Tianneng Power International - 819 HK (Current Price: HKD5.22; Entry level: Below HKD5.00 perhaps??; Target: HKD7.00): Undervalued market leader with strong growth prospects

Market Data: 

Share price: HKD5.22

Mkt Cap: HKD5,860mil

PER 2012-13: 6.2-5.2x

Dividend yield 2013: 5.5%

Net Gearing: 47.6%

ROE: 24%

Company Profile:

The Company is a major subsidiary of Tianneng Battery Group Co. Ltd, which was founded in 1986 under the name of Changxing Storage Battery Factory. It had since become a leading supplier of motive batteries for electric vehicles in China after two decades of development. 

Currently, the principal activities of the Company are production and sale of electric bike motive batteries, electric car motive batteries and new energy storage batteries sold under its "TIANNENG" brand. The Group has collaboration with several automobile manufacturers to speed up the research and development of motive batteries for pure electric cars. The Company is also implementing a sales and marketing strategy focusing on key new energy areas to accelerate the development of its wind and solar power storage battery business as well as its lead recycling business to support the national policy of energy saving and creating a low carbon economy. 

Since its establishment, "TIANNENG" has been the dominant brand in the China motive battery market and was also one of the renowned brands for all motive batteries. It has captured many awards and certificates, including the "National Well-known Trademark" and the "Zhejiang Prominent Brand Product." The Group was also acknowledged as the “Chinese Best Brand of Motive Battery” by Frost & Sullivan during the period from 2008 to 2011, “The Most Reliable Battery Brand for Electric Vehicles” and “Outstanding Contribution to the Promotion of the Electric Vehicles Industry in China” by CCTV.com. 

The Company has six production bases, namely (i) Meishan Tower; (ii) Wushan Town; (iii) Shuyang County; (iv) Wuhu City; (v) Jieshou City; (vi) Puyang City. The annual production capacity of electric bike lead-acid motive battery products was approximately 65 million units in 2011. 

Dr. Zhang Tianren is the founder, president and chairman of the Company and is the key driver of the Company in terms of business strategy and management. He is the major shareholder of this Company with a 36.55% equity stake. 

Business segments: 

Majority of the revenue comes from the electric bike lead-acid battery segment which accounted for more than 90% of the Company’s total revenue. The second largest contributor is pure electric vehicle (EV) battery segment which contributed 5.1% of total revenue in 2011, up from just 0.6% in 2009. The remaining revenue was contributed by Nickel Hydride (NiMH) and Lithium Battery segment coupled with storage battery segment. 

Electric Bike Lead-Acid Battery – Market Leader in China: 

The Company controls the largest market share of 26% in 2011, followed by Chaowei, a listed company which controls 24.5% of the market share. The next three top players accounted for 15% of the market share while the remaining is contributed by other peers. The company plans to expand its production capacity from 65 million units in 2011 to 80 million units in 2012 and 106 million units in 2013 to cater for demand from the primary and secondary markets. 

Defensive secondary (replacement) market the largest revenue contributor: The secondary market for electric bike lead-acid battery is the largest contributor to the Company’s revenue, accounting for 57.6% of total revenue in 2011. Typical lead acid batteries can be recharged 500 times and last about 12-18 months. During the lifespan of E-bike of about 10 years, batteries will be replaced at least 7 times. Thus, demand for replacement batteries will be defensive. This was further evidenced by the secondary market sales which only declined 2.9% as compared to 32.3% decline in the primary market during the economic downturn in 2009. 

Primary market for electric vehicles to benefit from severe road congestions and air pollution: Owing to the severe traffic congestions in major cities in China coupled with serious air pollution which is reaching dangerous levels recently, China is pushing for cleaner vehicles on the road, of which electric bike industry is a major beneficiary. In addition, users are offered cash incentives by the Chinese Government. In 2011, there were around 130 million electric bikes on the roads in China and this number probably increased to 150 million in 2012. According to China Dialogue, China expects 500mil electric bikes on the road and annual production of 75mil by 2020. 

