Solar Power Partners Evergrande; JP Morgan Prefers Upstream

As a nod to the revival of China’s solar industry, more Chinese enterprises are entering the solar farm business.

Evergrande Real Estate (3333.HK), a real estate developer, said it planned to invest $154 million in U.S.-listed Solar Power (SOPW) and develop solar farms together.

Although this is a small investment at the first stage, “more investments might follow suit”, noted J.P. Morgan, adding:

While the chance of long-term success in solar farm development remains to be seen for these major enterprises given their lack of prior experience in the sector, their increased interest will likely mean more near-term demand for solar modules.

But J.P. Morgan still prefers upstream manufacturers such as GCL (3800.HK) to mid-stream solar module producers, because the upstream market is more concentrated. Even solar bear Gordon Johnson of Axiom Capital acknowledged ” Chinese demand appears to be building,” in an emailed note this Wednesday. In particular, Johnson noted:

Overall multi module price steps up this week because the demand of China recovers gradually, but mono module price keeps stable this week.

Solar stocks fell sharply since mid-September. Trina Solar (TSL) has fallen 26.7% since September 15. JinkoSolar (JKS) retreated 25.7%. Canadian Solar (CSIQ) dipped 19.8%. JA Solar (JASO) dropped 15.5%. In contract, upstream manufacturer GCL fell “only” 8.8%.

Why Private Consumption Is Slowing In Emerging Asia

Foreign investors’ bet on emerging Asia’s rising consumption power has not quite paid off: Private consumption growth has been on the decline since 2011 (see graph).

HSBC gave a few explanations.

First, labor markets are not as tight as before. Although unemployment has not risen in most emerging Asia, employers are not adding jobs as rapidly as a few years ago, pondered economist Frederic Neumann. Consumers may not spend as much because “wage growth has likely eased back as well.”

Second, a big driver of household spending has been rapid credit growth. As global liquidity dries up and banks become more cautious, consumers will have to scale back and not borrow against their future to spend now. Among emerging Asia, Thailand, Malaysia and Singapore have particularly seen rapid expansions. Thailand, for instance, saw its household debt grow from just about 55% of the GDP in 2008 to over 80% in 2013.

Third, “wealth effect.” Property markets are cooling and consumers do not feel wealthy enough to spend. Hong Kong, for instance, experienced over 20% property price increase in 2010-2011; now, under 3%. This wealth effect could be substantial. HSBC reckons that every 10% drop in property price in Hong Kong could result in 0.6 percentage points decline in Hong Kong’s private consumption growth.

Month-to-date, the iShares MSCI Asia ex-Japan ETF (AAXI) fell 0.8%, the iShares MSCI Hong Kong ETF (EWH) gained 2.9%, the iShares MSCI Singapore ETF (EWS) dropped 0.5%, the iShares MSCI Malaysia ETF (EWM) was down 1%, and the iShares MSCI Thailand Capped ETF (THD) slumped 3.1%.

Intel, UMC: To Enter China’s Semi, Cozy Up Beijing

Two weeks after Intel (INTL) agreed to take a 20% stake in China’s state-backed Tsinghua Holdings, which owns China’s largest chip designer Spreadtrum, to develop mobile chips in China, Taiwan‘s contract chipmaker United Microelectronics Corp. (2303.TW/UMC) followed suit. UMC agreed to invest $1.35 billion in a three-way joint venture with the city government of Xiamen and state-backed Fujian Electronics & Information Group.

UMC just bought itself a ticket to enter China, noted Bernstein Research‘s Mark Li and David Dai, saying:

UMC has talked about the Chinese market but lacks a good way to penetrate into the market. Its current fab, Hejian, is an 8″ fab. The new 12″ JV fab requires a relatively small investment but would help UMC attract more Chinese fabless customers.

The new fab is focused on relatively mature technologies, which are nonetheless sufficient to address many local demands and avoid the heavy capex burden in 28nm and below.

Partnering up with China’s state-owned enterprises could reduce so-called “regulatory risk.” U.S.-based chip designer Qualcomm (QCOM) learned the hard way, having been investigated for anti-trust behaviors in China. At the World Economic Forum last month, the Minister of Cyberspace Affairs Lu Wei pointedly told Qualcomm executive chairman Paul Jacobs that “we should make money together.” See my column “Qualcomm’s Loss in China is MediaTek’s Gain” (September 13) on why China is keen to develop its domestic semi-conductor industry.

