Sorry, readers. I have not posted for last several weeks, as I have been busy applying for UC Berkeley’s HAAS MFE program. I just want to update PYI corp (0498.hk) regarding some recent development since my last post.
Since my last writing, the share of PYI corp has declined significantly from ~HKD 1.00 to ~0.75 a share. PYI issued final dividend in the form of stock warrants, a disappointment to many share holders. Although I think it is a prudent decision for PYI, undeniably the company is tightening its belt on cash. PYI has increased its financial leverage during the Fiscal 08. Debt/Equity ratio increased to 34% from 7%, while the quicken ratio dropped to 0.99 from 1.26. Cash is indeed one of my major concerns for PYI. Yangkou port project rely on land sale to generate cash for capex. A weak economy, particularly weak export industry in Jiangsu, will impair PYI’s ability to execute the plan. The purchase of 12.3% stake in Nantong Port will also burn a significant amount of cash on its balance sheet.
Trading at 30% of this book value, PYI is valued by Mr. Market as a toxic small real estate developer. I believe the market misconception gives a long term investor, like myself, a good entry point to buy a major port operator on Yangtze River at a discount to its book. PYI is not a real estate developer. PYI has very limited exposure to residential and commercial building market, which is in bubble-bursting mode. PYI’s major real estate exposure is its 42 sq km land bank at Yangkou Industry Park. The price of industrial land should not be hit hard, because there is simply no bubble to begin with. Unlike buying a residential or commercial property, one needs to be approved by local government to be eligible for buying industrial property. (Basically you need to have a company which generates tax payment.) It is a much more difficult market than residential property for real estate speculators. As a result, the price of industrial land is relatively stable during past several years I think the value of the land bank depends more on the success of the industrial park. The initial development is promising: Petro China’s 16 Billion LNG project is under construction and RGM international’s 11B project will soon begin construction. The key to watch is the initial land sale to Petro China, which is still under negotiation. The final price will set a bench mark for the value of PYI’s land bank at Yangkou. The industrial land at Suzhou, Yangkou’s neighbor city, is in the range of RMB 250-300/sqm. PYI’s management is hoping to sell their land at similar price, which is higher than my RMB 200-250 estimate. Furthermore, Yangkou port is expected to commence operation by the end of 2008 and Nantong port (discuss below) will be consolidated as a subsidiary. PYI’ share might benefit from the possible upgrade from “real estate developer” to “port operator”. Price to book ratio should be in line with other publically traded ports at 2-3 times.
The 12.32% stake in Nantong port is priced at RMB 191.46M, which values the whole company at RMB 1.55B. PYI paid RMB 430M in 2005 for its 45% stake, which worth 700M at current valuation (not accounting for controlling premium), 17.5% compound annual return on investment. If PYI is successful buying the stake, it will become the major share holder of the company, which will make Nantong port the first Chinese port ever controlled by “foreign” capital. There is unlikely to be another bidder for the stake. It is unclear at this point how PYI and Nantong Port Group (NPG) will split this stake. Most likely PYI will increase its stake to >50, which will allow it to consolidate Nantong port on this balance sheet.
Sunday, August 31, 2008
Sunday, August 3, 2008
Growth of Chinese steel production is deaccelerating (finanly)
Association of Chinese Steel Industry just released production data for the first half of 2008. The pig iron production increased 7.9% to 246 M ton compared to 16.9% growth in 2007. Total steel production increased 12.5% to 300 M ton compared to 23.9% growth in 2007. The production growth in the first half of 08 is outpaced by the demand growth. The steel export is 2691.3 ton down 20.35% or 687.8 ton from the same period in 2007. The average export price is $937.38/ton or 41.4% higher than last year.
I predicted the slow down in steel export in the my old post "Chinese steel industry 2008 and beyond". Both tight monetary policy and higher raw material cost are weighting on Chinese steel industry. The average export price is no longer significantly lower than its foreign competitors. As the raw material cost is rising, the labor cost as a percentage of total production cost is much less important than before. On the other hand, the high material cost makes the production efficiency much more valuable today. Thus the cost advantage for Chinese steel companies are diminishing.
This is certainly good news for my POSCO, whose stock has done relatively well compared to its peers recently. Near term, falling oil price will weight on the steel price and the share of steel producers. I am thinking about hedging this position by shorting some other steel makers.
I predicted the slow down in steel export in the my old post "Chinese steel industry 2008 and beyond". Both tight monetary policy and higher raw material cost are weighting on Chinese steel industry. The average export price is no longer significantly lower than its foreign competitors. As the raw material cost is rising, the labor cost as a percentage of total production cost is much less important than before. On the other hand, the high material cost makes the production efficiency much more valuable today. Thus the cost advantage for Chinese steel companies are diminishing.
This is certainly good news for my POSCO, whose stock has done relatively well compared to its peers recently. Near term, falling oil price will weight on the steel price and the share of steel producers. I am thinking about hedging this position by shorting some other steel makers.