Lead acid technology dominates E-bike battery industry: Lead acid battery technology dominates the E-bike battery market with market share of 91%, while the remaining is held by Li-ion (7%) and NiMH (2%). The popularity of lead acid is attributed to its lower cost, high reliability and recyclability, which more than offset its lower power output and heavier weight. Frost & Sullivan forecasted lead acid battery revenue will grow at CAGR of 20% till 2015. The following table is a comparison among the three battery technologies for E-bikes. 

EV Motive Battery: 

The Company is currently in collaboration with 106 famous auto corporations including some of the big names such as SAIC Motor, Chery Automobile, Wonder Auto, Kandi Auto, Zotye Auto and Shifeng Group for development and sales of motive battery for electric vehicles (EV). Chery is producing low-speed EV in small volume using Tianneng’s lead acid battery whereas Shifeng has a very strong presence in low-speed EV market in Shandong. Consequently, these collaborations make Tianneng the largest low-speed EV battery maker in China. In addition to its existing lead acid battery technology, Tianneng is aggressively embarking on research and development on NiMH and Li-ion batteries. Sales from EV motive batteries accounted for 5.1% of total sales in 2011, an increase of 135% year-on-year. Sales of EV motive batteries are projected to rise with the expansion of the company’s production capacity from 0.8mil units to 1.5mil units in 2012 and 2.0mil units in 2013. Mr Zhang Tianren stated that the success of the electric bike industry might be replicated in the low speed EV segment in the future with the Chinese government’s intention to make China the top electric vehicle producer in the world by 2020. The table below shows Tianneng’s expansion plans for its EV battery production capacity. 

New Energy Storage Battery: 

The Company embarked on development of storage battery for solar and wind power generation and successfully created storage battery with long lifetime and huge capacity. These solar and wind power generation is used in street lamp and traffic light systems equipped with LED lighting and lead gel storage battery. This segment contributed 0.8% of the total revenue or RMB43.5mil in 2011. The Company plans to expand its capacity from 100,000 units in 2011 to 200,000 in 2012 and 500,000 in 2013. 

Investment Case: 

Market leader becoming stronger after industry consolidation: The Chinese government has embarked on inspection and rectification works on the lead battery industry across the whole of China in 2011 and imposed stricter regulations for lead acid battery makers. Consequently, among the 1,930 lead battery makers, over 50% of them were under temporary suspension whereas another 30% were banned, partly owing to the limited resources available to smaller companies to comply with the strict regulations. This would bode well for Tianneng as the market leader as the Company could further advance its market share via organic expansions and potential M&A opportunities coupled with having greater control over the market price of its products. In May 2012, Tianneng acquired Zhejiang Huayi Power Co Ltd for RMB60.78mil to expand its production capacity. In addition, the Company is in the midst of another acquisition of 70% of Target Company at RMB47mil. There is likely to be more M&A acquisitions over the next two to three years owing to small-scale manufacturers being unable to compete with Tianneng’s competitive pricing and economies of scale. 

Recycling business to mitigate lead price fluctuation: Approximately 64% of production costs of lead acid batteries is attributed to electrolyte lead, thus production costs are susceptible to the volatility of lead price. To mitigate this, the Company set up a recycling plant in Wushan Changxing, Zhejiang province, the most advanced recycling plant to date in China which was fully operational in Oct 2012. The plant could process 150,000 tons of used lead acid battery and 100,000 tons of lead. According to management, this plant could generate RMB100mil of net income annually as the recycled products could be used as input to its production. The company is constructing a second recycling plant in Henan which will be completed in 2014. 

Besides, the Company has a strong distribution network over the country to recollect used lead acid batteries. This will bode well for the Company as China’s recycling industry is fragmented and lack of recycling channels. Thus, Tianneng is better positioned than its peers in terms of alleviating lead price volatility. The following graph shows the average selling price of Tianneng’s lead batteries and the average purchasing price of lead. 

