China company performance

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I have written a few posts about China recently. None have taken a look at the big picture for Chinese growth and at its affects on big Chinese companies that are receiving large overseas investment in their shares. Overall, China will not decouple. At a minimum, growth will slow — by how much remains to be seen.


It reminds me of a tale a friend has been telling me. Rashique, this friend, is an amazing analyst in the City of London. He has been telling me for 5 years now about his theory of a super-bubble. He says that the leverage and debt underlying the credit bubble of the late 1990s was not going to fully deflate and that we would see a major crash after the Beijing Olympics because the Chinese would alter their geopolitical and economic behavior after that. Rashique is pretty prescient in his theory regarding Super bubbles because that is exactly George Soros’ theory in his new book.

The super-bubble talk is intriguing, if a bit apocalyptic. I tend to agree with the overall framework but I am trying to take a more middle of the road approach. I do believe we have had a major 25-year debt bubble. But, what that means regarding future economic and financial market outcomes is hard to say. For now, China is doing just fine but there are clear signs of slowing.

One can find a lot of articles on this like The Start of China’s Post-Olympics Hangover? or Is China’s Growth Story Coming Unglued? or China’s Economic Gains Give Way to Hazy Future. But, at its heart the new stimulus package that China’s government is issuing despite high inflation has to be a bit worrying.

Yves Smith had a good post yesterday about the slowing Chinese economy and how it was NOT Olympics-related. The slowing Chinese economy s directly related to rising inflation and labor costs. This is going to affect some industries more than others. Let’s stay tuned. In the meantime here are four which just released earnings.

Earnings: One Telecom and Three Oil Companies
The four largest Chinese companies, which released earnings this week, bear noting. They attest to the varying degree of growth one should expect from China going forward.

First, was China Mobile. They released earnings yesterday that showed their subscriber base is growing less rapidly. The stock got hammered in the market. It has a huge weighting in Hong Kong’s Hang Seng Index, so that dragged the Hang Seng down more than 2%.

Lehman Brothers said:

With China Mobile still holding roughly 70% market share of the total mobile subscriber base in China, we are concerned that the provincial management staff of the other two mobile operators may act irrationally and attempt to gain subscriber market share at the expense of profitability.
Market Watch

Then there was CNOOC. That’s the Chinese oil company that was blocked from acquiring Unocal in an act of U.S. protectionism. Bloomberg reported that they had a fantastic first half for 2008.

Cnooc Ltd., China’s third-largest oil company, rose to the highest in more than a month in Hong Kong trading after first-half profit climbed to a record, beating estimates, because of higher output and oil prices.

The oil producer’s shares advanced as much as 6.4 percent to HK$12.36, the highest since July 15, and closed at HK$11.96. PetroChina Co., the nation’s biggest oil company, fell 3.3 percent to close at HK$9.96 after posting its steepest semi- annual profit decline in more than six years on refining losses.

Cnooc, which doesn’t run refineries, said yesterday profit surged 89 percent to 27.54 billion yuan ($4 billion), more than triple the earnings growth of Exxon Mobil Corp. and Royal Dutch Shell Plc. PetroChina, overtaken by Exxon as the world’s most valuable company during the half, said net income fell 35 percent after government fuel-price caps undermined crude gains.

“Cnooc earnings are much higher than the street consensus on strong second-quarter production growth, good cost control and pricings,” Graham Cunningham, a Hong Kong-based oil analyst at Citigroup Inc., said in a research report today. “The second-quarter production surged 11.8 percent, the strongest growth since 2005, which alleviates market concern over its full-year target.”

Bloomberg News

But, CNOOC is mainly about Exploration and Production. Upstream is doing well for oil companies. Of course it is – oil prices spiked to $147 a barrel. Downstream (refining and marketing) is getting creamed, though. Witness ConocoPhillips’ announcement yesterday that it is offloading its gas stations.

So, it was no wonder when Sinopec had horrible earnings because it is more leveraged to downstream profits. When the state sets price caps on your goods for sale that’s not good either.

Top Asian oil refiner Sinopec Corp posted an 87% fall in quarterly earnings as soaring crude prices and caps on state-set fuel prices pushed its refining business into the red, despite government subsidies.

Analysts say Sinopec is likely to face a similarly tough time in the second half of this year even after Beijing raised gasoline and diesel prices by 18% in late June, because the government may scrap a tax rebate on imported crude.

State-run Sinopec and rival PetroChina have found themselves squeezed between skyrocketing crude prices, which jumped by nearly half in January-June before hitting a record $US147 a barrel last month, and state-capped fuel prices, a massive burden for suppliers of the largest fuel market after the United States.
Sydney Morning Herald

PetroChina, once Warren Buffett’s favorite Chinese company, was also negatively affected by poor refining margins.

Unlike other global oil giants that are reporting record profits thanks to surging prices, price controls on fuel and other oil products prevent PetroChina and other domestic refiners from passing on higher costs for imported crude oil to consumers, forcing the state-owned refiners to bear heavy losses.

PetroChina, whose parent company is state-owned China National Petroleum Corp, said the loss for its refining and marketing business surged to 59 billion yuan ($US8.6 billion ($A10.08 billion) in the first half of the year, compared with a 3.9 billion yuan profit in January-June 2007.

Sydney Morning Herald

Luckily for CNCP, PetroChina’s parent, it has other options. You probably heard about the $3 billion deal they made with the Iraqis. Bush goes in and wastes hundreds of billions of dollars s the Iraqis can, as a democratic and free sovereign nation, sign oil deals with the Chinese. Nice.

Conclusion
The long and short of this all is that it is clear that China is slowing. Why else would the government be offering a stimulus package. But, it’s still pretty unclear how much China will slow and what that will mean for the global economy.

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