Friday, August 1, 2008
China's shift in its monetary policy
Recent press conference by Hu Jintao, stressing the need for growth,marked an important shift in direction of Chinese monetary policy. Inflation is still a big concern but balanced that with a call for continued growth. He said in this remarks, “We must maintain steady, relatively fast development and control excessive price rises as the priority tasks of macro adjustment.” Some of the policies adopted for fighting inflation will be shifted to support growth.
This shift does not come as a surprise to me, as Central government is facing intensive pressure from the governors from provinces in Eastern and Southern China, where exporting industry accounts for a large share of the economy, have been blaming the currency policy and pressuring central government for a change. Chinese exporting industry, especially those with low value-add industry, has been under pressure due to inflation in raw material,energy and wage, rising RMB and tightened credit market. During the first half of 2008, textile export to United States from Guangdong Provice dropped 31.3% to USD 10.8B (according to Caijing.com). Given the 7% rise in RMB, the export of textile dropped 38% in RMB term. As industries like textile are labor intensive, softness in these sectors put pressure on local employment. The labor markets in Eastern provinces like Jiangsu and Zhejinag are seeing softness the first time since 2002. As the smaller and weaker companies are shutting their doors, a potentially devastating crisis is the corporate debt that is often cross guaranteed. When a company, usually small or financially weak, failed to qualify a loan from bank, they often get a debt guarantee from major buyer or sister companies with same major share holder. Meanwhile the guarantor often obtains debt guarantee from a third company. Because the guarantor and guaranteed company are often financially linked (supplier/customer or business partner), the financial distress of one party might severely damage that of the other. The initiation of default on a small scale could trigger a chain reaction.
The inflation fighting school in the communism party, lead my prime minister Wen Jiabao, is losing their voice in central government, as the rapid rise in RMB and tight lending policy in the first half of this year did not cool the inflation down as effective as some expected. Meanwhile sluggish exporting business in South and East China as the consequence of inflation fighting policy raised enormous pressure from angry and nervous politicians and business people in those area. I believe the central government is forced to adapt the relaxed policy as least for the near term. As the inflation is far from being well-controlled, I doubt such policy will be beneficial to Chinese economy. I predict the RMB will like to appreciate much slower in for short period than it did in the first half of this year, PPI will face upward pressure and stay about 10%. The government will exert more pricing control of key input material (energy, electricity, fertilizer and etc) will be extended. I do not think such price control will survive for a long period, as the supply of these raw material will drop and the price on the black market will rise further (this is already happening in coal market). The government will eventually recognize their failure in fight against the market trend and relaxes or gives up the price control. The raw material sector, coal in particular, and home building sector are likely to benefit from this policy. On the other hand, banks will likely to take more risk and weaken their balance sheet, which makes them extremely dangerous when the government shift back to tight monetary policy if inflation gets out of control.
This shift does not come as a surprise to me, as Central government is facing intensive pressure from the governors from provinces in Eastern and Southern China, where exporting industry accounts for a large share of the economy, have been blaming the currency policy and pressuring central government for a change. Chinese exporting industry, especially those with low value-add industry, has been under pressure due to inflation in raw material,energy and wage, rising RMB and tightened credit market. During the first half of 2008, textile export to United States from Guangdong Provice dropped 31.3% to USD 10.8B (according to Caijing.com). Given the 7% rise in RMB, the export of textile dropped 38% in RMB term. As industries like textile are labor intensive, softness in these sectors put pressure on local employment. The labor markets in Eastern provinces like Jiangsu and Zhejinag are seeing softness the first time since 2002. As the smaller and weaker companies are shutting their doors, a potentially devastating crisis is the corporate debt that is often cross guaranteed. When a company, usually small or financially weak, failed to qualify a loan from bank, they often get a debt guarantee from major buyer or sister companies with same major share holder. Meanwhile the guarantor often obtains debt guarantee from a third company. Because the guarantor and guaranteed company are often financially linked (supplier/customer or business partner), the financial distress of one party might severely damage that of the other. The initiation of default on a small scale could trigger a chain reaction.
The inflation fighting school in the communism party, lead my prime minister Wen Jiabao, is losing their voice in central government, as the rapid rise in RMB and tight lending policy in the first half of this year did not cool the inflation down as effective as some expected. Meanwhile sluggish exporting business in South and East China as the consequence of inflation fighting policy raised enormous pressure from angry and nervous politicians and business people in those area. I believe the central government is forced to adapt the relaxed policy as least for the near term. As the inflation is far from being well-controlled, I doubt such policy will be beneficial to Chinese economy. I predict the RMB will like to appreciate much slower in for short period than it did in the first half of this year, PPI will face upward pressure and stay about 10%. The government will exert more pricing control of key input material (energy, electricity, fertilizer and etc) will be extended. I do not think such price control will survive for a long period, as the supply of these raw material will drop and the price on the black market will rise further (this is already happening in coal market). The government will eventually recognize their failure in fight against the market trend and relaxes or gives up the price control. The raw material sector, coal in particular, and home building sector are likely to benefit from this policy. On the other hand, banks will likely to take more risk and weaken their balance sheet, which makes them extremely dangerous when the government shift back to tight monetary policy if inflation gets out of control.
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