Risks of more stringent regulations by the government? The Chinese government seems to be taking a more serious stance towards pollution as evidenced by its introduction of rectification works on lead acid battery makers in 2011. In March 2012, Ministry of Industry and Information Technology together with Ministry of Environmental Protection released “Consultation Paper of Lead Battery Industry Entry Requirements” (“Entry Requirements consultation”) which made clear that the Chinese government shall further uplift the operating threshold of existing and newly-built lead battery projects. This could put further pressure to lead acid battery makers. 

Nonetheless, it is interesting to note that despite the rectification works implemented in 2011, Tianneng’s margins expanded instead. In addition, Tianneng’s board members are part of the committee which created the “Entry Requirements for Lead Acid Battery Industry”. The Management stated that the Company will comply with all the regulations as it is the market leader and will upgrade its production facilities to meet all the requirements by 2013. This should help alleviate some of the policy risks faced by the company. 

Valuation remains attractive: The stock is currently trading at PER 2013 of 5.2x as compared to its 5-year historical average of 8.7x. In addition, the Company is giving out commendable dividend yield estimated at 5.5% in 2013. The share price is still undervalued currently, owing to investors’ skepticism over the long-term growth prospects of lead acid battery and policy risks by the Chinese government. Nonetheless, backed by its strong growth prospects in the electric bike and EV markets, recycling plants which could lower production costs coupled with its low valuation, a PER of at least 7x should be attributed to its 2013 EPS, implying a fair value of HKD7.03, an upside of 34%. Over the past few months, Tianneng’s share price had increased in conjunction with the strong run up in HSI. The stock might have some consolidation if HSI experiences profit taking due to the surge in HSI. HKD4.90 seems to be a good entry level.

Many international funds are into this stock, including Blackrock, Schroders, Vanguard and Lumiere (One of the best performing equity funds in the whole world). It's a stock worth watching.

References: Tianneng, Maybank, OSK, CMB International, UOB Kayhian, Sunwah Kingsway, Frost & Sullivan, Bloomberg etc.

"Why China's housing market will slow, not collapse" By Nin-Hai Tseng

A less negative article about China's housing market, contrary to many views that China's heading for a hard landing:  

 

There's plenty of reason to believe China's housing prices will slide during what's expected to be a rocky economic year, but the market won't crash. Here's why.

 

FORTUNE – China's hot property market and its implications on the global economy has been on the minds of many investors, and for good reason.

In January, Barclays published its latest Skyscraper Index report, which tracks links between the rise in construction of tall buildings and economic busts over the past 140 years. This could be purely coincidental, but the index suggests that the East Asian giant is the world's "biggest bubble builder," and is on its way to an economic bust. China already has half of the world's existing skyscrapers (or buildings higher than 240 meters). And it plans to add more over the next several years.

However, let's not read into this too much. It's true, as Barclays notes, that the Great Depression coincided with the construction of three landmark skyscrapers across Manhattan: 40 Wall Street completed in 1929, followed by the Chrysler Building in 1930, and the Empire State Building in 1931.

No doubt, China's property prices have risen rapidly beyond the reach of much of the country's middle class. And there's reason to believe prices will certainly slide during what's expected to be a rocky economic year, but prices won't crash. Here's why:

China's nation of savers

It was the no-money-down mentality that partly brought down America's housing market. While it would be a stretch to compare the U.S. market to China's, it's worth noting that our neighbors to the East are nowhere near as leveraged.

China is known as a nation of savers, and consumers are relatively debt-wary, in part because the country doesn't have the kind of educational and health care safety nets that its Western neighbors enjoy.

What's more, Chinese officials trying to clamp down on rapidly rising prices have directly placed limits on how much homebuyers (and speculators) can borrow. For primary-home buyers, the government has set a minimum down payment of 30% of the home's total sale price while buyers of second homes must put down at least 60%.

