The Bank of Japan pleasantly surprised the financial markets by further easing monetary policy today.
In a 5-4 majority vote, the Bank said it would conduct money market operations at an annual pace of about 80 trillion yen, up from 60-70 trillion before. It cited April’s consumption tax hike and “a substantial decline in crude oil prices” to justify the larger QE. it re-iterated the 2% inflation target as the benchmark for QE.
The Bank extended the duration of its government bond purchases by 3 years to about 7-10 years, i.e., the Bank is discouraging foreigners from buying short-term bonds and encouraging them to buy long-dated ones.
Interestingly, the Bank of Japan placed enhancing corporate governance in the headlines. It said it would purchase ETFs that track the JPX-Nikkei 400 Index, or the “shame” index created earlier this year to only include Japanese corporations that provide good shareholder returns. It would buy about 3 trillion yen of those ETFs, tripling the amount in the past.
So what’s in the JPX-Nikkei 400 Index? We have the usual big names: Toyota Motor (TM), Honda Motor (HMC), Canon Inc. (CAJ), Mitsubishi UFJ Financial Group (MTU). Conspicuously missing is Sony Corp. (SNE), which terminated dividend payments last month.
The yen weakened sharply, heading towards 111 against the dollar at the time of the publication. The Nikkei 225 shot up 4.5% today. The “shame” index was up 4.1%.
The real estate developers soared today. Mitsubishi Estate (8802.TO) jumped 17%, Mitsui Fudosan (8801.TO) advanced 9.4%. Tokyo’s real estate market is the direct beneficiary of quantitative easing. See my September 26 column “How To Avoid Japan’s Muddle”.
The iShares MSCI Japan ETF (EWJ) fell 5.4% this year, after returning a handsome 26% in 2013. The ProShares Ultrashort Yen Fund gained 5.7% this year.
Bigger is better. China Mobile (0941.HK/CHL) is now Citi‘s new top pick among the three Chinese telecoms, because it is the largest. It also downgraded China Telecom (0728.HK/CHA) to Sell, asking us to take profit on this stock’s 27.9% rise this year.
“China Mobile has clear advantages in 4G smartphone supply and network coverage, and such advantages could sustain longer-term,” wrote analysts Bin Liu and Arthur Pineda today.
China Mobile gives consumers more choice on 4G handsets, selling 50 types of 4G smartphones that are priced under 800 yuan ($130). By comparison, China Unicom (0762.HK/CHU) sells about 15 4G models that are priced under 1300 yuan ($213) and China Telecom sells less than 10 of those under-1300-yuan 4G phones.
China Mobile is also planning much wider 4G coverage. It plans to build 700,000 4G base stations by the end of this year. By comparison, China Unicom plans to build 100,000 base stations only because it does not have enough cash, and China Telecom is targeting 140,000 base stations, because it is much smaller.
China Mobile sits on $74.4 billion cash and has $247 billion market cap, bigger than the other two combined, data from Capital IQ show. China Unicom and China Telecom have about $3 billion cash each.
Further, the analysts brushed aside China Mobile’s near-term earnings and said they were not important:
The long-term earnings growth trends of Chinese telcos could be different from the 3Q14 results. More positive 3Q14 earnings growth of CT and CU over CM was partly due to the interconnection fee change implemented in FY14. The interconnection fee change is unlikely to have a continued impact on earnings growth of each telco from FY15E. Also CM’s relatively more aggressive 4G promotions could lead to less short-term earnings benefit from selling costs cut than for rivals, but could lead to faster top-line growth and margin recovery in future.
They acknowledged China Mobile’s biggest risk is regulatory. The government may not want it to be so much bigger than the other two, but competitive landscape is not Beijing’s priority right now:
Major downside risk for CM could be regulatory interference. However given regulators’ strong initiative to make TD-LTE succeed, we expect any major regulatory efforts to balance market share could be slower than expected, leaving room for CM to deliver solid earnings growth turnaround with 4G.
Citi’s new price target for China Mobile is 115 Hong Kong dollars; China Unicom, HK$14; China Telecom, HK$4.3.
China Mobile has risen 23.6% this year, trading at HK$95.85. Citi’s price target implies another 20% upside.
This is not a good year for Samsung Electronics (005930.KS/SSNLF). Apple’s (AAPL) new iPhone 6 series are so popular even the Koreans are ditching Samsung Galaxy. There is also power vacuum at the top, with its legendary chairman hospitalized since May and rumors circulating that Samsung has no incentive to pay dividends and boost share prices because its heirs do not want to pay higher inheritance taxes.
