If it looks like a trade barrier, and moos like a trade barrier, it’s probably a trade barrier. China imposed stricter regulations on imported infant formula last week under the guise of improving food standards. Foreign dairy brands were ordered to register with the country’s quality watchdog. Those who failed the audit were banned from peddling dairy products in China. The move comes as the government campaigns to support “domestic” champions at the expense of foreign rivals. Imported brands account for close to 80% of the infant formula in China. Nevertheless, the vast majority of New Zealand dairy exporters such as Fonterra (FCG.NZE) should remain unscathed, according to James Bascand, a New Zealand-based analyst with Forsyth Barr. In fact, Fonterra, as one of the few New Zealand dairy co-operatives that received approval to export infant formula, would benefit from the recent regulation. Bascand said Fonterra, which had close control over the manufacturing process of infant formula, would be unaffected. “I believe the rules provide an additional barrier to entry against brand owners capitalizing on favorable prices,” said Bascand. The regulations should only punish those looking to make a quick buck from the “white gold” rush; slapping a label onto somebody else’s infant formula and then flogging it to Chinese parents does not count as “close control of the manufacturing process.” If anything, Fonterra’s bigger threat comes from within. The company is very sensitive to changes in input costs. Rising milk prices hurt the company’s bottom line, contributing to a 41% fall in earnings during the six months through January. A firm hold on the China market isn’t everything.
There must be money in China’s touring masses
Planning a trip to the US, or to Europe? We know 100 million people who are at least considering such trips, and they’re Chinese nationals who only a few years ago wouldn’t have dreamed of dropping thousands of dollars on leisure. The injection of disposable income into China’s middle class, located mainly along the eastern seaboard, could be the biggest thing in world travel – ever. Investors eager to cash in on the mainland’s mass vacationers are looking at the companies that are hosting the surge in spending. Ctrip.com International (CTRP.NASDAQ) is one of those firms. The online hotel- and transportation-booking platform posted this week US$254.5 million in revenues for the first quarter of the year, a 36% jump compared to a year ago. The company said that it plans to see nearly as much growth in the next quarter. One promising sign, according to Barclays Research, is Ctrip’s success with mobile. More than 120 million people have downloaded the app and mobile transactions grew by 400% year-on-year last quarter. Barclays recommends adding some of the company to portfolios. China Economic Review maintains a bullish stance on China’s travel industry and reckons there is much money to be made as the mainland explores the world.
Riding the Chinese rails in … Nigeria?
Never mind the kidnappings in Nigeria. The big news this week for the country is that China Railway Construction (1186.HKG) will build 1,385 kilometers of railways along the country’s lush coastline to support trains that run 120 kilometers per hour. The east coast of Nigeria is far from the country’s turbulent west, where armed militants have recently taken hundreds of school girls into the bush. More importantly, the deal the state company signed with Nigeria’s Ministry of Transportation is worth US$13 billion, more than all the deals the company signed last year. It’s also equal to 37% of both domestic and overseas deals in 2013. This should be great news for the company’s earnings this year. Investors in Hong Kong have reacted timidly to the announcement, however. Of course, when signing deals in developing countries in Africa – especially ones tied directly to the government, as they often are – investors will often remain weary until payout. No reason to worry, though. China does lots of overseas rail work. If investors fear Nigeria can’t eventually pay up the full US13 billion, about 5% of its 2012 GDP, they can always pick another overseas mega project. Consider the reported rail deal between China and North Korea. No worries about the hermit kingdom paying up, right?
IPO watch
And now the moment you’ve all been waiting for: Alibaba formally filed for an IPO in the US this week. However, they haven’t said whether they’ll list on the New York Stock Exchange or Nasdaq, a tiny missing detail that is probably driving a few investors mad. No need to get too excited, though. That offering won’t be here until well into the summer months. The Hong Kong market will remain quiet next week. The silence could only be reminding the regulators there how they lost the Alibaba offering, potentially one of the biggest IPOs, ever.