In 2010, a total of 4.4 trillion renminbi (or about $697 billion) of residential buildings were sold in China. However, mortgage loans outstanding were far less, at 1.4 trillion renminbi (or $222 billion), according to a JP Morgan November 2011 report on China's housing market.

"As a result, the probability of mortgage default is quite low," analysts say, adding that the quality of mortgage loans will "remain solid" even under the hypothetical scenario that home prices drop by 30%.

There's plenty of pent-up demand

While the Western world has plenty of available options for investors to park their money, housing is considered one of the few relatively safe investments to most Chinese. As incomes rise and as more of the country's population is expected to move into urban areas  (in January, China's urban population surpassed that of its rural areas for the first time in the country's history), demand for housing is expected to remain robust, says Shaun Rein, managing director of China Market Research Group, a Shanghai-based market research firm.

The demand, however, isn't just coming from the growing middle class but also the very rich. With tighter lending rules placed on Chinese buyers at home, many investors have gone abroad. Rein points to the formation of property bubbles in other parts of the world, as Chinese investors buy up homes in places such as Canada and California.

Even if home prices fall by 20% in China, it's unlikely that would spell disaster given that prices had surged so rapidly, says Bhaskar Chakravorti, executive director of Tufts University's Institute for Business in the Global Context. Lower prices would offer an opening to those who couldn't afford to buy a year or a few months ago (think about the 300 million middle class Chinese).

"Fundamentally, it's a deep market," says Chakravorti, after speaking recently on a panel about China's property market at the Bloomberg Link China conference in New York City.

Over the next year and a half, JP Morgan expects prices to fall 5% to 10% at the national level. At the regional level where prices rose much more rapidly (it notes prices surged an average of 82% between 2007 to 2010 in 35 major Chinese cities), prices are expected to fall much further by 20%.

The government won't let prices crash

China's central government has been known to tweak its economy as it goes. When officials saw property prices rising too rapidly for its tastes, it tightened lending rules. So the declines we have seen are welcome and are part of the government's plans to cool down its hot real estate market, making it more affordable for more Chinese to buy property.

The tricky part is in knowing how long officials adjust housing policies as the real estate market slows, according to JP Morgan. The bank adds that over the next year and a half, prices could fall 5% to 10% at the national level. At the regional level, where prices have risen much more rapidly, prices are expected to fall by 20%.

"This will likely slow the pace of economic growth but not lead to a hard landing," say JP Morgan's analysts.

To put China's property bubble in context, it's important to note that prices in major cities have risen much faster than the rest of the country, according to JP Morgan's November report. And major cities make up a relatively small portion of the national housing market. For instance, Beijing, Shanghai, and Guangdong's markets combined account for 16% of total real estate investment, 20% of the buildings sold (in value), and 10% of the floor space sold for the majority of 2011.

So before home prices at the regional level trigger a national market crash, the Chinese government should have enough time to change its game.

Sourced from here.

Bolton bets on Chinese domestic consumption

By Robert Cookson in Hong Kong

Published: July 15 2010

Anthony Bolton, the fabled British stockpicker, is staking his reputation on a £460m ($702m) bet that the Chinese economy is shifting away from exports and towards domestic consumption.In an interview with the Financial Times,

Mr Bolton, whose China Special Situations fund of that value was launched in April amid a blaze of publicity, revealed that his portfolio was heavily weighted towards stocks in the consumer sector. “The golden era for exports is coming to a conclusion and now it’s going to be very much more about the domestic economy, the domestic consumer – that’s going to drive the market,” said Mr Bolton, president of investments at Fidelity International.Mr Bolton, who has a formidable track record at picking winning stocks, said he had taken on relatively little exposure to commodity producers or exporters.

Until late last year, Mr Bolton planned to retire to the Caribbean, but decided to set up the Hong Kong fund because of his belief in the prospects of China’s economy. Mr Bolton’s bullish stance pits him against big-name investors such as Hugh Hendry, head of Eclectica Asset Management, and Marc Faber, author of The Gloom Boom & Doom Report, who are betting that the Chinese economy will crash.

