China's Changing Economy: Instant Noodles Edition

Caixin: Market For Instant Noodles Goes Limp

Demand in the market has slumped after peaking in 2013 for a number of other reasons — some obvious and some not — such as the economy’s shift away from manufacturing, the slower growth in the ranks of migrant workers, faster trains, higher disposable incomes, snack-food competition, and a budding interest in nutrition.

The performance of a front-runner in the industry, Taiwan-based Tingyi (Cayman Islands) Holding Corp., reflects the turn, as it has reported a drop of revenue in its core noodle business since 2014. Tingyi’s revenue was $2.5 billion in the first nine months of 2016, down from $3.2 billion in the same period in 2014.

China Consumer Slowdown

China's top 50 retailers saw sales fall 6 percent at the start of the year, and sales of basic goods from noodles to detergent grew just 1.8 percent at the end of last year, down from over 9 percent just three years ago, according to Kantar Worldpanel data.

The weak sales of even cheap household goods underlines the challenge for China, desperate to get its 1.4 billion people to spend and give some fresh impetus to the economy.

"Maybe before, if I wanted something I'd just go and buy it. Now I only buy things I really need," said Yang Shunjie, 28, a Shanghai-based client manager at a state-owned firm, who earns between 10,000-15,000 yuan ($1,500-$2,300) a month. He said he also shops more online where prices are cheaper and will wait for end-of-season discounts to buy new clothes.

Reuters: As China's consumers tighten belts, retailers cut jobs, offer discounts

Hence why Chinese consumer stocks have been crushed along with everything else.

China Unbalancing As Recession Hits Services; Industrial Support Courts Disaster

From October 2015: Chinese Recession Ready to Move Into Services. Recessions typically begin in the higher stages of production, such as mining and manufacturing, and spread to the lower stages over time, with retail and consumer sectors hit last. The bigger question, which looks to be answered in the affirmative, is whether as manufacturer to the world, the slowdown in China's industrial sectors heralded a global recession. For now though, those hoping for a services led recovery in China are out of luck.

FT: China’s rebalancing paradox hits home

A recent pledge by government ministries to support industry extolled the sector as “the backbone of the real economy” and “the main battlefield for stabilising the economy”. Infrastructure and real estate — two key drivers of demand for industrial goods — were the biggest beneficiaries of January’s lending boom, which has reportedly continued into February, according to banking sources of FT Confidential Research, a unit of the Financial Times.

Such moves to support industry should not come as a surprise. China has no option but to resuscitate its industrial sector, as FTCR argued last year.

Why? Because China’s industrial-led slowdown is also leading to slower growth in consumer spending and service sector activity.

Here's a look at some companies that make popular brands of snacks, instant noodles and drinks:

No surprise. The FT article goes on to say the slowdown is hindering rebalancing instead of hastening it. This is due to the government still refusing to accept the pain caused by a real rebalancing. It is why I believe the ultimate end game is a massive devaluation in the yuan.

It will also drive the world closer to a trade war. The scenario laid out in The Logic of Strategy: Yuan Devaluation and the Road to Trade War is coming closer to reality with each passing day. The Trump campaign is a nationalist campaign and it heralds the end of existing trade deals. Trade agreements will be renegotiated or scrapped under a President Trump.

MUST LISTEN: Stephen Miller Makes Case Against Marco Rubio in Epic Rant. The key portions are where he talks about sovereignty and opposition to trade deals. Trump will either get better deals on NAFTA and with China, or NAFTA and the WTO will die, to thunderous applause in America.

Debate on Retail Sales in China

First some comments from Christopher Balding on the retail growth in China. The whole piece is worth reading.

Balding: Digging Beneath the Surface of China Data: Retail Sales Edition

If we look at the year to date YOY sales of the top 50 retail enterprises, total retail sales grows by 0.9%. In fact, only one category grows by more than 3%, jewelry which grew at only 4.2%. The short version is that looking at the major retailers of China, there is no evidence to support the official statistics that consumer retail spending is a robust 10.8%.

