Rubber Meets Road: Liaoning Bank to IPO in Hong Kong

A little over a year ago, I posted Liaoning Sounds Warning on Chinese Economy. The impetus was seeing real estate investment and industrial production turn negative. A year later, Liaoning is still at the epicenter of China's industrial slowdown. In October, Industrial Production Collapsed 13.3% in Liaoning. Home prices in Jinzhou fell in October and are down 5.8% from last year. Dalian and Shenyang also have seen home prices decline as the entire province's economy slows.

Clearly, things are not going well in Liaoning, but a bank in Jinzhou city is about to IPO.

Over at FT Alphaville, Andrew Collier of Orient Capital Research asks: Could China suffer a banking crisis?

Could a banking crisis erupt in China? The commonly accepted answer among western analysts is no, for the simple reason that China has huge State owned banks that dominate the country’s banking industry. But dig a little deeper and a different picture emerges.

It turns out that within China’s smaller cities, the market share of the big banks fades away. Instead, local banks take over.

...In the city of Jinzhou, population 810,000, the state bank share drops by more than half to 19.4 per cent. Most of the slack is taken up by just one bank, the Bank of Jinzhou, with 62.6 per cent of assets.

Global Capital: Chinese city banks pounce on last window for HK IPOs

Bank of Qingdao Co plans to launch its $600m listing on November 20 via joint sponsors Citic CLSA Securities and Goldman Sachs, alongside a syndicate of some 10 banks, according to sources close to the company. Pre-marketing kicked off earlier in the week.

It is not the only one seeking fresh equity. Bank of Jinzhou Co commenced investor education on November 17 for its $600m float, while Bank of Zhengzhou, which is yet to gain approval from the Hong Kong Stock Exchange, is eyeing a $700 IPO before the year is out. Meanwhile, Bank of Tianjin is seeking a float next year.

A loan to Hanergy kept the firm's listing delayed: Hanergy wait over for Jinzhou in IPO

The commercial bank, based in northeastern Liaoning province, missed its original listing plan in June, as authorities questioned an eight billion yuan (HK$9.72 billion) credit line it granted to the parent of scandal-hit solar firm Hanergy Thin Film Power (0566).

The bank will kick off a roadshow next Wednesday and debut December 7.

The company's application proof is here: Application Proof, PHIP and Related Materials, Bank of Jinzhou Co., Ltd.

My curiosity got the better of me when I saw the bank is growing 50%+ yoy. I want to see how the bank increased assets to over 300 billion yuan with only 90 billion in loans. What are these assets? They're listed as debt securities classified as receivables. A look at the notes: wealth management products. The bank, as of June 30, had 90 billion lent out in normal banking and 125 billion lent out through shadow banking. Also from the notes: the average yield on their assets rose from 6.04% in the six months ended June 2014 to 7.80% in the six months ended June 2015.

These WMPs and whatever else is lumped in here, have been driving profits. "Interest income from investment securities and other financial assets" constituted 19.5%, 27.4% and 42.6% of interest income in 2012, 2013 and 2014. Note that they're investing in these products, in addition to offering them. Page 28 lists risk factors associated with these products. As of June 30, 2015, these assets were almost 70% of total assets.

A basic picture of another type of shadow banking works, beneficial interest transfer plans:

The credit guarantee makes an appearance. As of June 30, 2015, 45.9% of assets in BITP were backed by credit guarantees.

I wonder how the market will price this.

Hanergy Refutes Rumors, Blames Collective Sneak Attack By Short Sellers

The Standard: Hanergy trashes rumors

Hanergy Thin Film Power Group (0566) denied all rumors yesterday behind the stock's more than 40 percent plunge on Wednesday that wiped off HK$144.30 billion in its market capitalization.
Trading in Hanergy shares remain suspended. In an announcement on the company's official website, it said operations remain normal and it is in a good financial position.

It noted no large shareholder had reduced its stake as some media reports had speculated.

The company statement refuted the rumors, but an insider says the shorts did it.

Hanergy Implodes, TAN Takes A Hit, Chinese Solar's Austrian Moment

Hanergy is a solar power company whose stock advanced to new highs on nothing. Then: Chinese Solar Maker Plunges, Losing Nearly $19 Billion in 24 Minutes

Just 24 minutes of Hong Kong trading erased $18.6 billion of market value and wiped out almost four months of gains that made it more valuable than Sony Corp. of Japan. Those increases came as analysts and investors questioned why, exactly, this stock was increasing in the first place.

Barron's: Is Hanergy’s Stock Manipulated? FT Investigates

Hanergy Thin Film (566.Hong Kong), a little-known thin-film solar company with only one customer – its parent – is now the world’s largest publicly listed solar firm. Having risen 430% in the last year, Hanergy now boasts $35 billion market cap and is the largest component of the Guggenheim Solar ETF (TAN) with more weight than SunEdison (SUNE) and First Solar (FSLR) combined. It now has more market cap than Tesla (TSLA).

