo (0992.HKG) to the top of the league worldwide but that model is under pressure as tablets and mobile devices gain in popularity. To regain some of its luster, the company has just concluded a US$2.3 billion deal to buy the low-end server business of International Business Machines (IBM.NYSE), from whom it bought the ThinkPad PC marque in 2005 that helped push its name into the homes of consumer across developed markets. IBM just reported a seventh straight quarter of declining revenue, which it hopes to reverse by concentrating on software and services. The deal is positive for Lenovo “as it adds higher margin revenues to the mix,” said Alberto Moel, a Hong Kong-based analyst for Sanford C. Bernstein. “Provided, of course, that it doesn’t overpay.” Lenovo has been eyeing the unit for some time and the purchase is in line “with their strategy of diversifying into higher margin and ideally faster growing businesses.” Moel currently has a buy rating on Lenovo’s stock.
Gome plugged in for profit
The great journey home for Chinese New Year is well under way, given the appearance of soldiers at Shanghai’s main metro station guiding passengers lugging suitcases and bulging sacks. When they eventually sit down with their families for a week of feasting, many might be surprised to see new electrical goods scattered around the house. Many of those will have come from China’s largest home appliance retailer Gome Electrical Holdings (0493.HKG), which this week issued guidance that same store sale growth in 2013 probably topped 12%, while margins likely improved to 18% from 16% in 2012. Combined with cost control measures, the company expects to report significant improvement in profitability. Weighing down on the company’s fortunes is the low-visibility of its online store, noted analysts at Barclays. E-commerce is a huge growth driver in this sector and traditional retailers are coming under sustained pressure from such platforms, which offer bigger product ranges and lower prices. A key battleground is now rural China, where although total sales are lower than in urban areas, wages are rising faster. Urban disposable income growth slowed to 7% last year from 9.6% in 2012, official data released this week show. By contrast, rural net incomes rose 9.3% over the same period, while China’s 220 million or so migrant workers saw monthly wages rise 14% on average.
Next week sees three Hong Kong IPOs ahead of Chinese New Year, of which two are China related. Residential and commercial property developer Redco Properties (01622.HKG) and Honworld Group (02226.HKG), the largest maker of cooking wine on the mainland, which boasts superior products and established brand recognition, according to a note from Kim Eng Securities.