Morning Mumble: A valium edition - a recap, from China to the oil price requirements on government expenditure - flying pigs poignantly timed for Macau's disappearing Billions...but it's ok it's only 3-4% of the Macau Junket liquidity ++ KGF being Screwfixed!

Good Morning, 

One would be wise to make sure they have coffee or Valium!? Some missives from the past couple of days. 

Not only is there a rise in Chinese inventories, retail price increases, wholesale/factory gate prices are falling - to stay competitive China have resorted to energy price manipulation. All of which are eating into the earnings of global producers – aluminium a prime example. Following in unfortunate timing with, FT: Asia trades cautiously following Chinese data.

The overhauling of the SEO’s (State Owned Enterprises) is insufficient on its own. China, with any form of sensibility will have to adjust the wastage and excesses. The implications throughout the economy are not positive, if SEO’s suddenly garner economic prudence. The agendas of the Government will be harder to be played out, including, but not limited to, employment numbers, wages but also benefits.

The indicators suggest all is not as well in China, in addition to flying pig prices - notably the pork industry isn't as leveraged. China's food inflation won’t assist the economy out of this glut either, but they can hope. Similar to Russia but not as dramatic, China is suffering from a reducing wage cost, the impact on how people service there mortgage will perhaps be another story.

Finished goods prices (wholesale) have come under pressure from lowering demand but aided mostly by reducing commodity prices that are limiting the chances of growth. If UBS and Goldman Sachs forecasts’ of a worst case $28.50 and $20 a barrel respectively, come to fruition it’s not looking great either. If one was so inclined, this belated about turn by UBS and GS, may be an indicator the market is about to improve, with drilling count and well reductions.

See: AFR's: BHP Billiton price target cut on oil forecast revision and Bloomberg: How Low Can Oil Go? Goldman Says $20 a Barrel Is a Possibility. Essentially the outlook for certain countries isn't great, nor for debt of the oilers or the credit ratings.

Bloomberg’s Brazil's Junk Status is just the start of the risk realisation in international bond markets. Where, in the race for returns, monies have been lent on the basis of being a lower risk than the realities of the situation present. What are the implications for the following debt? More so who will own Petrobras? 

Country	Oil Price to balance fiscal budgets 2015
Algeria	Needed $130/bbl, revised to $98/bbl
Angola	$100/bbl++
Brazil’s just another story entirely, Petrobras’s debt woes won’t disappear overnight!	$115/bbl estimated just to service debt. Junk!
Ecuador	$80/bbl
Iran Allegedly	$130 by consensus but more than probable at $84/bbl based on increased exports.
Iraq	$95/bbl
Kuwait	$55/bbl
Libya	$140/bbl
Nigeria	$120/bbl
Qatar	$55/bbl
Saudi Arabia	$62/bbl (*based on revisions and financing)
Rest of UAE	$70/bbl
Venezuela	$120/bbl

Bloomberg's: Best & Worse Analysis.

For those readers that are keen on Pork Ribblets, Semi-Meaty. The UK suffered a lowering in pork prices and demand during August. Spain and Portugal, despite significant increases (double digit EMC estimates 10-12%) in exports, has seen only modest 2-4% increase in prices, despite a surge in demand. 

The global pork prices, even allowing for US woes of Porcine Epidemic Diarrhoea Virus, or PEDv, have not seen the supply issues being cited in the Chinese press nor so in China. One can only wonder who or what is leading the media to believe there is a supply shortage of pork in China? A flying pig perhaps? 

With the current news flow including companies attempting to rationalise their balance sheets and spending, similarities are yet again being drawn towards Japan. Japan suffered a prolonged period of disinflation occurred after periods of strong growth. Ticking another box in the theory that Chinese companies' having no alternative but to invest globally (EMC: Japan August 2015) and / or pay down debt. Some appear exempt on sensible ratios of debt. With Japan printing, is it a case of sell GEM (Global Emerging Markets) and buy Japan?

Corporate entities have a rather large issue in China. The need to focus on their borrowings, part acknowledged by China's reduction in interest rates. If Chinese corporations continue without some form of prudence and debt reduction, the deflation and slowing of demand will create a real risk the number of defaults rising. It could be just the foundations and consolidation that China needs. China's premier will not be resting on his laurels with regard to a stimulus, but perhaps more prudent to take ones time.

The wholesale deflation has made it very difficult for the corporations to service debt, maintain earnings and justify the higher levels of employment. Banks, are sensibly risk assessing new applications despite the actions of the PBOC (People’s Bank of China), shrinking liquidity further. 

