November 2012 (Chinavestor) There were not too many surprises in October. Chinese stocks continued to trade where they left off earlier the year; the Hang Seng Index (INDEXHANGSENG:.HSI) and Chinese stocks listed in the U.S. continued to advance while the Shanghai Composite Index (SHA:000001) fell further down for the month. It was only the Dow Jones Industrial Average (INDEXDJX:.DJI) that fell for the month of October yet is still in the black for the year 2012. All told, the Shanghai Composite Index (SHA:000001) declined 1.1% in October or a combined 4.9% year-to-date (YTD). Weak earnings continue to plague stocks in China where investors are looking at the government for help. But investors have given up buying stocks with no stimulus package on the horizon.
But trading was different in Hong Kong where investors pushed the Hang Seng Index (INDEXHANGSENG:.HSI) to eight months high in October. Strong profits of Industrial and Commercial Bank of China (ICBC), the largest financial institution of the country, offset weak earnings from the energy sector late October.
The composite of Chinese stocks listed in the U.S. rose 2.0% in October and is up 7.9% YTD. Most of the advance is due to strength coming from index heavy weight energy sector, China Petroleum & Chemical Corp. (NYSE:SNP) in particular, as well as a comeback from transportation stocks. Airliners made a strong comeback in October with China Eastern Airlines (NYSE:CEA) taking the lead. China’s second largest airliner advanced 13% in October while larger rival China Southern Airlines (NYSE:ZNH) rose 6%. Guangshen Railway Co. (NYSE:GSH), a railway operator in the Pearl River Delta region, advanced over 10% as well. But as the following charts suggests, transportation stocks just made up for all previous losses in the past three months and have a zero balance for the August-October three months period.
Energy stocks continued to outperform not just in October but for the last three months. Sinopec (NYSE:SNP) advanced the most in October ahead of earnings but fell following actual numbers. Petrochina Co. Ltd. (NYSE:PTR), China’s largest oil producer, has had a similar pattern for the month albeit with a reduced magnitude. China’s oil majors were hurting at the pump in the third quarter where prices are determined in Beijing while spot oil prices before refining reflect international trends. High international oil prices thus translate to lower margins at the pump. There has been a somewhat quiet yet important development regarding Chinese oil companies. Chinese oil majors have increasingly turned abroad for acquisitions to meet insatiable demand. CNOOC Ltd. (NYSE:CEO) led the foray in Argentina, Australia and now in Canada but Sinopec (NYSE:SNP) is catching up with acquisitions in Africa. China’s dependence on foreign oil is 57% now, double of what it was just a decade ago. In fact, China turned to be a net oil importer in 1993.
Healthcare stocks and index heavy weight Mindray Medical (NYSE:MR) in particular, have leveled off for September and October as investors wait for actual numbers on November 5. The healthcare sector outperformed any other segment among Chinese stocks for the last three months with more potential upside should earnings surprise to the upside.
There is a lot to watch at the ongoing earnings season. China’s GDP growth fell under 8% this year, for the second time in the last 20 years as the nearby chart testifies. The slower growth makes investors worried about what stocks and sectors may get hit the hardest and alternatively, what sectors will prove to be resilient to such overall economic downturn.
Technology stocks have suffered the most in October before earnings as slower growth made high P/E stocks vulnerable to correction. Chinese solar stocks continue to lead the decline after diminishing demand in Europe and overcapacity prolongs a possible recovery. Once mighty LDK Solar (NYSE:LDK), a stock trading as high as $68, is now a penny stock and is on the verge of bankruptcy with debt to equity ratio as high as 520 percent. But former industry heavy weight Suntech Power (NYSE:STP) is just as disappointing for the stock has lost 97% of its value since 2008.
But it’s not just the solar segment of the broader technology sector that took a beating. Internet stocks continue to trade at a discount ahead of earnings. Investors remain uneasy about the monetization scheme of mobile devices, throwing a curve at valuation of traditionally reliable companies. The much publicized Facebook (NASDAQ:FB) IPO and subsequent quarter was the wake up call technology investors needed to realize that traditional monetization methods will not work in the fast changing marketplace where mobile devices take an increasingly important role. This has had significant ramifications for China’s Facebook version of RenRen Inc. ( NYSE:RENN), a stock that is trading close to 52 week lows right now.
The telecom industry might present a pleasant surprise for many after 2012 Q3 numbers are out. Despite an overall economic slowdown, telecoms reported sound revenue growth of 12% in September and healthy margins. We are bullish with the sector given that telecoms, part of the services sector on the previous two charts, advanced at a modest pace in the last three months while reported healthy earnings.
China Mobile (NYSE:CHL), the largest telecommunications firm in China, reported third quarter net profit of RMB93.3 billion ($1.494 billion), up 1.4% year-over-year (YoY). Even better, China Unicom (NYSE:CHU) reported a 29.9% profit growth albeit from a lot smaller base. China Telecom (NYSE:CHA) net fell to RMB12.56 billion ($2.011 billion) as high user acquisition costs dented into profits.
Telecoms, and China Mobile (NYSE:CHL) in particular, face huge capital expenditures going forward while building a nationwide 4G network. According to latest quarterly reports China Mobile (NYSE:CHL) will invest RMB180 billion ($28.8 billion) in 4G base stations starting in the second part of 2012. This will keep profits at bay for the next four to six quarters but given the profitability of its feature phone business segment, this expense should not be a problem for this giant.
Apple Inc. (NASDAQ:AAPL) continues to be an underdog in China where unusually high volume smart phone deliveries in September bypassed its iconic iPhone line. In contrast, Google’s Android driven smart phone deliveries overtook that of feature phones for the first time, solidifying China’s position as the largest market for such advanced devices.
Unfortunate for U.S. vendors, Chinese manufacturers delivered the lion share of new devices along with Korea’s Samsung. Apple sold just around 4% of all new phones in China in September 2012.
Good news for China Life Insurance (NYSE:LFC) investors is that the company continues to lead the overall industry in terms of sales. Given its huge lead, growth rate for China Life Insurance (NYSE:LFC) is relatively slow compared to international and domestic rivals but is superior compared to second largest PICC Insurance.
Finally, I will spare a few words for Baidu.com Inc. (NASDAQ:BIDU), one of the first Chinese internet companies to report earnings at the end of October. Relatively light sales and net figures are hurting the company as it is trading over 5% lower after earnings today. As we have argued in the deep 16 page long fundamental report published last week on our website, Baidu.com Inc. (NASDAQ:BIDU) is hurt by uncertain mobile advertisement outlook as well as from a foray of Qihoo 360 Technology (NASDAQ:QIHU), a company that commences with over 10% of all searches in China.
Wish you successful investing,