Tuesday, September 09, 2008

Results Brief

Chalco (2600)

I had expected Chalco to have an average year but 2008 turned out to be much uglier. Profits dropped from $6.6b in 1st half 2007 to $3.3b in 2nd half 2007 to only $2.4b in 1st half this year. This drop in profit contrasted sharply against the expansion last year as Chalco took on more aluminum plants and enlarged its alumina capacity. The culprits: falling selling prices and increased costs.

I can understand the higher bauxite price and the energy costs as that's universal, but I have trouble reasoning the weak pricing power of Chalco, as it's already the biggest producer of alumina and aluminum in China. The steel producers seem to have fared much better amid similar difficulties.

On latest production figures, Chalco's market share of alumina and aluminum is over 45% and 20% respectively, basically unchanged from one year ago. As Chalco has expanded quite a bit over last year, this means everyone else has done the same. Thought there's no figures to confirm, it appeared national supply had grown faster just when demand growth had softened a bit. Probably these extra capacities are eating into everyone's bottom line now. Chalco's alumina production was 8% below target and aluminum production was 16% below target. On aluminum, sales / production ratio fell below 1 at 0.89 and sales / budgeted production was lower at 0.75. Partial blame could be put on the snowstorm in January which had disrupted production and sales. It's also possible that the newly acquired plants are going through an adjusting period so in time results should improve. True picture should emerge when the 2nd half figures come out. In fact price protection is said to be the company's focus in the 2nd half.

I'm disappointed by the aluminum segment which Chalco actively developed because it did not provide the buffer effect as intended. It appeared to be just as volatile and the drop in upstream alunina price didn't appear to benefit the downstream aluminum business. It's also surprising to see oversupply again, when the industry only started to recover in 2006 from its last oversupply problem and price war. Increasing energy costs will also become a bigger problem as it seems clear China will change its energy policy. It will take some time for the industry to consolidate yet again before Chalco can really achieve market dominance.

On the good side, Chalco did vary its financing structure by issuing more bond to reduce bank loan and to make acquisitions (as opposed to issuing shares). Debt level has thus grown by still manageable at about 56% (net) of equity.

Market capitalisation now is about rmb74b. Against a NAV backing of 58b it looks comfortable. Considering it earned over 10b in each of the past 2 years in a size that's smaller than today, there is little reason to doubt Chalco cannot breach that mark again when better conditions come. After all, aluminium is still a key infrastructure material required everyday in China and there have to be decent profit opportunities to entice investments. A better entry time may come when there's bloodbath in the aluminum market later this year.

OOIL (316)

This one is simpler to analyze. Earnings appeared to have dropped a lot, even on a recurring basis after taking out the disposal gain last year, operating profit of USD175m was only 2/3 of last year. But further study would reveal the difference was caused by (i) reduced interest income as a large part of the disposal proceeds had been distributed and (ii) property revaluation loss from the Wall Street Plaza in NY. Core business container shipping actually earned slightly more than last year, albeit on much larger turnover (27% higher) meaning reduced margin, but that's still respectable considering the tough operating environment in the 1st half.

It seems quite clear the US and Europe are heading into hard times and that will impact the volume of trade and hence shipping demand. But global trade is bound to be here and stay, and it's hard to imagine either continent going back into manufacturing what they need. It's just impossible to find another country which can truly replace China's status as the world's supplier. In terms of labour population, infrastructure, the stability of government, and the potential domestic market opportunities, there's really no competitor. Routes could be different but goods would continue to be shipped from once place to the other. And container shipping remains the most efficient way of doing this.

Speaking of valuation, it's only HK$15b! It barely covers the amount of usable cash OOIL had (assuming vessels can be 70% financed by bank loans). This valuation is also 55% discount to NAV of HK$33.6b and mind you vessels can be sold, probably at a higher value than would the discount suggest. So OOIL is now trading in scrap value with zero value attached to the earning ability of the fleet. This is frustrating but I guess OOIL probably isn't the most extreme in this very depressed market.