UMC’s entry into China have limited impact on its competitors China’s SMIC (0981.HK) and Taiwan’s TSMC (2330.TW/TSM), according to Bernstein:

On the surface, the new JV capacity (50K wafers/month) is as big as SMIC’s current 12″ capacity. However, the new JV will not reach the planned capacity until 2020.

SMIC certainly will not sit still either. Its Beijing JV fab with 35k capacity would complete by 2017 and it should have further capacity expansion plans in the next few years. Considering the large size and rapid growth of the Chinese market, we do not think the JV will limit SMIC’s growth.

TSMC will also see more competition in China. The investment thesis on the company however primarily hinges on their position in leading technologies. Hence despite China contributed 8% of TSMC revenue in 1H14, we believe the actual impact will be marginal.

On Thursday, TSMC’s US-traded ADR fell 0.6%, UMC slumped 1.9%. Today, SMIC fell 2.5% in Hong Kong today. Taiwan’s stock market is closed.

Gree Ties Up With Japan’s WhatsApp, Squeezes Shorts

Japanese mobile game developer Gree (3632.T) jumped over 10% in Tokyo today after it announced a joint venture with LINE, Japan’s popular over-the-top messaging service similar to WhatsApp, which Facebook (FB) bought for $19 billion.

This is a big deal for Gree, noted Jefferies analyst Atul Goyal, because Gree has not been successful with native games:

Gree was one of the two most powerful game platforms in the early innings of mobile gaming, which was played on mobile-browsers (as compared to native games downloaded on iOS / Android now). But since the world moved to native games, Gree and DeNA have faced structural decline in their browser-related businesses. We believe the browser-based business will move towards zero over the next 2-4 years.

Meanwhile, LINE is one of the few companies who do have a track record in the native-games space, with 2-4 of its games ranking among the top 20. Just like Tencent‘s (0700.HK/TCEHY) WeChat, LINE is also a game distribution platform, curating and selecting games to put on its platform, which reaches 560 million users in Japan and elsewhere in Asia. The tie-up can help Gree sell its games.

Investors have turned skeptical on mobile game developers, and Gree is no exception and heavily shorted. But with 9 days to cover, less than 40% of its shares free float and the market viewing this tie-up positively, short-sellers were squeezed today.

On Thursday, LINE introduced mobile payments and said it had no immediate need for outside investment. Its parent South Korea’s Naver Corp. (035420.KW) fell 4.2% today.

Lenovo Slumps: IDC Data Ain’t Bad, But Market Only Sees Bad News

Market researcher IDC said worldwide PC shipments fell 1.7% in the third-quarter – even though the decline was smaller than the 4.1% drop IDC had projected. Gartner, another market research firm, said PC shipments showed only a half-point decline.

The IDC data really is not bad. The top five vendors – Lenovo (0992.HK/LNVGF), Hewlett-Packard (HPQ), Dell, Acer (2353.TW) and Apple (AAPL) – each gained market share from a year ago, at the expense of the “other” category, suggesting that PC market was consolidating. Equity analysts also had a lively debate on whether the consumer PC market had bottomed, reported my colleague Tiernan Ray.

But the market was looking for bad news today, sending shares of Lenovo down 3.7% this morning. Market sentiments are weak – the Dow Jones Industrial Average gyrated from this year’s biggest gain on Wednesday to the biggest loss on Thursday. The Hong Kong Hang Seng Index dipped 1.4%. Across the strait, Taiwan‘s stock market was closed. On Thursday, Hewlett-Packard dipped 4.5%.

If investors are really looking for bad news, here is one: Morgan Stanley‘s Katy Huberty and team feared Q3′s good shipment data would not be sustainable, saying “our proprietary channel inventory tracker suggests these vendors built inventory in 3Q14, suggesting growth may not be sustainable into 4Q14.”

TSMC Rose On September Sales: Apple Bump

Taiwan Semiconductor Manufacturing Corp. or TSMC (2330.TW/TSM) said its September sales rose 8% from a month ago to 74.8 billion new Taiwan dollars, or $2.5 billion, bucking the low season trend. Last year, sales rose only 0.5% sequentially.

In a research note published before the September sales number came out, Bernstein Research’s Mark Li and David Dai expected TSMC to beat its own sales guidance, saying that Apple’s orders for its new iPhone will push TSMC above the consensus:

TSMC should continue to post strong results in 4Q14 due to AAPL products.