...There are a few points of economic analysis worth mentioning. First, we pay close attention to GDP and retail sales because we expect them to be good proxies of economic health and activity. However, firms pay with money not official GDP figures. Consequently, even if we stretch credibility and accept official GDP and retail sales numbers as perfectly accurate, firms are not seeing the related cash flow. Second, it appears that the retail slowdown has been much more prolonged than people realize. I present data here that covers revenue growth for the retail industry for all of 2014 showing sales growth of 3.8%. Again, if we believe the official retail sales growth number of 12%, firms live on cash flows and the slow down appears to have begun no later than 2014. Third, this data directly contradicts the entire economic rebalancing story in China. According to the data consumption is simply not outpacing growth in the traditional drivers of Chinese growth such as fixed asset investment. Fourth, this data comes much closer to matching most other data points we have such as consumer output, electricity, freight, and related data. If we ignore the topline official data, none of the underlying and independent data supports a 7% growth story.

He doesn't mention the Internet in there and online sales are a growing factor in China. High commercial rents due to expensive real estate and the shift to online consumption could be a big reason why retail sales numbers don't look good.

Consumer companies seem to confirm Balding's take though.

Chinese food maker Tingyi Q2 profit slides as economy weakens

Tingyi, owner of the Master Kong brand, said profit fell to $90.7 million in April-June, while revenue dropped 6.4 percent from a year ago to $2.55 billion.

For the first-half, profit fell 14.8 percent to $197.7 million while revenue dropped 11.5 percent.

How do sales at major consumer companies fall during a growing economy?

One firm is doing better: Uni-President’s innovative strategy pays off, but:

“We believe more product diversity could help it [Uni-President China] to reverse sluggish market growth [in China],” Credit Suisse’s Taipei-based equity strategist Jeremy Chen (陳建名) said in a report last week.
In addition, lower raw material costs and fading competition with Ting Hsin International Group (頂新集團) — known for its popular Master Kong (康師傅) brand in China — would be important drivers to maintain Uni-President China’s business momentum further, Chen added.

Stock performance hasn't been good for Chinese consumer stocks, but it isn't simply a bear market. Sales have been sluggish for several of the top firms, which points to economic weakness rather than firm specific issues.

Scott Sumner sees the headline retail sales as accurate: China's Retail Boom

Of course just as in America, some of this growth is coming at the expense of brick and mortar firms, and there are indications that sales are flat for many ordinary retailers. But don’t underestimate the importance of online; Alibaba alone now sells more than $100 billion dollars per quarter. If we assume the entire online sector is around $150 billion per quarter, then growth in that sector (year-over-year) is probably on the order of $50 billion per quarter, or $200 billion per year. Thus online growth alone can explain about half of the growth in China’s $4 trillion retail sector.

Bizarro Market or Not? Baosteel Is World's Largest Steel Company By Market Cap

One of the important things to understand about the market is that it is always "right" even if it is frequently wrong. The market reflects the aggregate thoughts of the investing public, which is weighted towards the "smart money" as they have more votes (dollars) in the process. When the market behaves in a way that is contrary to your expectations, a very big red flag must go up. Either your expectations are wrong or there is something affecting the market that you haven't unaccounted for. Psychology is one important factor sometimes overlooked. In other cases, economic or financial assumptions may be flawed.

During the housing bubble and the technology bubble before it, there were bears who pointed out the market would fall, but most also wisely said you don't short a psychologically driven market. Bulls incorrectly argued there was a "new normal" or that "home prices don't fall nationally." In the run-up to hyperinflation in Wiemar Germany, the public believed the economy was booming. The stock market rally was seen as proof of the economic boom, not incipient hyperinflation.

Today, here is ZeroHedge trying to make the case for corporate buybacks as one of the few things levitating the U.S. equity market: The US Equity Bubble Depends On Corporate Buybacks; Here's The Proof.

In 2013, responding to confusion about the plunging gold price, I argued the gold market was wrong back in 2011: Gold Lied, Inflation Died. I had a few trade ideas based on my deflationary thesis:

PowerShares DB Base Metals Double Short (NYSEARCA:BOM). Volume is very low now, but it peaks when base metals tumble.

For China, short iShares FTSE/Xinhua China 25 (NYSEARCA:FXI) and be long Global X China Consumer (NYSEARCA:CHIQ).

