Johnson & Johnson’s (JNJ.NYSE) executives must be brushing up on their ancient Chinese history. The US-based pharmaceutical heavyweight said late last week that it would invest US$3 billion in a new production base in Xian, the capital of the northwestern province of Shaanxi. It’s also home to China’s famed Terra Cotta Warriors, a tomb with 8,000 clay soldiers for the first emperor of China. The base, which was originally announced in November, is the first phase of the company’s westward expansion with its Chinese partner Xian Janssen Pharmaceutical. All seven of Johnson & Johnson’s production bases are in the east of the country but now the company will try to take advantage of cheaper production and land costs while also pushing sales in China’s expansive, a market relatively untapped by foreign pharmaceutical companies. “Lower manufacturing costs are one thing, yet it is important to consider what is manufactured at what site,” Tony Butler, an equities analyst at Barclays, said in an email this week. “Certain products carry higher profit margins than others. Therefore, product mix is also key to higher corporate profit margins.” Barclays has an “overweight” rating on the company, which means the bank projects that the stock could do better than peers in the industry.
No alarms and no surprises
No one gasped at the total government debt figures released by the National Audit Office on Monday. The survey showed the total figure at about US$5 trillion at the end of June, but it was the local government numbers that everyone was waiting on. By mid-2013, local governments held about US$2.9 trillion in debt, up from US$1.7 trillion in 2010. That’s very much in line with analysts’ expectations. So much so that several Chinese banks actually rallied on Tuesday in Hong Kong and Shanghai. China Merchants Bank (3968.HKG, 600036.SHA) rose 3.6% on the news. It’s good news that the figure didn’t terrify investors. But, China isn’t in the clear yet. The growth rate for local debt was fast, up more than 12% since the end of 2012. The rate of overdue loans at local government was 10.7%, much higher than the total overdue ratio of the entire banking system, which was 1.3%. The central government will need to step in with a strong plan for slowing the growth of debt in places far from Beijing. “We are currently neutral to cautious on China bank stocks and will wait for more reform details (likely from the March People’s Congress) before we revisit our stance,” Barclays said in a note to investors this week.
Off on the wrong foot
Samsung Electronics (005930.KRX) is having a bad 2014 – and it’s only three days into the new year. In trading on Thursday, investors dropped more than US$8 billion off the company’s market value, fearing substantially slower profit growth in the final quarter of the year. Analysts expect the company to report about 9% year-on-year growth for the last three months of the year, down from 26% in the third quarter of 2013. That’s a substantial drop. The declining price in smartphones, the company’s No.1 product, is a contributing problem. But investors looking at 2014 sales should remember that Samsung and several other big-name phone brands have only just recently put their phones onto what is expected to be one of the world’s biggest markets for 4G devices. China Mobile (CHL.NYSE) launched the country’s first 4G services last month. Investors in Apple (APPL.NASDAQ) cheered when the company said in December that China Mobile would sell its phones for the first time on its 4G network. Samsung phones have been compatible for years with all three of China’s mobile networks. Handsets such as the Note and the Galaxy have been best-sellers in the country. 4G phones sales in China can’t save Samsung from the some of the ailments of the industry, namely decreasing smartphone prices. But investors should be prepared for 4G device sales in China to be a major help to companies like Samsung this year.
IPO watch
The Hong Kong Stock Exchange will take on three Chinese companies next week. Among them, investors should keep an eye on Fujian Nuoqi, a men’s apparel company known to customers as N&Q. The firm is a domestic competitor to fast fashion brands such as Spain’s Zara and Sweden’s H&M. Nuoqi could be better prepared than some international competitors to market through online retail channels. However, it may not respond quick enough to changes in this rapidly growing segment of the fashion industry, according to a note from UOB Kay Hian. This will also be the firm’s third attempt to list after failing to get approval twice on the mainland. Nuoqi will float on Thursday and look to raise between US$39 million-$55 million.
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