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WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE?

Takeaway: Chinese firms are goosing exports to drive incremental liquidity into the banking system – a phenomenon that appears set to slow from here.

SUMMARY BULLETS:

 

  • It is our view  that Chinese enterprises are goosing their export statistics to mask capital inflows under the guise of merchandise trade shipments and Hong Kong is an obvious choice, given the cultural and operational proximity to the mainland. This tactic allows the guilty corporations to repatriate additional “earnings” back into the economy – which increases the amount of liquidity flowing into the Chinese banking system. To the extent the additional liquidity is not sterilized by the PBOC, the Chinese banking system is then able to accelerate credit growth beyond what would ordinarily be stipulated by domestic deposit growth dynamics.
  • In simple terms, this will continue until inflation becomes an issue – either actual or perceived – again. From an “actual” perspective, we don’t view a demonstrable acceleration in Chinese CPI readings as a probable event over the intermediate term, as best explained via our #StrongDollar = #StrongYuan thesis. From a “perceived” perspective, however, it’s very clear that Chinese officials remain worried about excessive liquidity fueling monetary inflation and asset price bubbles – with the former phenomenon having historically perpetuated social unrest across the mainland. Regarding the latter, the property market remains a key area of concern here. China Real Estate System data shows that average home prices across 100 cities rose +1% on MoM basis in APR (down just slightly from +1.1% in MAR and the 11th straight MoM increase) and +5.3% on a YoY basis (up from +3.9% in MAR).
  • To mitigate inflationary risks, on MAY 6, the State Administration of Foreign Exchange (SAFE) issued new regulations on foreign exchange inflows, in an accelerated effort to mitigate financial risks derived from foreign exchange receipts and payments. Specifically, the new rules will tighten limits on long yuan positions that banks can hold for their own accounts. Moreover, they are also designed to discourage firms from using dollar loans as a means to speculate on yuan appreciation. Whether or not SAFE implements and enforces its new foreign exchange regulations in an effective manner remains to be seen. It should be noted, however, that effective enforcement is a headwind for Chinese growth (particularly Fixed Assets Investment), at the margins, to the extent incremental liquidity flow to the Chinese banking system is slowed.
  • The Shanghai Composite Index (see chart below) has recently recaptured its intermediate-term TREND line ahead of the upcoming week of monthly economic data releases. In light of the recent string of macroprudential tightening measures, whether or not this is a head-fake to be ultimately faded is a key question indeed. We’ll likely know by the end of next week.

 

Overnight, China reported its APR Trade Data, which accelerated sequentially and surprised consensuses estimates to the upside in all three major categories (Exports, Imports and Trade Balance):

 

  • Exports: +14.7% YoY from +10% in MAR vs. a Bloomberg consensus estimate of +9.2%
    • To US: -0.1% YoY from -6.5% in MAR
    • To EU: -6.4% YoY from -14% in MAR
    • To Hong Kong: +57.2% YoY from +92.9% in MAR
  • Imports: +16.8% YoY from +14.1% in MAR vs. a Bloomberg consensus estimate of +13%
  • Trade Balance: $18.2B from -$0.9B in MAR vs. a Bloomberg consensus estimate of $16.2B

 

WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? - 1

 

ONE OF THESE THINGS IS NOT LIKE THE OTHER

The “strength” in China’s Export figures for the month of APR is obviously being driven by shipments to Hong Kong, China’s second-largest export market at 15.8% of total shipments per CIA Factbook; the US is first at 17.2% and Japan is third at 7.4%.

 

WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? - 2

 

Additionally, China’s marked acceleration in Export growth contrasts with a +0.4% YoY gain in South Korea’s APR Exports (essentially unchanged from +0.2% in MAR) and a -1.9% YoY decline in Taiwan’s APR Exports (which slowed from +3.3% in MAR). Taiwan actually alluded to cutting its 2013 GDP growth forecasts due to sluggish external demand – the same sluggish external demand that continues to weigh on Chinese PMI readings (particularly in the New Export Orders Index):

 

WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? - 3

 

WHY IS CHINA CHEATING?

It is our view  that Chinese enterprises are goosing their export statistics to mask capital inflows under the guise of merchandise trade shipments and Hong Kong is an obvious choice, given the cultural and operational proximity to the mainland. This tactic allows the guilty corporations to repatriate additional “earnings” back into the economy – which increases the amount of liquidity flowing into the Chinese banking system. To the extent the additional liquidity is not sterilized by the PBOC, the Chinese banking system is then able to accelerate credit growth beyond what would ordinarily be stipulated by domestic deposit growth dynamics.

 

WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? - 4

 

WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? - 5

 

It’s worth noting that the PBOC hasn’t issued notes since late 2011 and, prior to the start of the year, had been a net provider of liquidity to the market on a trailing-3M average basis. The fact that China’s central bank has largely been a net drainer of liquidity in the YTD is likely a key driver of the recent acceleration in export goosing.