...Between January 2, 2013 and February 9, 2015, Hanergy’s shares consistently surged late in the day, with buying 10-minutes before the close. If an investor bought Hanergy’s stocks at the start of trading at 9AM and sold at 3.30PM, he would have lost money and missed the ride.

This is not a normal trading practice in Hong Kong. Financial Times looked at other large-cap stocks and did not find a similar trading pattern.

Barron's again: Hanergy Profit Surges On Sales To Parent, Asset Disposal, But Chinese Love It Anyhow

But if you look at the incremental profit breakdown, Hanergy becomes less impressive. Bloomberg estimates that about 61% of Hanergy’s revenue came from its parent Hanergy Group and its affiliates. In Hanergy’s financing filings, it talked about doing business with IKEA and Telsa (TSLA), but an overwhelming majority of its business – 9.48 billion out of 9.62 billion revenue – came from mainland China. So Hanergy’s business is by no means diversified.

In addition, Hanergy sold five PV power plants in China last year for a total 1.4 billion yuan and recorded a net gain of about 777.6 million yuan. That is more than half of the incremental profit gain.

Not to mention Hanergy is by no means cheap. It is a company with 398 billion market cap, earning only 3.3 billion trailing profit.

But mainland Chinese investors love it anyhow.

Baofeng tells you everything you need to know about the stock rally, and if you want to avoid the next Hanergy, pay heed. This is a gold rush where prospectors aren't concerned if there's gold in them thar hills, what's important is that the price of the land is going up and it can be sold at a higher price to someone else, and if everyone's buying that land, there must be gold! Price doesn't reflect value; the market is the herd.

Barron's again, with a lot of updates on Hanergy: Is Hanergy The Next Yingli Green Energy?

UPDATE 4: I apologize for so many updates…

Well-respected Chinese financial magazine Caixin just had a piece out saying today’s selling was mostly done by Chinese institutions.

Close to 175 million shares eased hands today before Hanergy was placed to a trading halt at 10.40AM, well above the average daily trading volume of just over 100 million. There were 8 block trades with over 6 million shares each and 19 large trades with over 1 million shares.

Caixin said that Hanergy has been using its stocks as collateral for loans from banks and other financial institutions. Chairman Li Hejun personally owns somewhere between 73% and 75% of Hanergy’s shares, according to his own public statements in April.

Caixin found that Hanergy has been unable to repay some of its loans, causing Chinese financial institutions to sell and getting the snowball rolling. Unless Hanergy continues with share buybacks to prop up the value of its shares, which it has been (check out its filing with the HKEx on May 15), Hanergy is in financial trouble. First Financial‘s investigative report on Hanergy’s debt pile (see link to my blog above) is worth re-reading.

UPDATE 5: Chinese social media has been rumoring that Hanergy is being investigated for stock manipulation. Reuters just confirmed this:

Investors in Guggenheim Solar ETF (TAN) will take a hit on Hanergy; the fund held 12% of assets in the stock. Shares are down about 7% heading into the open.

Another solar maker in trouble is Yingli: Yingli Moves to Calm Investors After Going-Concern Warning

Yingli Green Energy Holding Co. Ltd. on Wednesday moved to calm investors, saying it will be able to repay its debt on time after issuing a going-concern warning in a regulatory filing last week.

Shares gained 7.5% in premarket trading after falling 44.7% so far this week.

Yingli, a Chinese solar-panel company, said in last week’s filing that “there is substantial doubt as to our ability to continue as a going concern.”

Yingli said Wednesday that the statement has been taken out of context, adding that it has plans to mitigate future risks and challenges.

I don't think the Austrian Business Cycle Theory fully explains the business cycle, but I believe they have it exactly right on interest rates. Interest rates are a crucial market signal, perhaps the single most important piece of information in an economy, and distorting them leads to malinvestment. Steel is going through a multi-year adjustment (Steel Trade Lawsuits Explode; Banks' Unceasing Nightmare; Defendants Flee), real estate's troubles are well known, and now solar may be hitting the toughest phase. Back in 2012, there was talk of trouble for solar:

Maxim Group

Amidst growing complacency that China's solar sector's political support is perpetual, we believe a new national government and gaping capital requirements will bring this dynamic to a tipping point.

With cash draining and capital-expenditures needs high, we believe the sectors' balance sheets are cracking at the seams with equity at risk of succumbing to insolvencies, recapitalizations, and take-unders.

Despite a wave of insolvencies striking solar manufacturing in Europe and the U.S., Chinese solar has largely sidestepped a major failure to date, in our view, from deep support from the government and banks. However, after accumulating $4 billion in free-cash-flow losses and straining under $17.5 billion in debt, we believe the balance sheets of Chinese solar's Top 10 are near the breaking point.

More at Barron's.