Steel Slowdown Hits Hidili

Not a week ago, I wrote Steel Industry May Finally Be Facing the End; Systemic Financial Crisis Looming?. No daisy chains of mutual credit guarantees have gone off yet, but a steel realted firm has taken a hit, Hidili Industry (1393), which produces coke. This company has seen its share of trouble as reflected in the stock price. Bankruptcy in the coal industry isn't a shocker given what has been happening in the global economy:

Bloomberg: Hidili Says Not in Position to Pay Bonds as China Defaults Mount

Hidili Industry International Development Ltd. is not in a position to repay $190.6 million of principal and interest due Nov. 4. on its 8.625 percent notes, it said in a statement Friday. The mining company based in the southwest province of Sichuan has defaulted on some of its 6 billion yuan ($947 million) of loans, it said. Hidili has hired UBS Group AG to advise on bond restructuring, according to the filing.

AAStocks: HIDILI INDUSTRY (01393.HK) Sees Cross-Default Risk

HIDILI INDUSTRY (01393.HK) announced an indirect PRC subsidiary of the company has not repaid a short-term unsecured loan from a PRC bank which fell due in June 2015 and has not paid the accrued interest so far. As of 30 September 2015, the principal amount outstanding under the loan was approximately RMB290 million. The company has been in discussions with the lender regarding a waiver of the breach and the renewal or extension of the loan. Due to the processing time required to pledge certain mining asset to the lender, the renewal or extension of the loan has not been completed. The company has received indication from the lender that a written waiver will be issued shortly.

The foregoing constitutes an event of default under the loan agreement. Moreover, such breach constitutes events of default under certain of the group’s onshore loan facilities that contain cross-default provisions.

Hidili is in Sichuan, a province that doesn't need a match tossed into its powder keg of debt.

From 1 year ago: Textbook Credit Implosion Underway in Sichuan Province

At end of December 2013, there were nearly 5,000 of these financial firms, an increase of roughly 4000 from June of the same year! Sichuan's provincial government counted 509 firms involved in credit guarantees at the end of 2013, with a ￥233.8 billion guarantee balance and 730,000 households served, making Sichuan province the second largest market in the country. Central bank data from the end of June 2014 counted 326 small lending companies in Sichuan, ninth in China, with ￥59.7 billion in loans, fourth in China.

41.4% of western Chinese SMEs need credit and 57.2% of those credit needs are met with private fundraising (shadow banking). Average interest rates are 19.1%, well above the 9.7% annual rate for bank credit. Since they have no credit guarantee or collateral, 72.1% of small businesses are forced to use private fundraising. In Chengdu, there are investment products on the market today offering 15% to 18% returns, well above the 7% offered by bank trusts and WMPs.

Are you ready for the punchline? One insider estimates that 80% of this private credit flowed into real estate. Thanks to the rapid growth of the real estate industry, some developers were (successfully) paying 100% annualized interest rates and even the common people were spoiled, with investors refusing to even look at wealth product yielding under 20%.

Morning Roundup

The Nikkei and Japanese yen were both off to the races this morning (link goes to charts), with the combo up over 3% after the open for dollar investors, but Nikkei gains quickly faded (as of 11 AM 东京).

China Merchants Bank (3968.HK) reported its third consecutive quarter of falling earnings and missed analysts estimates by 20%. From Bloomberg:

Net income fell 41 percent to 4.1 billion yuan ($600 million) in the second quarter, from 6.93 billion yuan a year earlier, based on figures released by the Shenzhen-based company. That fell short of the 5.1 billion yuan average estimate of six analysts in a Bloomberg survey.

President Ma Weihua, who introduced the nation’s first credit card and helped boost profit sevenfold since 2004, faces more challenges during an economic slowdown because of the bank’s focus on loans to home buyers and smaller firms. The profit decline was the steepest among China’s six largest publicly traded banks.

“The profit plunge is mainly due to margin contraction,” said Sheng Nan, analyst at UOB Kayhian Investment Co. in Beijing. “With funding costs expected to decline in the second half, China Merchants’ profitability will improve.”

Financials have underperformed off their 52-week lows and China Merchants climbed just 100% off its bottom. There are a few sub-100% rebounds on my watchlist, but most are in the range of 100%-300%, with a couple of 900% outliers in Comba (2342.HK) and Hildi Industry (1393.HK)

Lehman Brothers fallout continues in Hong Kong:

Six listed banks have made a combined provision of HK$1.1 billion for the first half of this year to cover refunds to investors who bought Lehman minibonds.

But that represents only 17.46 per cent of the total HK$6.3 billion settlement agreed by 16 lenders last month with the Securities and Futures Commission and the Hong Kong Monetary Authority.

Including the provision made last year, the six lenders have paid a total of HK$1.78 billion, representing 28 per cent of the total.

The agreement called for the banks to repay customers at least 60 per cent of their initial investment in the minibonds guaranteed by Lehman. Those who made individual settlements earlier below the threshold will receive a top-up.

Speaking of Lehman Brothers, too bad I didn't add it to the OTB Portfolio. On Friday, LEHMQ.PK was gunned to $0.15 on 73 million shares, a 200% advance. It had traded for $0.04 or $0.05 for the past five months, with a few brief pops up and volume around a few million a day.

Finally, China Southern Airlines reported a 97% drop in first half earnings (ZNH). Other airlines earned a profit from fuel hedges, but China Southern exited its hedges last year.