Chinese Castle In The Air – China A-Share Market Craze

Famous economist John Maynard Keynes applied psychological principles to investment theory and pronounced the “Castle in the air” theory back in 1936.

It analyzes how the crowd of investors will behave in future, stock valuation is based on optimism and investors tend to build their hopes into castles in the air. That applied to the dotcom craze, it also applies to the current China A-share market.

This week is the “Golden Week” in China, this national holiday lasts for a week and local stock markets are closed. Most Chinese will take a break from watching stock quotation screens and travel to Hong Kong or overseas for vacation trips.

A relative of mine from Guangzhou visited me yesterday in Hong Kong and I took the chance trying to understand first hand the development of the A-share craze. She is a 60 years old house wife, a retired civil servant, never invested in stock market until very recently.

Here are some interesting points:

• People only talk about stocks no matter in restaurants, universities or work place, you can hardly set up business meetings with anyone before 3PM which is the stock market closing time.
  

• They are rushing to open stock trading accounts, though the initial account opening deposit requirement has been increased 10 times from RMB5,000 to RMB50,000. (RMB50,000 is almost the annual salary for an average person in Guangzhou.)
  

• Chinese investors are speculating not only on stocks, but also mutual funds. Most investors think mutual funds are sure win investment because they are managed by ‘professional managers’

Interestingly, my relative knows she is gambling. She said she couldn’t understand why some stocks can keep going up even though they are money losing companies, she kept telling me the market will collapse sooner or later. This can perfectly be explained by the “Castle in the air” theory, everybody is looking for the next bigger fool.

The Chinese castle is developed because of one single reason, foreign investors are prohibited from A-share investment in general except those with QFII (Qualified Foreign Institutional Investor) quota allocation which itself is a scarce resource. Total QFII allocation is less than 1% of the total Chinese market capitalization and hence impact from international institutional investors are negligible.

In fact international investors are becoming more cautious of the A-share craze, one very good indication is the discount/premium demonstrated by the Morgan Stanley China A-share Fund (CAF).

From the chart below we can clearly see that CAF has reverted from its all time high of 15% premium in Dec 2006 into its current discount of 15% and the discount level is still keep increasing. Similar pattern can also be observed from the iShares FTSE/Xinhua A50 China Tracker (IFXAF.PK or 2823.HK).

This is opposed to the uni-directional movement of the Shanghai Index:

It’s hard to tell when will the A-share market correct, but I would say it has to be triggered by Chinese Government’s administrative intervention because all external forces will have no effect in this closed investment environment.

I am unwilling to bet on such timing and I have exited all my positions in CAF.

Disclosure: I have no position in the above mentioned stocks.

"錦江飯店"投資價值分析

去年１２月上市的錦江飯店 Jinjiang hotel (2006.HK)，基於奧運及內需概念的緣故，當時是其中一隻熱爆的新股。由上市到現在股價已經升了超過九成。

錦江飯店剛剛公佈了二零零六年的全年業績，就讓我們去看一看它的投資價值吧。

錦江飯店有兩個主要業務，一個是經營廉價旅館，另一是經營星級的高級酒店(例如上海的和平飯店)。它上市時的主要賣點是廉價旅館的發展前景，故事是基於中國經濟發展迅速，越來越多國內商務公幹及休閒旅遊的需求。在中國經營廉價旅館 的上市公司還有另外一家，那便是在美國上市的 ”如家酒店” Home Inn. (HMIN).

首先我嘗試計算錦江飯店廉價旅館及星級酒店業務２００６年的EPS. 由於沒有完整的資料，我用allocation 的方法把Finance Cost及income tax 分攤到這兩業務.

(please click here for a bigger image)

星級酒店業務的EPS = 0.0705

廉價旅館業務的 EPS = 0.0056

可以看到星級酒店的盈利貢獻是廉價旅館的12.6倍，那麼錦江飯店上市時用廉價旅館業務作賣點是否合理呢？

再看看錦江飯店廉價旅館業務2006/2005的同比增長率以及和Home Inn 作一比較。

錦江飯店的銷售額增長只有三成，相對如家酒店的增長是超過一倍。盈利增長方面，錦江飯店廉價旅館業務更是倒退了24%，如家酒店卻是增長了一點六倍。同樣地錦江的EPS倒退了25%, 如家酒店卻增長超過一倍。

現在我用最樂觀的方法去計算錦江飯店的整體股價。

我用了HMIN 和 香格里拉 Shangrila 作為錦江飯店廉價旅館及星級酒店業務的 comparables. 從錦江的業績看, 牠在這兩業務方面都遠遠不能跟HMIN 和 Shangrila相比，所以用HMIN 及Shangrila 的PE去作comparable是對錦江最樂觀的估價。("others"方面包含了酒店管理, 餐飲方面, 我也用了香格里拉作comparable)

可以看到就算在最樂觀的情況下，錦江也overprice 了8%.

再用一套我覺得比較合理的comparables, (50% of Shangrila PE, 70% of HMIN PE)

Downside 更增加到50% ！

不要忘記如家酒店的PE已經是非常高的157倍，可以看到錦江飯店的股價是如何的不合理地高 ！

奧運概念，內需概念是否可以justify錦江飯店這不合理的股價呢？就算考慮和平飯店重新裝修後的業務提升，我還是不太相信他可以超越Shangrila這一家真正五星級酒店的五星級業績表現。

雖然股價可以長期處于非理性的價位，是否投資錦江飯店還是各位自己去判斷吧。

Danone (ADR: DA) gives Wahaha a hard trademark lesson

In a story I wrote in Feb about how to profit from China's one-child Policy I have recommended Groupe Danone (ADR: DA), a French food company with multiple joint ventures set up in China selling consumer products from fruit juice, dairy products to bottled water. All of Danone's JV partners are Chinese market leading brands.

One of such joint ventures is formed with Wahaha, China's leading domestic beverage producer. Danone owns 51% of the JV and with the founder of Wahaha Mr. Zong Qinghou the second largest shareholder.

Recently the relationship turned sour and Danone is accusing Wahaha for trademark infringement in manufacturing and marketing beverage products under the same Wahaha brand outside of the joint venture which has exclusive right to such trademark.

In a very high profile press conference held yesterday in Shanghai, Danone Asia President Mr. Emmanuel Faber showed to the press the original joint venture agreement signed with Wahaha in 1996. One of the major terms of the agreement was that Wahaha has agreed to exclusively assign all rights in the Wahaha trademarks to the joint venture company, with such assignment even Wahaha would not be allowed to market beverage products under the Wahaha brand in China, all such activities must go through the JV company exclusively.

In a separate equally high profile public appearance, Wahaha founder Mr. Zong said that the JV agreement was a trap and he was not aware of the trademark assignment consequence when he put his name on the agreement. Danone is giving 30 days to Wahaha to remedy the situation or it will resolve it through legal action.

In return Mr. Zong has organized a national PR campaign asking the Chinese government to protect this well known national Chinese brand from foreign invasion, and has asked all the Wahaha employee and distributors to act together to protect this Chinese company.

The outcome is still remain to be seen, however, this is a very important lesson to all Chinese enterprises about the importance of protecting their own intellectual properties and the commercial consequences of accepting such intellectual property related clauses in the agreement.

As an investor it’s a potential opportunity to buy Danone if it finally succeeded in acquiring full control of Wahaha and became a dominant player in the huge Chinese beverage market. On the other hand, being a Chinese myself it’s sad to see Wahaha learned this lesson a hard way.

It’s high time all Chinese enterprises woke up and learn the basics in intellectual property protection, not only in respecting other's IP, but also developing and protecting their own.