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CHINESE BANKING REFORMS: SHORT OF DETAILS; LONG OF RISKS

Takeaway: Chinese policymakers appear committed to ignoring the risks embedded throughout the country’s financial system.

CONCLUSIONS:

 

  • We don’t like that Chinese policymakers appear committed to ignoring the risks embedded throughout the country’s financial system and its 3,800 banks.
  • Forging ahead with interest rate reform – as recently affirmed by the PBoC – in the absence of meaningful and accelerated banking system reform that is accompanied by broader economic reform (see: publically-perpetuated fixed asset investment bubble) is a HUGE risk, in our analytical opinion.
  • If it seems as if we’re no longer comfortable with NOT being bearish on China, then we’d say that is an accurate depiction of our fundamental bias at the current juncture.

 

How trite of me to send you a note in the late afternoon thrashing the 3rd Plenary Session of the 18th CPC Central Committee. Surely by now you’ve been pelted with sell-side notes and media headlines berating it for its lack of specificity on the reform front.

 

As such, we’ll spare you the details and a long-winded summary of our likes and dislikes; we really couldn’t put one out if we tried – the actual policies are to be designed by a hand-picked reform task force in the weeks and/or months ahead. For now, all we have are more questions than answers.

 

A short-winded summary of our likes and dislikes:

 

  • We like that Chinese policymakers appear committed to reforming municipal government financing. Per World Bank estimates, municipal level governments spend ~80% of total public expenditures in China, but take home only ~40% of total public revenues. This cash flow mismatch is financed largely by off-balance sheet debt issuance of questionable credit quality (~28% of outstanding bank loans per the latest CASS estimates), so anything to remedy the aforementioned disparity would be positive, at the margins, for reducing the risk of an NPL crisis predicated by LGFV liquidity issues.
  • We like that Chinese policymakers appear committed to restructuring property rights. While harvesting the low-hanging fruit will likely fall short of broad-based Hukou reform, we do think any progress on this front will help to alleviate the political pressure boiling up across rural China which has decidedly undermined CPC legitimacy in recent years.
  • We don’t like that Chinese policymakers appear committed to ignoring the risks embedded throughout the country’s financial system and its 3,800 banks. Forging ahead with interest rate reform – as recently affirmed by the PBoC – in the absence of meaningful and accelerated banking system reform that is accompanied by broader economic reform (see: publically-perpetuated fixed asset investment bubble) is a HUGE risk, in our analytical opinion.

 

If you’re not yet familiar with our seminal concerns surrounding the structural headwinds to Chinese (and global) economic growth embedded throughout the Chinese banking sector, we think it is important that you review the summary piece we published last Friday, “PREVIEWING CHINA’S THIRD PLENARY SESSION: CREDITHOLICS ANONYMOUS?” (11/8), as well as our 61-page slide deck titled, “ARE YOU SHORT CHINA [AND OTHER EMERGING MARKETS] YET?” (6/12).

 

CHINESE BANKING REFORMS: SHORT OF DETAILS; LONG OF RISKS - 1

 

If it seems as if we’re no longer comfortable with NOT being bearish on China, then we’d say that is an accurate depiction of our fundamental bias at the current juncture.

 

Please feel free to email us if you have follow-up questions that you’d like us to address.

 

Have a great evening,

 

DD

 

Darius Dale

Associate: Macro Team


A 'Sell' Rating on $RH? NONSENSE.

Hedgeye Retail Sector Head Brian McGough reports that a sell-side firm just initiated coverage on Restoration Hardware (RH) today with a Sell rating. "That's a head-scratcher" he says. 

 

In an emailed note McGough writes, "It’s tough to find any logic whatsoever in a short call on RH when the company will see 30%+ acceleration in square footage growth AND outsized comp growth to boot. This is Retail 101. Our estimates across durations remain 2-3x consensus."

 

Bottom line according to McGough is "RH is a $175 stock waiting to happen."

 

Check out the HedgeyeTV video below from October 17th where McGough explains why he believes RH is a 3-bagger.

 

 

(Note: McGough recently issued a 50-page Black Book on Restoration Hardware detailing his thesis. Ping sales@hedgeye.com for more information).


INVITE - FDX: Delivering After a Year in Transit? (Call Tomorrow @ 1PM EST)

Takeaway: Please join us tomorrow @1PM for an annual check-up on our FDX thesis

INVITE - FDX: Delivering After a Year in Transit? (Call Tomorrow @ 1PM EST) - FedExDIALIN 11 14 13

 

 

We will be presenting a Flash Call titled "FDX: Delivering After a Year in Transit?" on Thursday, November 13th at 1:00pm EDT.

 

A year after our initial Black Book and long call (Replay: CLICK HERE, Black Book: CLICK HERE) on FedEx Corp. (FDX), FDX shares are significantly higher and the opportunity at FedEx Express is better recognized. On the Flash Call tomorrow we will examine how key components of our FDX thesis are tracking and evaluate several relevant risks.  We think it is increasingly important to consider shares of FedEx on different time horizons.

 

 

KEY TOPICS WILL INCLUDE:

  • Long-term cycle drivers
  • Express margin opportunity vs. execution
  • Competitive risks
  • Industry headwinds
  • FY2Q set-up
  • Valuation and margin of safety

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 969216#
  • Materials: CLICK HERE

Early Look

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YUM: OCTOBER CHINA COMPS BEAT EXPECTATIONS

YUM reported October comps for its China Division yesterday after the close.  Total China comps (-5%) and Pizza Hut comps (+10%) beat expectations, while KFC comps (-7%) missed expectations.  Overall, we view this as positive news.  Total comps improved 600 bps sequentially from September and the recovery appears to be on track, as October marked the first month in several that overall results have come in above expectations.  We expect China comps to be positive in November, December and throughout 2014, as the company begins building sales momentum and lapping easy comparisons.

 

YUM: OCTOBER CHINA COMPS BEAT EXPECTATIONS - 11 13 2013 11 00 22 AM

 

YUM: OCTOBER CHINA COMPS BEAT EXPECTATIONS - YUM China SSS

 

 

As it stands, YUM is our favorite LONG in the big cap QSR landscape and, despite facing significant volatility over the past year, its long-term growth story remains intact.  As China same-store sales begin to accelerate meaningfully, we believe YUM’s earnings growth will follow suit and accelerate for the next year, and potentially longer, as margins begin to regain form.  We will be looking for more details on the pace and extent of the recovery during YUM’s Investor Conference on Wednesday, December 4, 2013 and will post on anything incremental following the meeting.

 

YUM: OCTOBER CHINA COMPS BEAT EXPECTATIONS - RLMMM

 

 

 

Howard Penney

Managing Director

 




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