A Chinese person might be more risk averse than the average Westerner in life choices but they still like to take a chance when money is involved. The fortunes of Macao reflect this – the small territory has overtaken Las Vegas to become biggest gaming hub in the world and its growth is relentless. Official revenue figures for January and February underscore the magnitude of the boom: Gross gaming revenue for the two months surged 24% year-on-year to US$8.3 billion with a 38% leap in business from the mass market segment. But those figures are slightly inflated because of the low base effect. One Hong Kong-based analyst, who asked not to be named, said on Thursday that while growth will stay high for the first half of the year the last six months will witness a slowdown. He forecast full-year growth around 15%. A significant number of equities strategists put large gaming operators into their China stock picks for 2014, citing strong demand. More than 770,000 mainlanders travelled south to the city during the Chinese Lunar New Year. The Hong Kong-based analyst said his firm has Sands China (1928.HKG), Galaxy (0027.HKG) and Melco (MPEL.NYSE) as the top picks given “their robust earnings momentum” and their exposure to the city’s new casino mecca, the Cotai Strip. China Sands is in a strong position for the rest of this year and early 2015 as the company is the only player already operating a property on the booming strip; it overtook SJM (0880.HKG) as the largest casino operator in Macao by market share, according to Barclays Research. Galaxy and Melco will open their casinos in the tourism hot spot next year. As for the negative effects of the corruption clampdown, the analyst wasn’t too worried. “After all, this is nothing new … we have seen rolling VIP trips slow down after corruption notices [from Beijing] but they have picked up again.”
Want Want doesn’t want for anything
Optimism from investors is rarely rewarded, especially when the market is betting against it. But the market shouldn’t let a single blemish blight a whole company’s outlook, especially when it’s doing things right. Fears that Taiwan-based food manufacturer Want Want (0151.HKG) would be threatened by falling margins due to raw milk price inflation were overblown – the company’s earnings came close to an all-time high. Jacqueline Ko, an equities analysts at Kim Eng Securities, said on Thursday that the company had passed down rising milk production costs to Chinese consumers by lifting their prices 13-14% over the last six months. Though the price increases coincided with a Chinese economic slowdown, demand for Want Want’s products has remained unchanged. “The slowing economy, the crackdown on corruption, etc., none of this really affects mass-market products”, Ko said on Friday from Hong Kong. After all, a rice cracker can only occupy so much of a housewife’s grocery budget. Coupled with a massive expansion in capital expenditures, better sales channel coverage and a huge presence in second-tier cities and rural areas, Want Want is well equipped to further increase next year’s earnings. And if investors are still unconvinced, they should take note of Want Want’s own vote of confidence into their company – the board initiated a US$19.3 million (HK$150 million) share buyback in January.
Copper: China’s final commodities domino falls
Copper prices are tumbling, and China has a lot to do with that. The spot price of the metal in New York has fallen 4.3% since Monday, a more-than 13% drop since the beginning of the year. The news shouldn’t be so surprising given the recent weak economic data and the talk of bond defaults coming out of China. Fixed-asset investment hit an 11-year low in the first two months of the year, according to data released this week. China’s factory output was the weakest since April 2009. At the same time, highly leveraged companies in many of the country’s glutted sectors are struggling to pay back interest on bonds. A solar company and a steel manufacturer defaulted last week and the Shanghai Stock Exchange suspended trading of another solar company bond this week. Copper is a proxy for the health of the Chinese economy, Helen Lau, a senior commodities analyst at UOB Kay Hian, said on Thursday. The bad news has thrown copper traders into a panic. The amount of speculative trading in the metal adds high volatility to copper prices, creating rapid highs and steep lows. But the collapse of copper seems unavoidable. “The situation is – if you look at coal, if you look at steel, at aluminum – all of these have already fallen to cost-production level,” Lau said. “Only copper has been staying very, very high. Could there be more downside? Yes, because if other commodities are falling to this level, there can be no escape.” In the short-term, the copper could recover somewhat given the low price. Barclays Research pointed out that Jiangxi Copper (0358.HKG) was at its lowest price since the onset of the financial crisis, and recommended accumulating more of the company. But watch out for March’s economic data. If it’s nasty, expect traders to once again unload their copper onto the market.
There are no Hong Kong IPOs coming up next week but Harbin Bank will start taking orders from investors next week ahead of its US$1 billion initial public offering in Hong Kong, which will be listed by the end of March, according to media reports. Worried that growing levels of bad debt on the mainland and China’s slowing economy will stem demand for its IPO, Harbin Bank is gathering hard-underwriting agreements from cornerstone investors to ensure a high valuation. Amid tighter regulatory requirements, Harbin’s IPO is one of the many from Chinese financial firms that are trying to recapitalize themselves through Hong Kong IPOs.
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