Samsung yesterday reported that its third-quarter profit fell by almost half from a year ago.
But things seem to be looking up. Its new Galaxy phones recently hit the market and its memory business is still doing well.
So is the worst behind us?
This morning, Morgan Stanley, a skeptic, switched to the Buy camp and upgraded this stock with a new price target of 1.6 million won.
We are all worried that Samsung is being pushed by Apple on the top and by Chinese manufacturers from Xiaomi to Lenovo at the bottom. The China fear is overstated, according to analyst Shawn Kim:
China fears have caused de-rating, but we view this risk perception as exaggerated: Even if Samsung were to lose 100% of its profits from China, we think it could sustain an 11% mobile margin in 2015 and W145,000 EPS, which would put P/E at 11x and P/B at 1.2x at our price target of W1.6mn.
Samsung’s shares rose 4.7% trading at 1.24 million won. At the current price, Samsung is trading at 8.5 times Morgan Stanley’s earnings estimate, if it were losing all of its profits from China. Apple is a lot more expensive, trading at 13.9 times forward earnings.
Morgan Stanley also thinks Samsung’s new strategy of targeting mid-market consumers could work:
Samsung may be able to reverse its share loss through its mid-market product strategy, which we think appears to be working well. Samsung is better positioned than most Chinese players with regard to its supply chain, time to market, cost advantage, marketing power, and brand.
The company is preparing a further model transition that will bring an entire mid-range/low-end smartphone lineup in the market during Q4, a new Galaxy A-series launch, which spans high-end market segments, and Galaxy S6 in 1Q15. The introduction of these new products will allow market share to stabilize and contribute to profits.
UBS, also a skeptic, is not quite there yet and maintains a wait-and-see Neutral attitude. Here is analyst Nicolas Gaudois on Samsung today:
We may need to get closer to the 1H15 products refresh to get confidence. Whilst an update on shareholder returns is possible in 3 months (the co. will at least declare the dividend), whether this will meet expectations or not can also be dependent upon the underlying profits outlook.
We believe Samsung is right to re-focus its products offering in the low/mid end, whilst not losing sight of innovation in the high end. Whether its rejuvenated products strategy (which will start to unfold in 1Q15) will lead to an acceleration of profits or not is not the easiest of predictions. On the positive side, Samsung will likely save component costs on those new low/mid end models, and each of them will scale through higher volumes. On the negative side, “spec-ing up whilst pricing down” will for some models mean lower products margins. Moreover, those devices could cannibalise part of the high end – a possible negative for the profits pool.
Forget about the stronger-than-expected U.S. GDP and the impending U.S. interest rate hike.
Asia’s markets are partying this morning upon news that Japan’s government pension fund would announce this afternoon that it intends to shift more of its $1.2 trillion portfolio to both Japanese and foreign stocks.
According to the Nikkei morning news, GPIF’s holdings in both Japanese and foreign stocks would be doubled to 25% each from around 12% currently.
If Nikkei was correct, the GPIF would split between equity and fixed income, and have 60% of its weight in local assets and 40% for foreign assets.
While GPIF’s shift to more risky assets is widely anticipated, analysts did not expect such large movements.
In recent trading, the Nikkei 225 jumped 1.7%, the Hong Kong Hang Seng Index rose 0.8%, the Hang Seng China Enterprises Index jumped 1.1%. In the smaller, southeast Asian countries, the Indonesia Southeast Composite Index rose 0.4%.
Japanese investors have already been buying foreign assets, for two months straight, in anticipation of GPIF’s move. “The pace of foreign equity investment by Japanese investors has been accelerating clearly over the past few months. Pension funds are likely to be shifting from JGBs into foreign equities gradually, ahead of the announcement of the new GPIF target portfolio weightings,” wrote Nomura Securities‘s Yujiro Goto this morning.
In addition, “high-frequency data suggests retail investors continue to purchase foreign equities aggressively. Rushed demand to benefit from Japanese Individual Savings Accounts (NISA) before year-end may encourage retail investors to accelerate their foreign equity investment via toshins,” added Goto. Last week, Japanese investors bought foreign bonds, for the first time in two weeks.