TSMC is making the Apple A8 chip, which is now confirmed3. It will benefit from the strong sales of iPhone 6 and iPhone 6 Plus in 4Q14. We expect 20nm revenue to grow 81% QoQ in 4Q14, and represent ~20% of TSMC’s revenue. TSMC will perform better than the seasonal softness, even with the risk of inventory correction in low-end smartphones.

TSMC’s near-term outlook is much stronger than our previous expectation and share price will get short-term support. Medium-term, the softening 28nm revenue and the share loss in 14/16nm next year is worrisome. Long-term, the structural challenges from cost escalation and competition from Intel and Samsung still persist. Hence despite the strong near-term prospects, we rate TSMC Market-Perform. TP=NT$130.

TSMC rose 2% in Taipei, outperforming Taiwan TAIEX‘s 0.1% gain.

Shanghai Plays Catch-Up To Hong Kong: A Bull Sign?

Since September, Chinese stocks traded in Shanghai played catch-up fast to their Hong Kong peers. The Hang Seng China Enterprises Index slumped 4.5% whereas the Shanghai Composite Index has rallied 6.9%. The iShares China Large Cap ETF (FXI) fell 3.6% but the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) rose 6.6%.

Shanghai rallied in no small part on law of one price. Shanghai’s shares trade at a discount to their Hong Kong peers and this month mainland investors will be able to buy and sell shares in Hong Kong, and vice versa, in what is known as Shanghai-Hong Kong Connect. The Shanghai-Hong Kong gap has narrowed sharply (see graph).

But Michael Shaoul of Marketfield Asset Management does not think the Shanghai rally is just traders arbitraging. As mainland investors increasingly expect a prolonged slump in the property market – their main source of capital gain in the past – they start to eye the long-neglected stock market. Here is Shaoul:

It is possible that the collapse of the local property market could serve to divert local investment flows into the equity market. Looking at the surge in active security accounts in China this would seem to be taking place and over the last 10 weeks active accounts have averaged 14.25mm, the highest level over a 10 week period since May 2011 (see chart). As to whether this simply represents a rush of “dumb retail” money that will be overwhelmed by an economic collapse we really need to ask how relevant the property market is to the main constituents of the equity market and how contained will the misery be going forwards.

And the equity market can rally even when the rest of the economy remains in a slump. Shaoul recalled that the U.S equity market bottomed as early as October 1990, even though the financial system remained under duress for at least another 2-3 years.

Going a step further, Shaoul argued that a Shanghai rally could drag Hong Kong out of its slump:

We appear to be reaching the upper limit of the relative value of the SHASHR/HSCEI ratio, particularly if the SHASHR were to break out above the technically important 2013 high.

The Hong Kong Hang Seng Index rallied 1.2% today. The Hang Seng China Enterprises Index gained 0.8%. The Shanghai Composite Index rose 0.3%.

Tianhe Plummets After Denying Fraud, Underwriter Morgan Stanley Defends

Tianhe Chemicals (1619.HK), which went public only in June, plummeted close to 40% upon resuming trading from a fraud allegation. Tianhe halted its trading for six weeks after short seller Anonymous online hacking collective accused it of keeping two sets of books and overstating its profitability.

Tianhe’s underwriters were Morgan Stanley (MS), UBS (UBS) and Bank of America Merrill Lynch (BAC). Its shares rose as much as 30%, at one point trading at 2.44 Hong Kong dollars. Tianhe was trading at HK$1.42 today.

Morgan Stanley had a research note out today, defending and reaffirming a Buy on Tianhe.

First, the short sellers said that Tianhe’s revenue and net income in local AIC filings were substantially less than that in the Prospectus – a swipe at the underwriters’ due diligence – and that Tianhe presented two sets of income statements to the local accounting authority AIC.

Tianhe responded by showing letters from the AIC and local accounting firms confirming that statements in the short seller report were not from the company’s local AIC filings, and the chairman’s signature in the short sellers’ report was forged.

Morgan Stanley looked at the letters and said “we do not believe the allegations are credible.”

Second, the short sellers said that the amount of tax paid by Tianhe based on the Prospectus far exceeded tax revenue reported by the local government.

Tianhe obtained receipts from the local tax bureau and Morgan Stanley said that “Tianhe’s receipts of income tax payments are appropriate evidence.”

But Tianhe has failed its rebuttal on the third allegation. The short sellers said most of Tianhe’s largest customers disclosed in the prospectus were all related parties, and the rest were very small. Tianhe said CITIC International, an unrelated party, was its largest customer. Morgan Stanley has verified there is business relationship between Tianhe and CITIC but the “business scale” could not be confirmed and “may prove difficult for Tianhe as it involves disclosing information about companies other than its own.”