Mr Bolton’s portfolio selection will be closely analysed by other investors seeking to emulate his previous success. During his 28 years running Fidelity International’s Special Situations fund in London, he delivered an annualised return of 19.5 per cent.

The China Special Situations fund is heavily weighted towards sectors that are plays on the domestic economy, including financials, retailers, service businesses, and pharmaceuticals.About one fifth of Mr Bolton’s fund is allocated to stocks in the consumer discretionary sector. By contrast, the consumer discretionary sector makes up just a twentieth of the MSCI China index against which his fund is benchmarked.

His biggest sector holding is in financial stocks, which account for a third of the fund – a lower proportion than in the benchmark. Mr Bolton said he was confident that last year’s lending binge by Chinese banks would not lead to a dangerous rise in bad debts.In a bid to take advantage of under-researched stocks, Mr Bolton has invested more than half of the fund in medium-sized companies and small caps.

Buying stocks overlooked by most investors was a strategy that served Mr Bolton well in the west. But sceptics question whether Mr Bolton will be able to pull off the same trick in China, given that he does not speak Mandarin and only moved to Hong Kong three months ago.In another indication of investor hesitance, his fund failed to reach its target of £650m ($1bn).Only 12 per cent of Mr Bolton’s holdings are listed on stock exchanges on the Chinese mainland.

Most are China stocks listed in Hong Kong, the US and elsewhere, as well as other stocks listed in Hong Kong such as HSBC.The China Special Situations fund raised £460m before starting trading on the London Stock Exchange in April, becoming the largest UK investment trust to be launched in 16 years.The four biggest individual holdings in the fund are China Mobile, Industrial and Commercial Bank Of China, China Merchants Bank, and Tencent, the Chinese internet business.

For related posts, click the following links:

Random thoughts on current issues

Jottings on China yuan's reform

Fund focus: OSK-UOB Asia Consumer Fund

Random thoughts on current issues

There is just a huge disconnection between China equities and its economy. Whilst the Chinese economy continued to do well by posting double digit yoy growth, its equity market performance was just pathetic. CSI 300 index has fallen by 25% YTD, as compared to KLCI's gain of 4% YTD. Currently, the Chinese equity market is trading at one of its lowest levels at PER of 13x for 2011 as compared to its historical levels of 30x, even lower than Malaysian market's PE of 13.5x.

There are just many lingering issues surrounding China's economy i.e. asset bubble, labour strikes, fallout in exports owing to EU and US problems, higher yuan etc etc. Are these concerns overblown? Hyped up too much by the media? (Some fund manager just told me not to listen to the media too much as most news would be exaggerated with a minor issue could potentially become a full-blown crisis in the hands of media. Hmmm...Well, I'll take the middle ground :) It's good to have info from the media but try to analyze the issues and judge for ourselves how serious they are)

China's economy is having a transition of becoming a domestic-driven economy from an export-oriented economy. In 2009, China's economy continued to register robust growth despite the drop in net exports. The economic growth was mainly driven by domestic consumption and private investments. Thus, a higher yuan and demand for higher wages by labourers will help domestic consumption and lead to a firmer economic growth. With imports becoming cheaper coupled with higher income, consumer spending is bound to rise. A higher yuan also allows EU and US exports to be more competitive which could help cement a firmer recovery in these western countries while inflation in China could be contained though this is not an immediate concern yet.

Real estate prices appeared to moderate as evidenced by two months of slowing property price increase, indicating that government's efforts to cool down the real estate market seem to bear fruit, allaying fears of property bubble burst. What I see is that the Chinese government is trying to control the supply of properties and therefore could help put a lid on property prices. However, prices won't go down much owing to majority of high-end properties are bought with cash. Incoming supply of properties in 2H 2010 could help contain the price increase.

On Chinese trade, exports continue to do well with exports to US and EU registering growth of more than 40% yoy, despite the weak recovery and lingering debt concerns in these countries.