China is being forced to become efficient (or attempt to), this will have implications for employment levels and taxation receipts. The PBOC has realised this, with planned infrastructure and PPP/PFI spending, there are little alternatives.

It’s prudent to have a quick recap of the Chinese growth story and their economy this year. To prop the economy up, the PBOC has reduced interest rates five times (soon to be six). Injected capital directly into the banking system to attempt increase lending and part replace the capital outflows. 

China have reduced the Reserve Rate Ratios (RRR) 5 times to a now 18% and attempted to prop up the stockmarket financially, followed by policy. Better yet, China devalued their currency and tightened up on e-payments and capital outflows including commodity financing deals. Glencore would be wise to consider the latter.

Most of the actions by the Chinese government have had limited impact, China has no alternative but to acceleration spending on infrastructure projects. China has already been discreetly bringing forward infrastructure projects, examples being the development of waste management systems for Beijing.

Tax incentives are being given for investments and capital expenditure, both for individuals and corporations, on top of development grants for those wishing to become entrepreneurs. We have not forgotten the dire state of local government and their dwindling revenues and central government seizing $150B, where the confetti of debt has been issued and underwritten by central government. 

It appears Macau have caught another cold, thanks to a group with a light-fingered approach to gambling. Not only is Macau in the glut of a property depression, in part aided by Li's anti-corruption policies and clampdown on excesses, but more so, the wider economy both with property and business revenue declines. 

Not to worry, gross revenues in Macau may have dropped by 38% in June (worst for five years), but their property has so far only dropped 15%. Junket’s losing near $250M appear not to be of significance to some analysts, it’s only 3 percent to 4 percent of junket volumes.  Ironically, due to the declines it’s actually nearer 8% but what’s a few % of an entire market in decline?

One has to wonder how well the listed Macau Property (MPO) is and what of their Net Asset Valuations in light of the property situation in Macau. With some dramatic discounts being touted on high end property of 25%, but the average is 15% decline as a minimum. We'll know more in due course with a visit planned very soon by the travelling duo!

Of course, with a share buyback in full swing at MPO you'd have thought the SP would be appreciating/holding. With a NAV near 50% above the current SP, one cannot think what the buyers are waiting for!

Staying with a theme, Cloudbuy's (CBUY) NOMAD Westhouse has quit with immediate effect. Disappointedly (for the management) it won't have helped them with their half yearly report also out at the same time. 

Why did Westhouse quit, more so, if anyone was long on this stock post the EFH (Here EFH 1 and Here EFH 2 about turn) debacle covered very well elsewhere, then they need to have words with themselves. Time would not be wasted in looking at how EFH traded this stock, perhaps those whom earn monies exposing such things will be inclined? 

Kingfisher’s interim results are out, beating expectations (EMC) and also a beat on the implications of the BDO. However, the drop in profit is not to be ignored. One has to consider the sensibility of the ScrewFix expansion - 200 stores. The press/city would be wise to wake up to the discounting and margin erosions, more so ScrewFix is not just a “tradesman’s entrance.” Margins yet again under pressure.

KGF are not confident of a French performance (remaining cautious on trading in Castorama and Brico Dépôt France). In essence what the UK gave, France took away. It would be wise to monitor the industrial output of France, renamed “the indicator for Catorama and Brico Dépôt.” KGF, in hindsight for them, may be thankful in being unable to complete on Mr Bricolage.  How prudent of KGF to sell their controlling stake in China.  

To save time, we’ll say goodbye to Haik Chemical now, this company has been the eternal dog of performance. We could blame the likes of Hi-Tech Spring, whom consistent with higher inventories and lower demand have been forced to be more competitive.   

Apologies for the search function not working properly in the top left hand corner, there is nothing that can be done about this. Utilising Google's site search, may be wise. 

Atb Fraser

(Travelling today so limited). 

PM Bolt On: Chinese Property the shadow of valuations, and a scatty walk through Chinese economics.

Good Evening, 

The EMC and various traders/parties have been batting a few (add-on) ideas around for a while and coming to firmer conclusions today. A summary with suggestions about the distortion and inaccuracies in the  property data in China. Today's discussions drew similarities between Spain and China in separate discussions.

The consensus being that the measure for house prices is warped, stalling more than the Chinese official data implied. With what can only be described as greater downside risk than 2009 (comparative point). Revenues in the form of company turnover and taxation have all fallen, save for some clever accounting, it’s a sector in decline. 