 

WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? - 6

 

WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? - 7

 

HOW MUCH LONGER WILL THIS TREND CONTINUE?

In simple terms, until inflation becomes an issue – either actual or perceived – again. From an “actual” perspective, we don’t view a demonstrable acceleration in Chinese CPI readings as a probable event over the intermediate term, as best explained via our #StrongDollar = #StrongYuan thesis. NOTE: the CNY made yet another post-revaluation record high today, trading at 6.1413 per USD.

 

From a “perceived” perspective, however, it’s very clear that Chinese officials remain worried about excessive liquidity fueling monetary inflation and asset price bubbles – with the former phenomenon having historically perpetuated social unrest across the mainland.

 

WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? - 8

 

Regarding the latter, the property market remains a key area of concern here. China Real Estate System data shows that average home prices across 100 cities rose +1% on MoM basis in APR (down just slightly from +1.1% in MAR and the 11th straight MoM increase) and +5.3% on a YoY basis (up from +3.9% in MAR).

 

To mitigate inflationary risks, on MAY 6, the State Administration of Foreign Exchange (SAFE) issued new regulations on foreign exchange inflows, in an accelerated effort to mitigate financial risks derived from foreign exchange receipts and payments. Specifically, the new rules will tighten limits on long yuan positions that banks can hold for their own accounts. Moreover, they are also designed to discourage firms from using dollar loans as a means to speculate on yuan appreciation.

 

Additionally, SAFE also said it will also increase scrutiny on exporters who channel money into the country disguised as trade payments, threatening to hand down a risk warning notice 10 days after it finds that a firm's capital flows do not match physical goods shipments or if the firm is channeling unusually large amounts of money into China.

 

Whether or not SAFE implements and enforces its new foreign exchange regulations in an effective manner remains to be seen. It should be noted, however, that effective enforcement is a headwind for Chinese growth (particularly Fixed Assets Investment), at the margins, to the extent incremental liquidity flow to the Chinese banking system is slowed.

 

The Shanghai Composite Index (see chart below) has recently recaptured its intermediate-term TREND line ahead of the upcoming week of monthly economic data releases. In light of the recent string of macroprudential tightening measures, whether or not this is a head-fake to be ultimately faded is a key question indeed. We’ll likely know by the end of next week.

 

Darius Dale

Senior Analyst

 

WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? - 9


VIDEO: Bullish On Babies

 

Hedgeye Director of Research Daryl Jones appeared on Yahoo! Finance's Big Data Download this morning to discuss recent birth trends and how it can be a leading economic indicator. The increase in births has led to an increase in household formation. This is a huge boost for organic growth as well as the housing market and thus the US economy. 

 

You can watch the full video with Daryl above.


JAPAN: Passing The Torch

Japan has been following in the footsteps of the United States lately and is burning the Japanese Yen. The value of the Yen has fallen considerably since the beginning of 2013 as the Bank of Japan decides that monetary stimulus is a positive. Sure enough, the Nikkei 225 Index is up +65% since November 2012. Stocks are going to go up anywhere when the political class is hellbent on printing money. We'll see what Japan has up its sleeve for their next trick.

 

JAPAN: Passing The Torch - FXYperf


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Squeezing Commodities

Gold and other commodities have fallen in value considerably since the US dollar started appreciating in value in February. Gold remains in bearish formation and crude oil (OIL) is next in line for a (likely) squeeze. Cheaper gas equates to more consumption and that's good for growth and stocks.

 

Squeezing Commodities - YTDOIL


MCD NOT GOING TO HIT NUMBERS

The upside in McDonald’s stock is not being driven by the company’s fundamentals. The underperformance in the stock since we added it to our Best Ideas list on 4/25, is , is likely to continue and, if we are right on the numbers, could become worse for shareholders.

 

The company has a lot of work to do to turn its operational performance around and we are not seeing any indication that this reversal will transpire any time soon. Management's recital of the (stale) tenets of the current Plan to Win, “optimize our menu, modernize the customer experience and broaden accessibility to brand McDonald's around the world”, as an answer to all ills, does not instill confidence that the current leadership is coming up with new ideas to counteract the company’s current operating headwinds. 

 

 

April SRS vs Consensus (Consensus Metrix)

  • US Beat: +0.7% versus consensus -0.1%
  • Europe Missed: -2.4% versus consensus -1.0%
  • APMEA Missed: -2.9% versus consensus -1.4%
  • Global Missed: -0.6% versus consensus -0.5%

United States: “Premium McWraps, compelling value options and the ongoing popularity of McDonald's breakfast contributed to the month's results.

 

Europe: “positive performance in the U.K. and Russia more than offset by Germany, France and other markets.”