Meadville (3313)

Both turnover and profit kept the momentum and soared over 30% (excluding interest income and share award expense). Meadville continues to benefit from the investment in the China telecom sector upgrade and the outsourcing trend in manufacturing advanced electronics in China. Margin was down slight from 22% to 20% but that was inevitable for all manufacturers and part of it could also be attributed to the pre-operating losses of some new facitities.

Financial position remains tight as the gearing remains unchanged at 80%, understandable as the company is in a quick expansion mode, which however requires some precision in execution to prevent troubles down the road. Recent conclusion of a syndicated loan of HK$1.3b should help lengthen the debt profile (total net debt: $2.5b) and ease the funding pressure for ongoing expansion. But one should keep a keen eye on this area.

With an annual earnings expected to be at least $500m and on a rising trend, Meadville continues to be a better bet on the telecom sector / electronics sector. But its relatively strong share price performance has reflected part of this and its 7x p/e is no longer a steal in today's market, where value stocks are in abundance.

RIMH (1997)

Similar to Meadville good performance was as expected. In fact RIMH is one of the rare breed to have increased turnover, profit, and margin. Dividend again was very generous but I'm afraid there's gonna be a slowdown in the 2nd half after the Olympics. I guess most of RIMH's customers have large exposure to the China market and after this wave of TV upgrade demand growth will slow, and the added production capacities of the industry will start to weigh down on everyone's earnings. Latest monthly turnover in Aug is reported to be down from last year and that's second month in a roll. RIMH also appeared to have slowed down its expansion as suggested by the larger dividend and yet-to-be-utilized proceeds more than 12 months after IPO. The effect from the resignation of CFO and INED earlier this year seem to have past.

With an annual earnings of I guess not less than $300m and a net cash position of $400m, the current market capitalization of $1.2b is low. Future appears less certain as the flat panel tv market may have a difficult time but that is countered by the excellent dividend yield. But since cheap choices are everywhere, RIMH probably isn't the most attractive one.

I hold all the above stocks at time of writing.

Monday, September 01, 2008

Something Else

Recently I got some experience travelling in Europe with Finnair and Air France. Here are some interesting contrast to share with you. It tells you a bit about the airline and the people behind too.

Finnair - Scandinavians are very time conscious and efficient. When I arrive at the HK airport a little less than 90 minutes before take off time, there's no queue at the counter. I thought the flight must be pretty empty but in fact everyone had already checked in, and the ground staff was already waiting to close the counter!

The interior was tidy and quite new. Info system was top notch with very large and bright screen. Movie selection was quite international and even included choices from Japan, Korea and China. Meal serving was very fast and cleaning up was done even quicker, barely allowing enough time for any slow eater. Once the meal time was over all snacks and drink, save water, now costed extra, and there's only Pringle chips, sandwiches and soft drink. Services stopped and I had to get my own water at the back of the plane, even buying chips is no exception.

On the ground custom/immigration officers worked very fast as well, at speed comparable to officers here in Hong Kong.

Air France - French are in my mind too romantic and have too much time to burn. When I took my flight at the Paris airport at night, there's only 2 immigration counters working and a huge line up of people! And nothing was done about it as the queue continued to lengthen. I really couldn't believe this could happen in an international airport in an international city. When I get through the security procedures I only had 10 minutes left before boarding. The plane left on time though and there's no delay on arrival either.

Inside the plane everything was slightly older but only by a small degree. The info system though looked like an antique, very slow to respond and took forever to load the menu from French into English. The screen was much smaller and french movies took up considerable space. For meals it's nice one could get champagne (even at breakfast) and forks and knifes were from Phillipe Starck! And there's every snack and drink (save alcohol) you can grab for free at the back after meals. Service was comparable but Air French actually employed a Chinese translator who took up a passenger seat at the back and only did translation work. This was a novelty to me.

For speed and efficiency, choose Finnair (it actually flies to most European cities); for those who need to stopover and pick up a few bags on the way back, Air France is the only choice.

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