Even in the wild lone wolves need to come together from time to time to get through a tough winter. China’s telecoms carriers, who despite being controlled by Beijing, are assertive enemies fighting to win big in a major mobile market. But their winter has come: Falling income from SMS and voice calls and the costly rollout of high-speed 4G mobile networks have put the telecom giants in the same boat. China Mobile (CHL.NYSE, 0941.HKG), China Unicom (CHU.NYSE, 0762.HKG) and China Telecom (CHA.NYSE, 0728.HKG) are planning to “bake a pie” together so that no one will starve from falling revenues. The three carriers said in filings last Friday that they had agreed to jointly form a telecommunications tower company, named China Communications Facility Services Corp., which primarily engages in the construction, maintenance and operation of telecommunications towers. “Overall, we believe tower-co establishment is positive for the whole sector,” Barclays Research said in a note this week. “We also believe that China Telecom and China Unicom could potentially benefit more vs. China Mobile were all existing tower assets to be injected into this tower-co, as China Telecom and China Unicom could then expand the coverage and network quality quickly to narrow the gap with China Mobile, while China Mobile’s coverage advantage could be eliminated eventually.” Once fed, they will continue to tear away at each other.
New WMP rules bring order to banks’ profits
Chasing better returns from their savings is a national pastime for many Chinese, and seemingly every new product to market sees explosive growth. Wealth management products under management surged 33% by the end of May from the start of the year to RMB14 trillion, according to the banking regulator. Bankers might be unhappy then that their new bonus filler will come under greater regulation. The China Banking Regulatory Commission has told lenders to separate accounts, insolate risks, standardize operations and centralize management to control this unwieldy sector. WMP assets are equivalent to about 27% of GDP. But the new rules are unlikely to hurt this emerging sector. “Given the new rules are mostly related to operations, we believe China banks will have to restructure WMP-related operations to be compliant. However, the implementation of new WMP rules will have limited impact on banks’ P&L,” said Victor Wang, a research analyst at Credit Suisse. The new rules could actually be a plus. “We view the new WMP rules a necessary step to enhancing WMP-related operations and minimizing potential disputes,” Wang wrote in a note on Monday. Credit Suisse sees banks with high WMP exposure including China Merchants Bank (3968.HKG, 600036.SHA), CITIC (0998.HKG, 601998.SHA) and Minsheng Banking (1988.HKG, 600016.SHA) are likely to report stronger fee growth. That depends however on people still subscribing to WMPs. The new CBRC rules also require banks to register all WMPs to a centralized database, which will surely make wealthy individuals and officials even more nervous of anyone keeping track of their sometimes ill-gotten gains, particularly amid this tough if selective crackdown on corruption.
It’s the little guy lining Sands China’s pockets
Macau’s shrinking pool of VIP gamblers has hurt casinos, and, by extension, the local economy. The once booming town that has excited equity analysts because of its strong allure for Asian gamblers saw casino revenue fall 3.7% year-on-year in June. By some estimates, there was as much as a 20% dip in income from VIP players – a sign of the corruption crackdown over the border in mainland China. The World Cup in Brazil also likely distracted football-mad Asian punters. Gaming stocks took a tumble. These short- term dips have combined with a general slowdown in the Chinese economy to pack a hefty combined punch to Macau. To counter this drop in the number of high rollers, previously the core focus of casino operators, Sands China (1928.HKG) is targeting mass and premium market gamblers. The general clients split is 60/40 VIP to mass, but at Sands China mass players contributed 56.1% of revenue in the second quarter. The company also has a much larger hotel room inventory to accommodate higher numbers of players to its casinos. “Although the VIP segment is likely to see a recovery following a pick-up in junket liquidity, its higher exposure to higher-margin businesses [mass and premium mass and non-gaming] and its largest hotel inventory in town would enable Sands China to continue to deliver strong earnings growth in 2H14,” Victor Yip, an analyst with UOB Kay Hian, said in a note on Friday. Yip has a “buy” rating.
IPO Watch
Integrated landscape architecture firm Broad Greenstate International (1253.HKG) is the only Hong Kong listing planned for next week. The company is trying to capitalize on widespread urbanization in China and works on major commercial projects. It postponed its IPO by a week however, and reduced the size of the offering from 248 million shares to 215 million shares, of which 167 million shares will be new shares. China Shengmu Organic Milk (1432.HKG) which listed this week was flat after three days.
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