China's Economy: More Crystal-Ball Reading

Yesterday, stock markets rallied because China's Purchasing Manager Index had improved sharply. Industrial production is supposed to be up strongly in April, and more and more forecasters are projecting solid Q2 yoy growth of 7 % or more.

But apparently, China's April electricity output was down 4 % yoy, quite a bit worse than in March.

An official from the Electricity Regulatory Commission seems to think this is a good sign: "Although the rate of decline in April may be faster than that in March, the big drop in power generation overall has been halted." Anybody get his logic? I don't.

But more often than not, it's anyway rather useless to read official statements. This announcement was published by Statistics China regarding Q1 electricity use. It contains highly illuminating statements such as this one:

Energy consumption of basic industries and key energy-consuming industrial enterprises was booming up:

Comparing the fourth quarter of last year, the decreasing or increasing rate of energy consumption of power and raw materials and other basic industries was narrowed or enlarged. Of which, electrical power industry descended 8.91 %; iron and steel industry was declining 5.66 %; chemical raw materials industry dropped 10.59 %; building materials industry increased 3.32 %, booming up increasing rate by 2.42 percentage points.

In the first quarter, the annual energy consumption of key industrial enterprises in the whole country stood at 10,000 tons of standard coal or more decreased 5.0 % over the same period of previous year, narrowed 6.95 percentage points over previous quarter. Key industrial enterprises in energy consumption since November 2008 were constantly picking up (rose 2.34 percentage points monthly).

Got it? I didn't. How these two paragraphs can describe any "booming up" is beyond me (not that "booming up" exists as an English expression, as far as I am aware).

(Previous post on same topic.)

China Auto Sales

According to this report, GM China's April auto sales are 50 % higher than last April.

While the best-selling car (the Wuling Sunshine minivan) apparently sells for as little as 3,000 US$ (i.e. as low-market as it gets), they also seem to be selling lots of Buicks and other models.

No other carmaker has released April sales so far.

Beijing Commercial Real Estate

According to this article, office vacancies in Beijing rose from 13 % in Q4 to 19 % in Q1. That's quite a jump for just 3 months...

Average monthly rent dropped 9.3 % from Q4 to Q1.

The article also says that massive new supply will hit the market later in the year, i.e. vacancy rates are likely to worsen further.

(Earlier posts on Shanghai Commercial Real Estate: here and here.)

Singin' the Trucking Blues

It's not a good time to be a maker of trucks and ship engines when transport volumes decline sharply and financing evaporates.

MAN is the world's third-largest maker of trucks (behind Daimler-Benz and Volvo), and its Q1 results show how the industry is suffering:

Orders have increased a bit from a catastrophic Q4, but compared to Q1 last year, they are still rather sobering:

- Total orders are down 53 % (domestic -46 %, international -55 %)

- Orders for busses (-18 %) and turbines (-18 %) were comparatively "stable"

- Ship engines suffered a 38 % drop

- But the real problem is trucks: Orders were down 66 %

Amazingly, MAN still managed to post a small profit. But as they are still working on old orders, revenues were down "only" 27 %, i.e. the full force of the impact has yet to hit their bottom-line.

MAN's outlook: No improvement expected for the immediate future.

By the way, it's amazing how long it took for the extent of the crisis to sink in: By accident, I stumbled over a press article which quotes the head of MAN's trucking unit as saying: "Right now, we can assume that our orders will increase in 2009". Date of the article? September 21, 2008. Just 7 months ago.

Oil - Update

...and sold.

It always seems to turn out this way: Whenever I invest in oil "for the long run", the oil price shoots up and the forward curve steepens, and I end up selling again a few days later, because I can't help but think: "This is too much, too soon!" Not really the intention, but if it earns me a short-term return of 7 %, I can't exactly complain.

(This is a follow-up on this post.)

Big Trouble in Zuffenhausen?

Not too long ago, everybody was looking at Porsche in awe: With their very own financial wizardry, they had somehow managed to outwit the world's hedge-funds, seemingly taking over Volkswagen for free, and even made many VW employee shareholders quite rich as a pleasant side-effect.

Porsche's Annual Report as of 7/08 (Porsche doesn't publish interim financials) shows some pretty impressive figures:

The company posted a pre-tax profit of 8.6 bn € on sales of 7.5 bn €. How? Well, they booked 19.3 bn € "Erträge aus Aktienkurssicherung" (earnings from share-price hedging transactions), which came mainly from "Aktienoptionen und Aktientermingeschäften" (stock options and stock futures).

As for the balance-sheet: Straight equity went from 8.7 bn € to 15.1 bn €. Not bad. Except that financial debt also skyrocketed from 6.5 bn € to 16.4 bn €. And the biggest asset is 18.4 bn € "derivatives". Presumably refering to all those stock options and stock futures.

So much for "ancient history" (as in: the 7/08 annual report).

Fast forward to today:

Der Spiegel reports that Porsche cannot afford to exercise its remaining VW stock options, unless it is somehow able to raise additional 3.3 bn €. If the options are not exercised, the banks will sell the VW stock they hold (for the purpose of being able to fulfill the option contracts), and VW's stock will tumble. This in turn means that Porsche will have to write off "many billions".

Hmmmm. This is a bit mysterious: As long as VW is still "at equity" in the Porsche balance-sheet (it was as of 7/08), the VW stock price has no effect on the balance-sheet valuation of its VW stake. But of course the value of Porsche's remaining derivatives might suffer if the VW stock tumbles. And considering that the balance-sheet value of their derivatives was 16 bn € not so long ago (though we don't know where it stands today), that can indeed be a bit... problematic. So I suppose this is what they mean when they talk of impending write-offs: The rise in VW's stock that Porsche itself engineered caused last year's profits, but a drop will have the reverse effect, because many (most?) of those derivatives are still there. Too bad that (presumably) some of the money is no longer there, as it has been used to buy more VW stocks. Creating something out of nothing apparently didn't work out after all.

