Great Wall Motor spinning wheels in the mud

Great Wall Motor spinning wheels in the mud

Having the luck to be in the right market at the right time isn’t going to guarantee success forever. For Great Wall Motor (2333.HKG), this could be the bitter reality. Hitched to a booming Chinese auto market over the past decade, Great Wall Motor’s past explosive growth has come to a halt. The company revealed disappointing June sales on Monday, marking the third consecutive month of sales decline. “The sales drop of GWM was mainly dragged by sedan sales as well as a slowdown in SUV sales,” UOB Hay Hian said in a note this week. The sluggish Chinese mass market, combined with fierce competition from joint venture brands in the mass-market sedan segment, is driving Great Wall Motor’s sales into the mud. Lacking a competitive edge, Great Wall Motor is finding it hard to stand up to stronger rivals hitting the market. UOB Hay Hian expects Great Wall Motor’s SUV sales to follow its sedan sales on downward trend, despite launches of new models. “The deteriorating sales momentum could trigger a further earnings downgrade and de-rating on the stock.” UOB Hay Hian maintains its “SELL” rating on the firm.

Why let coal dirty your balance sheet?

People say a balloon is meant to fly, so if a rock drags it down, you cut it lose. In the case of Datang International Power Generation (0991.HKG, 601991.SHA), this troublesome “rock” appears to be its loss-making coal-to-chemical business. So when the company said this week that it would sell off part or all of its coal-to-chemical and coal-to-natural-gas operations in an effort to comply with Beijing’s economic and state-sector reforms, Datang International’s shares rocketed 23.1% on Tuesday. Despite big investments in a technology that the Chinese government is eager to develop, the returns for Datang International have been non-existent. A similar restructuring could also boost China Coal Energy (1898.HKG), which has also been a large-scale investor in the largely unprofitable coal-to-chemical segment. “Lower (and uncertain) profitability from these projects coupled with a sharp increase in interest cost is the key driver for our UW rating on China Coal,” Barclay Research said in a note. Any exercise to spin off assets similar to Datang International’s could help China Coal Energy cut its debt and interest costs, which Barclay Research sees as positive for its earnings. Although any future restructuring is uncertain and unpredictable, investors should keep an eye open for possible “reform moves.”

Cheap China isn’t always bad

Tell a stranger in a bar in Lujiazui, the financial heart of Shanghai, that Chinese stocks are cheap and they might just say that’s because equities here are just bad business. China’s bourses are consistently among the world’s worst performing. But Chinese stocks shouldn’t just be written off completely. In their latest quarterly report on Asian equity strategy released this week, analysts at HSBC Research are overweight on China. “An accommodative monetary policy should support the building growth momentum. This, combined with low valuations, allows for further outperformance of Chinese equities, in our view,” the report said. Driving momentum in Chinese stocks is a return to economic competiveness at the global level and an upgrade in the quality of products made including telecoms equipment. Domestic productivity is also improving, while reforms to state-owned enterprises are aimed at making them more profitable. On top of that corporate earnings are holding up well, and are expected to grow 7.8% this year from 6.2% a year earlier, which “looks reasonable in light of the expected 7.5% GDP growth penned in for this year.” Chinese banks look stable on continuing net interest incomes while insurers’ “stock prices have overshot on asset risks and offer impressive returns at present.” Other top picks focus on energy, telecoms and utilities. This view of Chinese stocks, however, is balanced with the word “tactical,” meaning investors should focus on this quarter and review the next. Across Asia, China remains the cheapest market on a PE multiple basis at 8.6 times, the report notes, with the implication that there is still value in Chinese stocks. But “the upside potential in China will likely be limited. As far as deleveraging continues to put a ceiling on Chinese ROEs, multiples will unlikely be able to expand on a sustainable basis.” A bargain never lasts.

IPO Watch

Shenzhen-based specialty e-commerce site Cogobuy (0400.HKG), which serves the growing Chinese electronics manufacturing industry, lists next week, aiming to raise up to HK$1.54 billion (US$199 million). Menswear company Fordoo (2399.HKG) and China Shengmu Organic Milk (1432.HKG) are also scheduled to go public.