Emerging markets should underperform Europe, since Europe has already seen several major markets decline. ProShares Short Emerging Markets (NYSEARCA:EUM) is one way to go.

Resource exporting countries and companies will likely be hit hardest: they are threatened by a stronger dollar or weaker commodity demand. Brazil and Australia are two countries to underweight or avoid. Companies without sufficient capital to fund their operations will likely go bankrupt, and many commodity producers and explorers could go bust if they have insufficient capital heading into a crisis.

More conservative plays: iShares Barclays 1-3 Year Treasury (NYSEARCA:SHY), iShares Barclays Short Treasury (NYSEARCA:SHV), PowerShares DB U.S. Dollar Index Bullish Fund (NYSEARCA:UUP), ProShares UltraShort Euro (NYSEARCA:EUO).

Most of those picks were spot on. Brazil tumbled, the euro slumped, the dollar rallied. The worst pick by far was the CHIQ long, FXI short:

As I wrote then:

Gold is not alone in signaling weakness: nearly all commodities are sending a similar signal. On top of this deflationary force, the Chinese leadership appears ready to rebalance the economy towards the consumer sector, something that will dry up demand for many raw materials. Copper faces a far darker future than gold.

So what happened? Why did China's consumer sector go nowhere? Consumer stocks such as Want Want (0151) and Tingyi (0322) are well below their 52-week highs. A mitigating factor is that these stocks are in Hong Kong, but the Chinese herd hasn't caught on to these stocks at the very least because neither experienced "the pop."

Not only did consumer stocks fail to rally, but some of the sectors still suffering from overcapacity have outperformed the A-share market. Cement has done well considering, but steel has really outperformed. China's is currently puking steel because domestic demand is moribund. The performance of the global steel industry and suppliers has been poor:

Yet while SLX is down 20%, Chinese steel companies have double and tripled:

Bloomberg: China’s Baoshan Catches Nippon Steel as Most-Valuable Producer

“Baoshan has an edge over steelmakers in Japan where auto production won’t grow at a pace seen in China,” said Yoku Ihara, who runs Japan’s Growth & Value Stock Research. Baoshan is one of the few Chinese producers that can supply high-end sheets to automakers, making it the “best positioned among so many Chinese suppliers, most of which make construction steel,” he said.

The China Association of Automobile Manufacturers projects domestic vehicle sales to increase an average of 5 percent to 10 percent a year, with sales last year of 23.5 million units. Japan’s new-car sales rose 3.5 percent to 5.6 million units in 2014, data compiled by Bloomberg show.

FT: Steelmakers braced for China slowdown

On Monday, The World Steel Association, the industry’s main international body, said it expected global steel demand to be largely flat in 2015, at about 1.54bn tonnes. Demand growth will then increase slightly next year, to 1.4 per cent.

“We are releasing a restrained growth outlook for the global steel industry mainly due to the deceleration in China,” said Hans Jürgen Kerkhoff, chairman of WSA’s economics committee.

My default assumption is the Chinese stock market rally has been indiscriminate or that the rally may be a precursor to currency devaluation. Stanley Druckenmiller has voiced the next best explanation China Stock Gains Signal Economic Recovery.

H-Shares Near or at 52-week highs

I posted this list on the "mirror" site, and I'm not about to translate it at this hour. Add .hk to the symbols and you can see them on Yahoo!, or click the links and change the page to English. First are near 52 week high, then at 52 week high, and then I have one Mainland stock, Emei Shan. This list is not total, nor any recommendation, just some stocks off one watch list. Many are tech, commodity, and consumer stocks.

很多我经常看看的股票快到52周高：
香港交易所 0388

越秀投资 0213

中国粮油控股 0606

紫金矿业 2899

有的已经到了！
腾讯控股 0700

京信通信 2342

金山软件 3888

阿里巴巴 1688

中国食品 0506

康师傅控股 0322

中国旺旺 0151

比亚迪股份 1211

中国动向 3818

大陆
峨眉山 000888.SZ

Update 2009-06-03: Clive Corcoran has an article on Seeking Alpha, the title of which explains the content: 

Hong Kong Index Ends at Exactly 38% Retracement of Swing High/Low