And let’s not forget Japanese equities. They are obvious beneficiaries to GPIF’s move too – and foreigners are already taking advantage of this. “Foreign investors were net buyers of Japanese equities (JPY178bn or $1.7bn) for the first time in three weeks [last week],”, wrote Goto. This morning, Fast Retailing (9983.TO), which owns the Uniqlo brand, jumped 2.6%. Sumitomo Mitsui Financial Group (8316.TO) rose 2%.
The one asset hurt by this is obviously yen, which is now trading at 109.37 against the dollar. Overnight in New York, the ProShares Ultrashort Yen Fund (YCS) rose 0.7%. The iShares MSCI Japan ETF (EWJ) gained 0.8%. The iShares MSCI All Country ex-Japan ETF (AAXJ) rose 0.5%.
Nikkei reported that Japan’s $1.2 trillion Government Pension Investment Fund , or GPIF, plans to boost its stock holdings to 50%, split between domestic and foreign stocks, and reduce its domestic debt holdings to 35%. Analysts had expected GPIF would hold 24% domestic stocks, 15% foreign stocks and 40% in Japanese bonds, according to a survey polled by Bloomberg.
“GPIF’s current portfolio targets are 60 percent for Japanese bonds, 12 percent each for local and overseas stocks, and 11 percent for foreign bonds. The remaining 5 percent is allocated to short-term assets,” wrote Bloomberg’s Adam Haigh.
“Even assuming that BOJ events later today prove disappointing, this GPIF news reinforces the possibility that the trend of JPY weakness and higher stocks will continue uninterrupted,” wrote Nomura Securities‘s Yunosuke Ikeda, adding that yen at 110 against the dollar is “within shooting range.”
Japan’s new welfare minister may approve the new GPIF portfolio today, according to Dow Jones Newswires. Yen was at 109.3 against the dollar in recent trading.
The Nikkei 225 rallied 1.3%. Toyota Motor (TM) gained 1.3%, SoftBank (9984.TO) rose 1.1%. The iShares MSCI Japan ETF (EWJ) rose 0.8%.
Lenovo (0992.HK/LNVGF) yesterday closed the $2.9 billion merger deal with Motorola Mobility, which Google (GOOGL) divested.
After the deal close, my colleague Tiernan Ray of Barron’s Tech Trader Daily blog got the following message from Lenovo:
Yesterday’s IDC smartphone data was a day too early. As of this morning, Motorola and Lenovo are a clear #3 with 25.6 million devices, 8.7% market share and a global footprint.”
Background: Xiaomi shipped 17.3 million w 5.3% share, Lenovo shipped 16.9 million, Motorola shipped 8.7 million devices, so combined Lenovo+Moto shipped 25.6 million, w 8.7% share.
In the third-quarter, for the first time, Chinese smartphone manufacturer Xiaomi joined the top 3, after Samsung Electronics (005930.KS/SSNLF) and Apple (AAPL). See Tiernan’s blog “Samsung Falls, Apple Rises, Xiaomi Shoots Out of Nowhere in Q3 Smartphone Rankings“.
IDC’s third-quarter ranking is history; the more relevant is the future. Can Motorola Mobility help Lenovo in its quest for smartphone users worldwide?
Strategy Analytics is skeptical:
The “big three” DISDVANTAGES of the merger include:
1. Lenovo is slowing down. Lenovo’s rapid smartphone growth of recent years is now coming to an end, due to fierce competition from Xiaomi and others. Based on our data, Lenovo’s global smartphone shpiments annual growth rate has more than halved from +74% YoY in Q3 2013 to +30% YoY in Q3 2014;
2. Motorola is losing money. Motorola continues to make hefty financial losses, due to a relatively large cost-base. Based on Strategy Analytics data, Motorola has NOT made a profit for 4 years;
3. Smartphone mergers usually take several years to integrate. For example, TCL-Alcatel, a Chinese and French merger, took around 5 years to stabilize and sustain growth.
Clearly, Lenovo and Motorola have strong tailwinds — such as 8% global smartphone marketshare and two well-known brands. But Lenovo and Motorola also face major headwinds. Lenovo’s golden era of easy smartphone growth is coming to an end, while Motorola continues to lose money. Merging these two firms next year will NOT be as easy as many expect.
