Bank earnings reports are rolling in. Industrial and Commercial Bank of China (ICBC; 1398.HKG, 601398.SHA) profits rose 10.2% to US$42.3 billion (RMB263 billion) in 2013 mainly due to higher lending profitability and banking fees. At Bank of China (3988.HKG, 601988.SHA), net income rose to US$$5.9 billion (RMB36.7 billion), an unexpected rise in quarterly profits. They got a boost from high interbank rates at the end of the year, making the small loans that it gave to other banks more profitable. Agricultural Bank of China (601288.SHA, 1288.HKG) posted a slowdown in growth in the last quarter. Curbs in government lending likely offset the bank’s improving asset quality. The earnings report said it had US$14.12 billion (RMB 87.8 billion) in nonperforming loans in December, down from US$14.16 billion (RMB87.9 billion) at the end of the third quarter. The performance of the banks was relatively stable in 2013 but it’s possible that profit growth could slow this year. “The average is about 10% profit growth [in 2013], Chen Xingyu, a Shanghai-based equities analyst at Phillip Securities, said on Friday. “We estimate it might be under 10% in 2014.” The ratio of non-performing loans will likely increase this year, Chen said, bringing a higher level of risk to China’s biggest banks.
Shimao defies the downward trend
Few analysts will recommend buying into mainland real estate companies in early 2014. The market is at a turning point and, with increasing oversupply in the second- and third-tier housing markets, it’s unclear what lies ahead for property developers. Prices are cooling off outside of China’s biggest cities. Homebuilders highly exposed in markets that are seeing a slowdown – or even falling year-on-year prices – could struggle to pay back loans. Some small, private developers are in serious trouble. Then there’s Shimao Property Holdings (0813.HKG), which just posted strong results for 2013 and could have another promising year ahead of it. “Shimao’s contracted sales increased by 45.5% year-on-year in 2013, to US$10.7 billion (RMB67 billion), mainly due to the robust demand from its mass market customers,” Moody’s Investors Service noted in a report this week. Shimao is a bright spot in a sector that Barclays Research labels as “negative.” The bank advises adding more of the company to portfolios. “Given Shimao’s balanced approach towards growth and margins, we believe the company should continue to outperform its peers in term of sales as well as the share performance,” Barclays said in a report this week.
Build railways, but only so many
Chinese shares have risen in the past few days on expectations that the government will step up efforts to boost the economy after a flash PMI reading released by HSBC on Monday indicated that activity will continue to slow in March. Investors are hoping for a repeat of the mini stimulus last July that pushed GDP just above the government-set figure for 2014. Economists caution that is unlikely to happen again. Nevertheless infrastructure activity will pick up in the coming months after the State Council last week said it would accelerate construction projects to “keep economic activity in a suitable range.” Analysts with UOB Kay Hian in Hong Kong see a short term play on the cards for investors. “The government could definitely speed up its project implementation post the NPC meeting. We expect better activities in urban transit, renewable energy and environmental protection to benefit,” they wrote in a note on Thursday. The National Development and Reform Commission has just approved five railway construction projects worth US$22.8 billion (RMB142.2 billion) after a hiatus on such decisions for several months. Their top picks are China Railway Group (0390.HKG), CSR Corporation (1766.HKG), Anhui Conch (0914.HKG) and Xinyi Glass (0868.HKG). But don’t hold them for too long. These stocks should “not translate into long-term portfolio holdings as FAI will continue to be de-emphasised under China’s economic reforms,” the analysts noted.
The big news in Hong Kong IPOs this week isn’t even an IPO. It’s really more of a reverse merger. Citic Pacific (0267.HKG) said it would buy up tens of