On the other hand, US high unemployment is not a surprise. In fact, economists last year have already predicted that high unemployment could continue until end of 2010. Employment growth had not been a smooth one during the last 2 recessions, this recession couldn't have been much different either. So, what's the big hoo-haa on US high unemployment in the media?

There's a lot of liquidity in the system. What are investors going to do with all these money? Put it in the banks with almost zero interest? Perhaps moving back into equities should be a good idea after all.

China property prices fall on month as curbs bite

Looks like the measures implemented by Chinese authorities are bearing fruit. Property market could develop in a more sustainable rate and avert a severe bubble burst.

BEIJING, July 12 — Chinese property prices in June recorded their first monthly fall since February 2009, providing further evidence that a government drive to let the air out of an inflated market is working.

Average prices in 70 cities edged down 0.1 per cent from May, lowering the annual property inflation rate to 11.4 per cent in June from 12.4 per cent in the year to May and April’s reading of 12.8 per cent, the National Bureau of Statistics said today.

Coming on the heels of much slower import growth and a controlled moderation in bank lending, the figures reinforced the conviction of many economists that no further policy tightening is on the cards.

However, with surprisingly resilient exports offsetting softer domestic investment, the consensus is that Beijing will not be rushed into relaxing policy either until clearer signals emerge from the all-important property and construction sectors.

“Currently the Chinese property market’s at a crossroads. It’s a game of who blinks first,” said Dong Tao, chief China economist at Credit Suisse in Hong Kong.

The government, determined to squeeze out speculators, refuses to back down by reversing curbs imposed in April; developers don’t want to waver because they paid high prices for land last year and have a bullish long-term outlook; and home buyers are sitting on the sidelines, Tao said.

“One of these three key players needs to blink first and change their stance,” he said. “I see policy in a pause mode. Whether that lasts till the end of the year is not entirely clear to me. It all depends on who blinks first.”

Engineering a soft landing in the housing market is critical.

To prick a bubble that, by common consent, had developed in big cities such as Beijing and Shanghai, the government in April raised down payments, ended mortgage discounts, tightened rules on loans to developers and made it harder to buy multiple homes.

Although annual property inflation has subsequently fallen for two months in a row, underlying demand remains strong and few home buyers expect a sharp decline in prices, said Zhang Huadong, a property analyst with Xiangcai Securities in Shanghai.

“It’s very unlikely that the government will relax its policy of curbing demand,” Zhang said. “If — and I mean if — policy were relaxed, there would be another surge in property prices. It would be a disaster for the market.”

The Securities Times reported today that banks in major cities, including Shanghai and Shenzhen, had resumed making mortgages on third homes, in what the newspaper took as a sign that the government was easing its grip.

But Tao with Credit Suisse and Liu Kun, a property analyst with Great Wall Securities in Shenzhen, said banks were just probing Beijing’s determination to implement its curbs firmly.

“The government is unlikely to announce measures to adjust its previous policies until the first half of next year,” Liu said.

Economists at Bank of America Merrill Lynch agreed.

“Banks always like to test the resolve of policymakers. We are glad to see more people are coming around to our view that there will be no policy reversal and policy easing very soon on the property front,” they said in a note to clients.

Bringing prices down is a political imperative for the ruling Communist Party.

Buying an apartment in a big city is now beyond the reach of ordinary people, reminding them of the inequalities that blight China and thus posing a potential threat to the social harmony that is President Hu Jintao’s ideological leitmotif.

Yet the government does not want to squeeze the life out of a sector that makes up 10 per cent of national output and 25 per cent of fixed asset investment and drives sales of everything from furnishing to electrical appliances and even cars. Construction also accounts for half of China’s steel consumption.

To square the circle, the government is ramping up the construction of low-income housing, though many analysts doubt it can meet its ambitious targets.

Zhang with Xiangcai Securities said he expected additional measures to boost the supply of property. “For instance, the government will force property developers to build on land they have purchased as quickly as possible,” he said.