Since “market [is] looking for more detail on sales channels,” Morgan Stanley expected Tianhe’s shares to remain subdued. “What could make us change our view on value would be either a failure to hit earnings projections, evidence regarding related party transactions and, or a further lack of clarity on customers and sales channels,” noted the bank.

Ctrip: Golden Week Stats Validate Bet On International Travel

In August, China’s largest online travel agency Ctrip.com (CTRP) expanded its international hotel portfolio by tying hands with Priceline (PCLN). Last month, it ventured into cruises by buying a liner from Royal Caribbean Cruises.

Ctrip is betting that as Chinese get wealthier and have traveled within China and gone to nearby places such as Hong Kong and Macau, they want to venture further and visit new places.

Statistics from the National Day Golden Week holiday seems to validate its bet. According to China Aviation Administration of China (CAAC), the total number of tourists traveling during the Golden Week grew only 10.9% from a year ago, quite a bit slower than the 15.1% recorded for last year.

Chinese have not stopped traveling – they just have gone overseas, which CAAC’s statistics does not capture. Here are Barclays analysts Alicia Yap, Joyce Zhou and Gregory Zhao:

China Southern Airlines announced that its international passenger volumes increased 20% yoy during the Golden Week, compared to domestic passenger growth of 4%. In addition, according to a news report (Sina, 8 October 2014), the number of travelers choosing outbound cruise tours during the holiday increased over 50% yoy, with cruises to Japan and South Korea the most popular routes. Jeju Island (South Korea) received over 90,000 tourists from China during the holiday and 21.8% of them were travelling on cruises.

Ctrip retreated 14% in the last month. It rose 3.6% on Wednesday in New York as Chinese technology companies broadly gained on dovish Federal Reserve minutes.

ASEAN: Nomura Ups Malaysia, Downs Indonesia, Philippines On Stronger Dollar

ASEAN: Brace for market volatility when the global carry trade unwinds, warned Nomura Securities.

ASEAN did pretty well when global equities were sold in early September (see graph) because that correction was “due to softening of global growth prospects than expectations of tighter policy”, wrote analyst Mixo Das and team.

Looking forward, Nomura was less optimistic, because any sell-off would come from an unwinding of the global carry trade. U.S. investors, for instance, could pull their money from overseas to invest at home when the U.S. interest rates arise. ASEAN historically was more affected than North Asia because its markets were smaller.

Dollar strengthened broadly since September, but Nomura said the stronger dollar so far was due entirely to divergent monetary policies between the US and Japan and EU. The broker saw the dollar to rise further, as global liquidity for the greenback dries up.

As such, within ASEAN, Nomura said we should stay defensive, on Malaysia and Singapore, both in the past having been “more insulated from the impact of foreign capital movement given their lower beta nature, strong presence of local capital (and government-owned funds in Malaysia), more developed capital markets and markets’ greater confidence in their policy-makers.”

“Thailand is currently less exposed to foreign capital outflows than the Philippines or Indonesia. Over the past year, Thailand has seen sizeable foreign capital outflows already, whereas both Indonesia and the Philippines have seen significant inflows.”

Nomura was most cautious towards Indonesia, citing that its political outlook was worsening. Here are the analysts:

The opposition has thus proven more united than our previous expectation and appears bent on using every possible mechanism to deter and derail Jokowi’s potentially progressive reforms (at least in terms of governance, budget management and infrastructure development) in an attempt to undermine his presidency.

Foreign buying has been a key support for the Indonesian market all year, and we believe hopes of such investors that Jokowi will be able to deliver despite the adversity has been somewhat set back by recent events.

Earlier this week, Credit Suisse raised its outlook for Thailand and downgraded Indonesia.

Month-to-date, the iShares MSCI Indonesia ETF (EIDO) lost 2.3%, the iShares MSCI Thailand Capped ETF (THD) fell 2.5%, the iShares MSCI Singapore ETF (EWS) lost 0.3%, the iShares MSCI Philippines ETF (EPHE) rose 0.2%, and the iShares MSCI Malaysia ETF (EWM) was little changed.

Except for Malaysia, ASEAN rose today on a dovish Fed overnight. The FTSE Strait Times gained 0.7%, the Thailand SET Index rose 0.7%, the Indonesia Southeast Composite Index rallied 1%, and the Philippines PSE Index was up 0.3%. The FTSE Bursa Malaysia Index fell 0.5%.