But Barclays‘s Kirk Yang and Ric Cheng are more encouraging, saying Motorola could break even in only 2-4 quarters:
We believe it should be easy for MOT to at least double its smartphone shipments this year, helped by strong MOTO G and MOTO E demand (mainstream models), while MOTO X targets the high end. As MOT’s ASP is around US$200, it complements Lenovo’s ASP of around US$70 to broaden the product portfolio and possibly embark on a dual-brand strategy in selected markets. MOT will bring Lenovo more IP than its China competitors and give Lenovo a better chance to succeed outside of China, especially in mature markets, in our view. Lenovo reiterated its expectation that it would take 4-6 quarters after the deal closes for the combined business to break even, but we believe it should only take 2-4 quarters since MOT’s smartphone business is already gaining share in 1H14 (prior to the closing) and we expect strong synergies can be achieved between Motorola and Lenovo.
MGM China (2282.HK), a subsidiary of MGM Resorts (MGM), reported $229 million in earnings, about 14.5% ahead of the consensus $200 million EBITDA.
The earnings beat was due to better margins, which grew by 1.4 percentage points to 28.8%.
“In an environment of slower growth, Management execution capability will differentiate company performance with peers,” wrote Credit Suisse analysts Kenneth Fong and Isis Wong this morning. MGM China is their top sector pick “for its solid execution, strong cashflow generation (5% yield), undemanding valuation of 14.5x FY15 PE with new project that will more than double its capacity in two years, which is currently not in price.” MGM China said the Cotai construction was on track and the casino there, which would double its capacity in Macau, was set to open in the fall of 2016.
MGM’s management said that traditional seasonal peaks – the Golden Week in October and the Labor Day week in May – will become less pronounced in the future:
Management believes that the seasonal revenue peaks during the year during important holidays (e.g. Golden week holiday) will become less pronounced going forward. A more evenly distributed business volume should benefit the operators on better capacity utilisation. The mass market trend for MGM has been steady and consistent so far, despite a slow growth market.
Checking in on prices, overnight in New York, MGM Resorts rose 0.4%, Las Vegas Sands (LVS) gained 0.8%, Wynn Resorts (WYNN) advanced 0.9% and Melco Crown (MPEL) was up 0.8%.
Analysts are racing to raise their price targets on Baidu (BIDU) today, even though its third-quarter revenue growth was in line with company guidance and Q4 revenue guidance was weaker than that of Q3.
They like the solid progress Baidu has made in mobile search. For the first time, mobile search traffic was larger than PC’s. Mobile constituted 36% of Baidu’s revenue.
Deutsche Bank analyst Alan Hellawell III and team raised their price target from $245 to $261, saying mobile search could get more advertising dollar than before because Baidu’s new offline-to-online service Baidu Connect is already picking up pace one month after its launch:
We expect the CPC gap between mobile and PC to narrow further from 32 % to 28% by FY15 on: 1) improving bidding system support, 2) enriched product offerings, such as dynamic ads and recently launched Baidu Connect (which has attracted 400k merchants).
Mgmt is focused heavily on local services given the potential greater monetization opportunity in the segment. By connecting the user with various local services, Baidu should engage more deeply in the transaction process, which should enable incremental ARPU.
Macquarie analyst Jiong Shao and team now have a $300 price target, up from $280, for similar reasons. HSBC‘s Chi Tsang and team raised their price target from $245 to $275.
Morgan Stanley analyst Philip Wan and team raised their price target from $251.6 to $275.2, and said the pre-installation expenses Baidu incurs in the last year is tapering down:
While the company enjoys a clear leading position in mobile search (70-80% market share we estimate), it will continue to focus on investing in technology to enhance search quality, in order to bring better user experience and higher quality traffic, hence improving its ROI on mobile search. At the same time, Baidu will continue to invest in customer acquisition channels, such as pre-installation, but to a lesser degree, as the company has already accumulated a vast user base, with a solid brand awareness, on mobile. According to the company, sales and marketing costs related to pre-installation have been trending down since 2Q.
All the analysts above believe Baidu will register better margins next year.
See my column on Barron’s magazine last weekend on why Baidu has made it on mobile whereas its largest competitor on PC search Qihoo 360 (QIHU) has not: “Why Baidu’s Headed Up and Rival Qihoo Down“.
Baidu closed at $224.6 yesterday. It is down 1.6% in after-hour trading.
Financial media today floods us with articles on how Samsung Electronics‘s (005930.KS/SSNLF) third-quarter earnings dipped on stalling smartphone sales. Tell us something that we do not already know. Samsung Electronics already warned us that when it issued preliminary Q3 results on October 6.