Source: Reuters

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Jottings on China yuan's reform

The announcement: PBoC recently announced that it will cancel the yuan's peg against USD which has been in place since mid 2008 during the global financial crisis, citing reasons such as a strong economic recovery in China and gradual global recovery. This move could also help China to deal with its inflation rate which in May exceeded its target of 3% for 2010 and probably may reach 4% by the end of this year, coupled with preventing asset bubbles. Nonetheless, the government's move to maintain the yuan's daily trading limit of +/- 0.5% was a disappointment to the market as this means that the yuan will only appreciate rather gradually and not as fast as what others may want. Having said that, this was still a surprise to many as the market expected yuan to only move away from the USD peg in 3Q owing to the lingering Europe debt crisis. This could have explain the rally in the markets on Monday.

Other reason for the announcement? There could be other hidden reason why China made this announcement at this point of time. One could be due to the upcoming G20 summit in Toronto next weekend where China might face the onslaught from members of the summit in particular US. With this announcement, China could at least deflect some of the attention away from its 'unfair' currency peg and focus more on tackling the crisis of highly indebted countries.

How much will the yuan appreciate in the short term? Probably not much. Some reports are stating 4% to 6% appreciation against the USD by end of this year, which is expected to have little effect to their external trades. There could be further pressure for China to allow greater flexibility for yuan to appreciate. There is a possibility for more reforms on yuan after the G20 summit i.e. widening of daily trading band and revaluation of the yuan. Yuan appreciation could actually work in favor for the country. It can help the country to cope with its inflation and surging asset prices (which is of a higher priority now) coupled with aligning the country's economic model to a more domestic-driven one instead of an invest-export model.

However, I believe yuan appreciation has to be moderated and not let it be revalued too rapidly, lest it will suffer the same consequences of Japan in the 1990s when Japan revalued its currency upwards drastically under the pressure of US while being reinforced by Japan's asset bubble burst in 1990-91, causing a deflationary slump from which it has yet to fully recover.

Appreciation of yuan could help lift regional currencies: Historical data has shown that Asian currencies actually benefitted from yuan appreciation, mainly due to China’s rising position as a major trading partner among the Asian countries. To recap, Chinese government allowed its yuan to appreciate against USD in July 2005. The yuan had since appreciated by 1.6% over the next twelve months, giving rise to the appreciation of Asian currencies. Consequently, the Singapore dollar, Indonesian rupiah and Malaysian ringgit appreciated by 5.1%, 7.0% and 2.7% respectively during the same period. CIMB is forecasting Malaysian Ringgit to appreciate to 3.05 against the USD by end 2010.

Implication to Malaysia: Probably less competition from China's exports coupled with stronger exports to China. Exporters might be slightly affected such as palm oil players, electronic exporters and glove manufacturers. Importers such as automakers and food producers coupled with companies with high foreign borrowings such as Tenaga could benefit. Higher domestic currency could also attract foreign investors to park their money in our capital markets especially bonds which is further supported by the interest rate differentials between Malaysia and other countries.

Agricultural Bank of China IPO - A buy sign for Chinese stocks?

An interesting article by Jim Jubak on Agricultural Bank of China IPO offering which could signal a good buy on China stocks. Stock market going to do well then in July?

China Property Market: Hard crash unlikely

China property market came to the limelight again when the Chinese government announced stricter regulations for the property market in mid April which were similar to the regulations back in pre-crisis levels in Sept 07. The announcement was made after Housing Price Index (HPI - Based on 70 major cities in China) continued to rise by 11.7% y-o-y in Mar 2010. On month-to-month basis, HPI retreated for the first two months of this year before rising again in Mar 2010. The government's tightening measures early this year appeared unable to contain the rising property prices.