Any Chinese analysis always has a caveat of government intervention (the stimulus), including the possibility of social housing schemes (large scale) being introduced by the Chinese Government or 101%+ mortgages. The sales incentives on the property sales should be discounted out of the price achieved and disclosed to Government data and revenue collectors. The incentives only serve to distort the figures that should have a greater impact than the ones announced.

Margins have been squeezed, with developers failing to incentivize buyers, whether for speculation or their own home. The Government has increased the liquidity, reduced the down payment criteria and loosened the first home-buyer entitlements to include those that had previously owned. 

With the Chinese Government slowly running out of options to stimulate the economy at a local government level, expect to hear more about western investment in Chinese public-private partnerships (PPP), reducing the burden in the short-term on local governments.

So with banks having a biased interest in prices being maintained and how the value is carried on the books against their reserve requirement ratios (RRR). We're bordering on a Spanish manipulation of the housing market by the banks, with an arm’s length consent by the Chinese Government. Any drop of more than 6% year on year leaves the Chinese banks being forced to make drastic cuts to their balance sheets. Alternatively, the Government reducing the RRR requirements further to allow for greater flexibility.

There's a glut of property inventory out there, both commercial and residential, those Irish property speculators will be all too familiar with and wary of. Although China is far from at the extreme of the Irish property contagion, it does have resounding similarities such as excessive supply, unrealistic balance sheet valuations, overly expectant prices and the minor problem of evaporating demand. 

The lower income, like most economies, are the drivers in China and the transfer of wealth between state and comrades is slowing and potentially contracting. PPP could just be China’s saviour to avoid a property contagion and at least meet more realistic growth targets in the short-term whilst international expectations are reset.

Whilst remembering the caveat "without further stimulus", Li and I, have been working on some modelling for the Chinese property sector. (worse for commercial property). We'll exclude the likes of the equivalent Chelsea areas within Shanghai（上海), Shenzhen, Guangdong Province（广东深圳）, Beijing（北京）and Sanya, Hainan Province（海南三亚） (EMC has gone international with copy and paste; we hope Li's versions are not offensive!). 

The EMC is off the fence and a depression and/or staling in property prices until 2017 and perhaps beyond. This of course depends on how the economics of China pan out and how the Chinese Government motivate the economy re: PPP. With factory gate prices, earnings and raw materials all under pressure, this could extend beyond 2017 and as far as 2020 before a realistic growth story sets in. There's a risk of a property contraction year on year for near 3 years, with restricted growth their after. 

The contraction in financing is being noticed by the traders, save for the larger houses whom have internal liquidity and government cheques. A limited example being the Chinese purchases of gold, down circa 30%, copper, iron ore and coal. The property woes are being exacerbated by the contraction in financial liquidity (within China and externally) for speculation.

It implies the RRR of most of the major Chinese banks is questionable with balance sheet valuations ignoring the obvious elements of the economy…or are they, as speculators disappear?? It’s not going unnoticed that Chinese companies are refocusing on international property portfolios (the hedge) like Japan in yesteryear.

In part, the commodities have depreciated as the Chinese were incapable of tapping yet more finance for leveraged speculation (after significant loses), this has a knock on effect throughout China. It would be wise to consider the Chinese milk crash, which is unfolding as we sip our coffee, the pork crash that didn't appreciate during Chinese New Year (historically appreciating). Those Pork Riblets, Semi-Meaty have a greater margin if exported to the Congo now, we'll ignore the political issues some miners should be disclosing.

When considering how weighted the Chinese economy is reliant on the property sector, its concerning no action has been taken. The lack of taxation revenues both centrally and locally is having an impact. Various measures are likely but property taxation will have to be utilised to plug a gaping hole in the local government budgets bolting on to PPP. This will further kick property developers as those speculators derisk their "investments" as the asset becomes a greater liability. As such, China, although further from negative interest rates than most, could be more reliant than any central bank on these measures.

We acknowledge that China's property taxation model is dependent on building, with low cost ownership currently the norm. The property taxation and revenue model will have to be rebalanced, with an equilibrium applied to existing home taxation plus a new homes sales tax. The Local Government debt has grown disproportionately to the decline in property taxation revenues, and the lack of growth, contradicting the desire to “urbanise.”

The rolling up of local government debt will have to be answered sooner rather than later. It would be wise to reset the expectations of Chinese growth to 4.5% now to iron out these problems, rather than anything near the 7% the analysts think sensible. 

There's implications for demand on all base metals and resources excluding oil and gas, and water. More time is required to explain the latter three with China as a consumer and space required to validate the statement. Sweeping statement perhaps, but not without good reason. 

Atb Fraser.