Let’s learn something new.
Samsung expects demand in the fourth-quarter to improve across all product categories. Morgan Stanley kindly provides us with the details:
The mobile market stays highly competitive but Samsung’s shipment and ASP should increase with new model launch, and benefit internal components (OLED, mobile A/P). Memory demand enters a peak period while supply remains tight. Management guided for low 50% bit growth (mid 30% for industry) in DRAM in 2014 and slightly outpacing the low-40% NAND market bit growth, which exceeds our outlook. TV sets (up 40% QoQ) and panels (+ high single) should benefit from seasonality and high-end product mix.
Keep in mind market expectation towards Samsung is low. It trades at only 1x book and still has a profitable memory business and new flagship phones are in the market for the fourth-quarter. How much lower can it go? See Barron’s October 11 cover story “Samsung: Why the Stock Could Soar“.
Shares of Samsung jumped 4% in recent trading. Memory competitor SK Hynix (000660.KS) rose 0.1%.
Two of China’s oil giants reported earnings today.
In the third-quarter, oil and gas revenue at CNOOC (0883.HK) fell by 4.6% from a year ago to 53.6 billion yuan, dragged down by weaker oil price. CNOOC managed to sell its oil at an average of $99 per barrel, down 6.8% from a year ago.
Analysts are having a heated debate this morning over how fast CNOOC can grow next year. CNOOC’s management re-iterated its 6-10% annualized growth target, despite weak third-quarter results and an anemic crude oil market.
Morgan Stanley analysts Andy Meng and Daisy Li thought “>15% production growth is still very likely in 2015″ and:
forecast ~18% production growth in 2015, as 1) all the major new projects have progressed smoothly, as confirmed in 3Q14 results announcement, and we see low risk of further uncertainty in 4Q14 post typhoon season; 2) CNOOC’s capex growth has decelerated in 3Q14 while 1Q-3Q14 capex growth (+24%) stands just at the middle of full-year target range. Such modest capex growth suggests progress on all the new projects is well on track; 3) Certain overseas assets owned by CNOOC have been consolidated into Nexen internally, making production split between organic and non-organic more difficult. This explains why management include Nexen’s volume in production CAGR.
Barclays‘s Somshankar Sinha, Ying Lou and Rex Feng said “irrespective, CNOOC is likely to be one of the fastest-growing global E&Ps in 2015 even as capex falls.”
UBS‘s Peter Gastreich and Benson Chen disagreed and interpreted CNOOC’s lower capital expenditure differently from Morgan Stanley:
We believe the market understands the guidance that was set out in January 2011 was exclusive of major acquisitions, hence we believe there is some risk that the comments could disappoint the market.
Management also mentioned 2015 capex could be lower than the 2014E level. While lower 2015 capex could bode well for cash flow, this could lead to uncertainty regarding subsequent years’ production outlook.
Nomura Securities‘s Gordon Kwan and Bob Chen have an outright Sell on CNOOC, saying that compared to PetroChina and Sinopec, CNOOC has the highest correlation with oil price. A bear market bodes ill for this stock.
Trading at 7.8 times forward earnings, CNOOC is the cheapest among the three. PetroChina (0857.HK) trades at 10.2 times and Sinopec (0386.HK) trades at 8.7 times.
Overnight in New York, CNOOC (CEO) slumped 4.3%, PetroChina (PTR) gained 0.3%, and Sinopec (SNP) fell 0.4%.
Separately, PetroChina‘s earnings fell 18% from the second quarter to 0.15 yuan per share, 11% lower than the Bloomberg consensus. In the refinery segment, because of the slumping crude oil price in the third-quarter, the company reported a 1.8 billion yuan operating loss, reversing the profitable trend.
In Hong Kong this morning, CNOOC opened 4.5% lower. PetroChina fell 0.8%. Sinopec gained 0.2%.
Barrons.com’s Asia Stocks to Watch blog analyses news and research from this vibrant and diverse continent, challenges conventional wisdom, and discusses investment ideas from Shanghai to Singapore, and from Indonesia to India.
Shuli Ren has written for Dow Jones Newswires on corporate strategies and Asia markets. Before becoming a journalist, Shuli conducted quantitative equity research at Lehman Brothers, and later Barclays Capital. She was also a consultant for Charles River Associates. She holds a CFA and FRM and studied economics at the University of Chicago’s graduate school.
Write to Shuli at Shuli.Ren@barrons.com