Tightening measures announced in Jan 2010:

1. Deposit: Raised to 20%-30% for first time buyers and 40% for second buyers as opposed to 20% across the board.

2. Mortgage rate (% of BLR currently at 5.94%): 70%-85% for first time buyers and 85%-110% for second buyers as opposed to 70% across the board

3. Increase supply of properties to suppress prices

4. Prevent land and property hoarding; Outstanding land premium to be collected

Tightening measures announced in Apr 2010:

1. Rise in downpayment for second home from 40% to 50%

2. Rise in minimum mortgage rate for second home from 85% to 110% of BLR (5.94%).

3. Greater efforts to deal with violations such as keeping unused land, hoarding properties and price rigging.

4. Discourage lending to third home buyers and non-residents

5. Developers to launch all units which have obtained presale consent within a certain timeframe

What is actually the property market condition in China?

There are many ways to look at it. Some of the main methods used to evaluate include:

1. Housing Price / Income Ratio (Using Median House Price /Median Annual Income)

2. Mortgage Payment / Monthly Income

3. Rental Yields

Housing Price / Income Ratio (The lower the more affordable):

On a national level, China doesn't appear to be excessive and is close to the average. (I think KL is somewhere along that line as well) The highest are Singapore and Hong Kong (Too expensive).

However, on a closer look at the individual cities, Beijing topped the list while Shanghai was close to Singapore and Hong Kong. Based on this, actually the highish property prices are only concentrated on several cities like Beijing, Shanghai, Tianjin, Shenzhen and Guangzhou. Nonetheless, China is not just based on two or three cities unlike other countries like France or UK, but has about 160 cities which have more than 1 million population. Therefore, looking at China as a whole, China appear to be nowhere near bubble territory.

Mortgage payment / Monthly Income (Affordability Index):

Surprisingly, affordability index has been on a downward trend with only a slight uptick expected in 2010. A lower affordability index indicates higher affordability. This was due to the higher growth in household income as compared to property prices.

Rental Yields:

Nonetheless, rental yields are not painting a good picture on property prices. China's rental yield is only at 3.24% with Shanghai and Beijing dropping below 3%. The reason could be due to the loose monetary policies and regulations which encourage people to buy instead of renting. Such low rental yield might not be able to sustain the property prices.

Potential further measures by the Government:

1. Capital gain taxes

2. Property taxes

3. Prohibition of purchase from non-residents

4. Rate hikes in RRR and interest rates

5. Increasing supply of houses

Property market outlook:

1. Property sales will slowdown: Buyers might take a 'wait and see' approach to see how the government is tackling the issue and wait for property prices to drop.

2. Property prices might drop by 10-20%, but unlikely to fall below 30%. Most developers are sitting on strong cash position and limited supply, therefore not in a hurry to sell off their properties at lower prices. In addition, it is not the government's intention to lower the property prices but to quell speculation on property market.

3. Property market might turn to a buyer's market where supply exceeds demand in 2H2010. This is due to potential incoming supply of properties in 2H2010 as many projects were started in 2H2009. Usually, it takes 9-12 months lead time for projects to reach pre-sale condition.

Tightening measures good for long term sustainability of the property market:

Many investors are worried of tightening measures by government which could hurt corporate earnings and slow down the economy. However, it is actually good that the government is making efforts to cool down the property market to prevent any asset bubble from forming especially in the top 5 cities, namely Beijing, Shanghai, Tianjin, Guangzhou and Shenzhen. Inflation for now is not really an issue as it is expected to be around 2-3% only with most of the inflation coming from food prices. On the other hand, there are worries that non-performing loans will surge on the back of possible property collapse which will cause a banking collapse. Non-performing loans might rise but will be cushioned by low leverage and high savings rate among China households and corporations. A banking collapse is also unlikely as domestic funding is largely controlled by the government and the government will not let bank runs to happen in China like what had happened in US and EU. This is in addition to Beijing's strong fiscal position to support the banking industry.

Therefore, property prices could drop, but will not be severe. Government will continue to introduce further measures to cool down the property market which will cause volatility to the equity markets. Nonetheless, the measures undertaken by the government will be good for the sustainability of the property market and prevent any asset bubble burst.