State-owned enterprises don’t come much bigger or more powerful than the energy giants tasked with fuelling China’s surging demand for oil and gas. But government-run firms are rarely efficient in managing natural resources, so when moves are made to turn them into more market-focused actors, investors might spot an opportunity. Earlier this week PetroChina (PTR.NYSE, 0857.HKG, 601857.SHA) said it would splinter sections of two key strategic gas pipelines into a 100% third-party owned unit. A reform-oriented move, it will allow the company to concentrate on more profitable assets in exploration and production. The public auction of the assets could net PetroChina up to about US$1.6 billion (RMB10 billion), according to Neil Beveridge, senior energy analyst at Bernstein Research in Hong Kong, but that’s less cash than was raised in similar sales in 2013. “PetroChina’s decision to sell down a large part of their midstream gas assets is a welcome move, although we do not believe that it will be as earnings accretive as last year,” he wrote in a note. Bernstein has a “market perform” view on PetroChina, and suggests rival Sinopec (SNP.NYSE, 0386.HKG, 600028.SHA) as a better option to play SOE reform as it is making more impactful moves regarding its own asset sales.
Conjoined at the hip
Foxconn (2317.TPE) has thrown its lot in with Apple (APPL.NASDAQ). The electronics manufacturer takes all the windfalls, and shortfalls, that come with being dependent on one of the most profitable tech companies in the world. But if Apple’s fortunes take a downturn, it will be the lead weight consigning Foxconn to a watery grave. So far, being conjoined at the hip hasn’t been a crutch for the OEM as might be expected. The company has beaten market expectations in nearly all indicators for January to March this year, most notably for operating profit margins, in what is usually the IT industry’s slow season, according to a Barclays note. The investment bank also recommends watching for a boost in earnings from the release of the newest iteration of the iPhone franchise. Their optimism has led them to say the “iPhone 6 could be the best product cycle in years.” Although previous iPhones have only shown incremental to non-existent improvements, analysts anticipate the sale of larger-screen models will tempt consumers to give up their hard-earned cash, even if “this is two years behind its competitors.” Barclays believes the company will produce 70-85% of the 4.7-inch models and 100% of the 5.5-inch models. A possible downside is that eager consumers waiting to buy the iPhone 6 will delay their purchases, dragging down sales for the iPhone’s older model. “However, we believe most of the bad news should already be priced in the iPhone supply chain, and that further share price weakness, if any, could present an opportunity to strengthen positions in selected stocks into the iPhone 6 product cycle.” Barclays said Foxconn remains as one of their top picks.
Here comes Tencent; keep your head down
Chinese have a nickname for those people perpetually hunched over their smartphones. They call them “head-downers.” State-backed media have been pushing out stories condemning the behavior as a dangerous distraction. Unfortunately for government minders, this cohort of preoccupied beings is only set to grow. But that’s good for Tencent Holdings (0700.HKG) – or rather it’s a meter on the company’s success with its messenger apps such as WeChat, which boasts nearly 400 million users, the QQ chat client or its growing stable of mobile games. If China’s “head-down” rate isn’t a good enough gauge on Tencent’s profitability, then take its first quarter earnings as proof. The company this week posted a 60% climb in net income to US$1.04 billion, far surpassing analysts’ expectations. Tencent’s share price jumped nearly 10% on the news. Strong revenue growth in mobile gaming and advertising on WeChat accounted for the overall jump in revenues. Barclays Research thinks Chinese users are bound to keep their heads down in 2014, projecting that the stock could climb from today’s price of US$66.18 (HK$513) to US$83.85 (HK$650) by the end of the year. Keep your head down and buy Tencent.
Chinese railway builder China CNR (6199.HKG) is listing in Hong Kong at a time of continued railway build-out in the country, with the railway sector a main beneficiary of targeted stimulus measures. The company reduced the maximum amount it is seeking by about one-fifth to US$1.2 billion. The other China-linked IPO coming up next week is lingerie materials provider Best Pacific International (2111.HKG).