 

APMEA: Results reflected “the impact of Avian influenza, primarily in China, and softer results in Japan and Australia.”

 

 

Without Sales Growth, Earnings Growth Will Be Difficult

 

In 1Q13, McDonald’s posted revenue growth of +0.9% on systemwide sales growth of 0%. One month into the second quarter, MCD systemwide sales have decreased -0.4%.  The Street is expecting 3% revenue growth in the second quarter.

 

MCD NOT GOING TO HIT NUMBERS - mcd sales eps leverage1

 

MCD NOT GOING TO HIT NUMBERS - mcd 13 eeg

 

MCD NOT GOING TO HIT NUMBERS - mcd systemwide sales

 

 

May and June will be crucial months for McDonald’s.  A sequential acceleration in two-year average trends of 105 bps is needed to meet May consensus comparable sales growth in the U.S. So far this year, the two-year trend in U.S. comps has decelerated every month by an average of 83 basis points.

 

MCD NOT GOING TO HIT NUMBERS - mcd global comps

 

MCD NOT GOING TO HIT NUMBERS - mcd us comps

 

MCD NOT GOING TO HIT NUMBERS - mcd eu comps

 

MCD NOT GOING TO HIT NUMBERS - mcd apmea comps

 

 

Long-Term Trend Remains Discouraging

 

MCD NOT GOING TO HIT NUMBERS - mcd srs global ttm

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 

 


MPEL 1Q13 REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

 

OVERALL 

  • BETTER:  We were ahead of consensus and MPEL still managed to beat our numbers by 2%.  Continued mix shift toward mass helped margins.

 

TABLE YIELD

  • BETTER:  Group-wide RC volumes have grown +18%, significantly outperforming the market and highlighting MPEL's success with its ongoing table optimization strategy whereby they focus on maximizing group-wide EBITDA by yielding up each individual table.
  • PREVIOUSLY: “Our table yields at the City of Dreams continue to outperform all other major properties in Macau while at the same time our table yields in the rolling chip segment at both Altira Macau and City of the Dreams continue to improve. Our table optimization initiative is ongoing, as we proactively look for ways to maximize the performance of our most scarce and valuable resource."

STUDIO CITY

  • SAME:  Remains on time and on budget.  Capex 1Q was US$40MM.  Construction cost guidance of US$2.04 billion is unchanged. (2013: $800MM-$1BN).  Most of the piling work is substantially completed.  In the few months, the structure will come out of the ground.  There are 800-1,000 workers on the structure.
  • PREVIOUSLY:  "Studio City remains on track to open around mid-2015. With regards to Studio City, we've been in heavy-duty construction mode since summer. We have done, I think, 95% of the piling work, and we are ready to move on to the basement very soon. We have about 500 workers on site, and so far the main contractor has been doing a good job."

COD MARGIN 

  • BETTER: CoD margins were 29.5% this quarter despite a low hold rate. MPEL believes that as mix continues to shift towards mass they have room to continue to grow margins.
  • PREVIOUSLY: “So I think we are looking at somewhere at this very moment at 20% to 27% in terms of CoD margin, and we're looking at some improvement from this level onward."

COD PHASE 3

  • SAME:  Is optimistic on breaking ground before the end of 2013
  • PREVIOUSLY: “We were optimistic that obviously Phase 3 is still subject to our official Board approval, but I think we are very advanced in terms of the designs and schematic designs. We are waiting – as you know, Phase 3 used to be apartment hotels. So we are waiting for that piece of land to be re-gazetted, and the moment it's re-gazetted we're almost ready to go. So we are optimistic that it could get started at the end of this year."

CHINA OUTLOOK

  • SAME: Lawrence is more optimistic on market growth in Macau than at the outside of the year, although the did not quantify it
  • PREVIOUSLY: “So we're very optimistic. I think with the new administration will – is ramping up at this stage, and I think, give them a few more months they will be in full swing. At the same time, if you look at most of the China production index, they have all turned quite positive over the last little while. So our view is that the market this year should definitely grow stronger than last year. And I think we always predicted a 10%, 15% or more growth. So I think there would probably be more upside than downside."

PHILIPPINES RESORT

  • SAME:  Will open in mid-2014.  No change in ROIC minimum expectation of 20%. MPEL is optimistic proposed tax changes will get favorably resolved
  • PREVIOUSLY:  "For the Philippines, we anticipate spending approximately $450 million to $475 million this year into that project."

DIVIDEND

  • SAME:  Committed to returning shareholder capital through a buyback or issuing a dividend in the future.
  • PREVIOUSLY:  "We would want to see dividend definitely sooner rather than later. We will continue to monitor that. I think if 2013 plays out to the way we've been able to play out and given the development nature is as smooth as we hope it will be, I definitely think we can commit to the dividend policy early."

MPEL 1Q13 REPORT CARD - g


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