Feeding China’s growth has been a lucrative affair for the state-controlled companies of resource rich nations the world over. Yet for Russian energy titan Gazprom (GAZP.MCX) the benefits of a blockbuster US$400 billion deal to supply natural gas to China over 30 years have until now been less than clear. When the deal was agreed in May analysts were split on what it meant for the company; many cited concerns about the high cost of building up the necessary infrastructure to ship gas to China over a vast distance. The deal pricing wasn’t announced, raising fears that the Kremlin had accepted a low-ball offer as it was desperate to diversify supplies. The Russian government owns 50% of Gazprom. But Bloomberg this week reported, citing unidentified Russian officials, that Gazprom will get around US$360 per 1,000 cubic meters. This figure has not been confirmed by any party, but if accurate could ease investor worries that the company was forced into a value destructive deal. “The price looks significantly higher than we expected, as we anticipated that Gazprom could provide an additional discount to China to close the deal with China in 2014,” Andrey Polischuk, senior analyst at Raiffeisenbank in Moscow, said in an email on Thursday. Raiffeisenbank estimates the internal rate of return on the project at 10%, “which is not high, but we should take into account that the project also have strategical benefits for Gazprom,” said Polischuk. That rate also depends on the deal not including export duties. Polischuk is anticipating only limited market reaction from this week’s news – Gazprom share rose 16% in May and held throughout June. He has a “hold rating” on the company. But “we expect a significant positive reaction if Gazprom announces that the price does not include export duties.”
Save less, lend more
If the IMF’s cutting of its China growth forecast for 2014 is like a sucker-punch aimed at the face of Chinese banks, the recent easing LDR should at least soften the blow. The China Banking Regulatory Commission on Monday said it would change the way banks calculate their loan-to-deposit ratios in an effort to free up more funds to support economic growth. Deutsche Bank estimates that the change should lower regulatory LDR by 410bps to 67.5% as of end 2014, trimming liquidity requirements on Chinese banks. The new rules will classify loans more strictly while defining deposits more broadly, thereby easing lending conditions. Being able to lend more is good for banks’ profits. BOCOM International sees that while banks with high LDPs will have limited room to roll out new loans, the change “may encourage the banks to issue more loans to the agricultural sector and small [and] micro enterprises, which should bode well for profit.” Deutsche Bank maintains “a positive view on the listed Chinese banks, as the relaxation of the LDR rules should reduce competition for customer deposits, thereby easing the pressure of rising funding costs.”From the big four state lenders Deutsche Bank has Agricultural Bank of China (1288.HKG, 601288.SHA) and Bank of China (3988.HKG, 601988.SHA) as its top picks. Both Deutsche Bank and BOCOM International said China Merchants Bank (3698.HKG, 600036.SHA) would gain as well.
In market economies, you can make money from affordable housing
Good professional relationships get you jobs, but good government relationships get you construction projects. Government-backed China State Construction International (CSCI; 3311.HKG) looks set to cash in on government spending on low-cost housing. In a note released this week, Barclays Research sees CSCI earnings grow stronger in 2014 on the back of rising build-transfer projects and better guidance from management for 2014-2016. Even as government spending filters out in a couple of years CSCI will grab a larger chunk of the market as it can offer lower financing to clients, mostly local governments, because it has access to cheaper offshore channels in Hong Kong compared to rivals. That will also put it in good stead for infrastructure projects. Still, margins on build-transfer projects will decline over that period. Barclays Research raised its rating to “equal weight” on the news. The market has already priced in the announcement from management so upward impact on share price going forward will be limited – unless policymakers in Beijing turn the stimulus tap back on.
A busy week ahead in Hong Kong with no fewer than 14 listings planned. Sinomax (1418.HKG), a leading maker of viscoelastic pillows, mattresses and other bedding products more commonly known as memory foam with a strong market position in the UK, Hong Kong and mainland China, is looking to raise up to US$138 million. Swiss luxury-watch brand Ernest Borel is aiming to pull in as much as US$29.4 million from a listing next door to a key market.
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