China is going to move an extra 100 million people to urban areas by 2020, according to a blueprint for urbanization unveiled last Sunday. By that year, 60% of the population will be living in cities – on par with the average in developing countries – up from 52.6% at the end of 2012. That’s lots of business for rail construction firms and telecoms companies to look forward to. It also means more mouths to feed for grocery kings Sun Art Retail (6808.HKG), Lianhua Supermarket (0980.HKG) and China Resources Enterprises (0291.HKG). Under this wave of urbanization the government is targeting building up populations in third- and fourth-tier cities in central and western parts of China; the plan will make it easier for farmers to register for the hukou urban registration in smaller cities. That favors companies with “sustainable retail networks in prefecture- and county-level cities” such as Sun Art Retail and China Resources Enterprises, Frank Xu, an analyst with Guotai Junan Securities, said on the phone from Shenzhen on Friday. Xu noted that Sun Art has more stores in tier 3-5 cities, strong store selection and expense control and more development space in smaller urban areas. He has a “buy” rating on the stock. China Resources Enterprises is a longer-term prospect in the next two or three years as it has to complete the integration of the China stores it bought from British grocery retailer Tesco (TESO.NASDAQ, TSCO.LON), noted Xu, who has a neutral view of the company for now. Both companies operate so called “multi-format” stores, including giant hypermarkets in major urban areas plus smaller supermarkets and conveniences stores. The Chinese grocery market is also highly fragmented – offering much space to grow: Sun Art had 13.6% share of hypermarkets and China Resources Enterprises just 3% of supermarket sales (the biggest in their respective categories) in 2013, according to research house Euromonitor.
China Mobile has to spend (a lot of) money to make money
Sometimes it’s not about how much money you make, it’s about how much you spend. That was certainly the case for China Mobile (CHL.NYSE, 0941.HKG) in 2013. For the first time in 14 years, profits at the world’s biggest mobile operator by subscriber numbers slowed. The company reported that net profits fell 5.9% from the year before to US$19.5 billion (RMB121.7 billion). The stall in growth came as China Mobile forked over US$29.6 billion (RMB184.9 billion) to roll out its 4G network while its 3G service struggled to maintain a viable average rate of revenue per user, although it has improved somewhat. That capital expenditure was nothing for the goliath. The company plans to spend 21% more this year, or a whopping RMB225.2 on the country’s most advanced mobile network, signaling that it has quite a bit more spending to do before it can make the big bucks off 4G. The fall in profits has worried investors; shares fell 3.6% on Thursday. Also troubling is how much more China Mobile will spend on handset subsidies in 2014. The company is expected to pay out RMB34 billion to reduce the cost of phones to users. That’s up more than 20%, Ricky Lai, an equities analyst at Guotai Junan Securities in Hong Kong, noted on Friday. The huge spending plans will put pressure on the company’s profits in 2014. “We are quite pessimistic about the company’s outlook this year,” Lai said. China Mobile will find it hard to spend its way toward profit growth.
For BYD, latest news is old news
Automaker BYD (1211.HKG) saw shares plunges this week after the company forecast a sharp decline in 2014 first quarter earnings. But investors with longer memories than those of the average retail investor will note that Thursday’ news was, in fact, old news. Historically, the car company’s figures and earnings have rarely warranted its high price. Scott Laprise, an analyst with CLSA in Beijing, insists “BYD was never running on earnings, it has the highest P/E ratio in Asia.” He compared it to the auto sector’s sobering 8. Even with the 15% fall in its share price, BYD’s price-to-equity ratio was a whopping 146.5, the sort of stratospheric number usually reserved for overvalued tech companies. Laprise said BYD’s current high stock price could be partly attributed to positive investor sentiment in alternative energy cars that has been buoyed by US electric automaker Tesla Motors (TSLA.NASDAQ). With the release of Thursday’s report, it is as if hung-over investors giddy on the idea of investing in the next Tesla realized they had one too many drinks the previous night and were now hastily making vows of abstinence from BYD’s shares. An announcement in February that BYD’s electric vehicles had been approved for sale in Beijing and Shanghai was also disingenuous. Most Chinese EVs are sold for public transportation use, and its best-selling electric vehicle, the Qin, has yet to receive approval in Beijing. Laprise said, however, there remained a silver lining: Orders are booming for BYD’s K9 electric buses, a market in which it has a virtual monopoly. Still, that’s not likely enough of a ticket to ride for investors.
Next Friday sees the listing of mainland China industrial parks developer Optics Valley Holdings (00798.HKG), which is looking to raise about US$128 million (HK$1.09 billion). Harbin Bank (06138.HKG), the first mainland lender to list in the city since December, could raise up to US$1.28 billion (HK$10.06 billion) as it seeks to bolster its cash ahead of likely regulatory rules requiring bigger capital reserves.