The Chinese government has been busy probing Western firms this week. On Monday, the country announced it would investigate EU wine dumping into the Chinese market, an action that could see prices hiked on imported wine this year. On Wednesday, it accused foreign baby formula producers of fixing prices. Now, brands such as Danone (BP.EPA) and Nestlé (NESN.VTX) have agreed to lower their prices by up to 20%. The probe could be well founded, but the drop in prices doesn't bode well for domestic companies that struggled to compete even with a pricing advantage. “In the short term, the drop in price could affect the competitiveness [of domestic brands],” said Tracy Dan, a food and beverage analyst at financial services firm First Shanghai. “But in the long term, the government plans to make them strong again.” Chinese consumers have shunned national leaders such as China Mengniu Dairy (2319.HKG) and Yahshili International Holdings (1230.HKG) since deadly baby formula hit the Chinese market in 2008. Dan said Mengniu is performing well this year. Those looking for a short-term play might stay away from the company, as it could get hit when the prices of its competitors drop. That said, strengthening the company is on the national agenda, so Mengniu could be a stock to hold on to.
The captain jumps ship
China's Organization Department, the high-level body of party cadres that appoints important government and state firm position, shook up the management at the country's largest government-controlled shipping company China Cosco Holdings (601919.SHA, 1919.HKG) this week on fears it will post a third consecutive year of losses. The company's captain since 1998, Wei Jiafu, will step down and Cosco's president Ma Zehua will step in. Given the dire conditions of China's shipping industry, which is plagued by overcapacity, any wind in the sales of a company that lost US$324 million in the first quarter of the years is unlikely to come from a management switch. However, one analyst, who wasn't authorized to speak to the press, said Wei helmed much of the expansion that resulted in far too many ships for not enough cargo. “As long as the guy who made that expansion is at the top, any heavy handed restructuring would be very hard to achieve,” the analyst said. For the longer term, investors should note that the shake-up could be a positive for growth in the company. Shareholders on the mainland no doubt hope that results come sooner rather than later. Another year of losses and the company will be delisted from the Shanghai Stock Exchange.
Crying all the way to the bank
The Chinese government thinks the media has given too much play to the recent interbank liquidity crisis. After the hundreds of articles on the subject, CER is increasingly inclined to agree. But it’s hard to resist taking one more swipe at it. Last week, the message was that banks were in no real danger and to look for buying opportunities. On further reflection, also known as calling up banking analysts, this seems a bit of a simplification. Banks are definitely in for a world of hurt as the government appears ever more poised for reform. Even if they come out stronger in the long run, banks will likely axe more of their higher risk borrowers, thus cutting into their returns as they seek to shore up their assets in the event of another cash crunch. “Structurally, it’s the end of the boom cycle for banks,” said one analyst, who wasn’t authorized to speak to the media. If you need to park your money somewhere, Industrial and Commercial Bank of China (601398.SHA, 1398.HKG) and China Construction Bank (601939.SHA, 0939.HKG) are still your best bets. As we’ve stated in the past, these two have always been more conservative when managing how risky their assets are, which will serve them well in times of stress.
IPO Watch
Hong Kong didn’t have much of interest for China investors this week with only KVB Kunlun Financial Group (8077.HKG), which serves Chinese in diaspora, and Malaysian iron company CAA Resources (2112.HKG) listing on the exchange. Even worse, the two have essentially been flat in their first two days out of the gate. The real IPOs to watch are today: mainland tax software developer Sinosoft Technology Group (1297.HKG) and cigarette package maker Jin Cai Holdings (1250.HKG).