(How many VW shares does Porsche hold? As of 7/08, it held 30.3 %. This report says Porsche reached 42.6 % in late October, not including stock options. And according to VW itself, Porsche held 50.1 % of voting rights and 37.4 % of paid-up capital as of 12/08. As for VW's share price: It currently trades around 20 % higher than at Porsche's 7/08 balance-sheet date, and IMHO is rather expensive based on fundamentals as well as compared to industry peers. The crazy stock-price gyrations which saw VW shooting up from 200 € to 900 € took place in Q4, and I have no idea if Porsche managed to make "profitable use" of them in any way.)

And let's not forget that Porsche also has a core business: Making Porsches. Which, unsurprisingly, is doing not too well right now: According to this source, sales in the all-important US market are down nearly 30 % in year-to-April. Sounds like a considerable cash-flow-strain from the operating side of the business.

So what to do? According to Der Spiegel, two scenarios are currently in discussion by Porsche and VW: One is to merge the two companies (and to raise money from Katar, which would become a major shareholder), and the other is for VW to buy Porsche. According to this report, VW has already offered to buy Porsche for a cool 11 bn € (that would be less than 7/08 balance-sheet equity. But of course we don't know if balance-sheet equity is still anywhere near that number. A lot can happen in 10 months. And in any case, Porsche's car business was recently hived off into a separate subsidiary company, and presumably VW would buy that subsidiary, not Porsche SE).

How quickly things change: Just when people thought VW was one of the few major automakers with a decent balance-sheet, they propose to go out and spend 11 bn € for an irresistible M&A deal...

Double Decaf Hazelnut Latte anyone?

To what extent are American consumers cutting back on non-essentials? If Starbucks is any guide, they are doing so quite a bit:

In the quarter ended March 29, Starbucks US revenues were down 7 % yoy. In the previous quarter, the decline had been 6 %.

"Comparable store sales" were even worse, declining 8 % yoy (5 % fewer transactions, 3 % lower bill-size per transaction). In the previous quarter, the decline had been 10 %.

International revenues are down even more sharply (-12 %), but that's due to aggressive downsizing in Australia, and a sharply lower British Pound (Starbucks does not seem to publish fx-adjusted sales data).

Mind you, Starbucks is far from going bankrupt: In spite of massive restructuring charges, it still managed a small profit for the quarter (25 m $, after 65 m $ in the previous quarter; down 77 % yoy).

Anyway, the market still believes in Starbucks, it seems:

Shareholders equity is 2.6 bn $ (2.3 bn $ after deducting goodwill and intangibles). Yet market capitalisation stands at 10 bn $. The stock price has nearly doubled from its low in November 2008.

Extrapolating net income for the last two quarters to the full year, P/E is only... 55. Yes, I suppose the market does believe that current performance is just a temporary setback.

(By the way, I didn't manage to figure out how much of Starbucks revenues and profits comes from China: You'd think that sales volumes are substantial, what with more than 100 stores in Shanghai alone. But strangely, the quarterly reports never mention the word "China" anywhere. As for the annual report, it does at least tell us that the number of company-operated stores in China reached 178 as of Sept. 28, 2008, with another 269 stores licenced out - these should be the stores in Shanghai/Zhejiang/Jiangsu, which are operated by Taiwan's UniPresident. While 447 stores may sound impressive, China only accounts for a mere 2.5 % of all Starbucks stores worldwide. And judging from the many smallish and half-empty Starbucks restaurants I've encountered in Shanghai, I assume that China store sales are quite a bit lower than the worldwide average, i.e. China revenues should be less than 2 % of total revenues. No wonder they don't bother to disclose any details...)

(To see how archrival McDonald's is doing, check this post)

Anybody out there?

I activated Google Analytics last week-end to see who is reading this blog. Here's a summary of visitor activity over the last 7 days:

- Average number of daily visitors was 60 (with a high of 90 last Saturday).

- On average, these visitors accessed 140 blog pages per day (i.e. clicked on 1.3 additional pages after reading the page they initially had accessed).

- 63 % are from Germany, followed by UK (12 %), US (7%), Canada (3%), Switzerland (2 %), Austria (2 %), Australia (2 %) and China (2 %).

- Over the week, there were visitors from 24 countries (14 European countries, 6 in Asia, 3 in the Americas, and Australia).

- 80 % of visitors came from other websites, the most prominent of which were Weissgarnix (18 %), Das gelbe Forum (10 %), FAZ (9 %), Bomlat (9 %), Blogger (8 %), Forum GlobalHousePriceCrash (6 %) and Michael Pettis (4 %). I must admit that up to now, I have never heard of "Das gelbe Forum" and "Forum GlobalHousePriceCrash".

- Other source websites with less than 10 incoming visitors each (in order of importance): Egghat, Verlorene Generation, BlickLog, Credit Writedowns, Immobilienblasen, Brad Setser, Die Zeit, Börsennotizbuch, INSM-Ökonomenblog, Toytown Germany.

- 17 % came directly to the website, and 3 % came via Google Search.

- 55 % were first-time visitors, 45 % had visited the blog before.

Oh, and another statistics not related to Google Analytics: So far, there have been a total of 98 reader comments (this number includes my responses to some of the comments; the number of "external comments" is probably around 80). Comments were infrequent initially, but started to pick up in April. Highest number of comments on one single post has been 10.

Peak Oil Revisited

On Thursday, I invested in oil again.

Not really sure myself why I did so exactly now:

None of the fundamentals have changed since I last sold a month ago. Prices are a little lower (in €-terms), and the forward curve is a little less steep. But there's still huge oversupply and no indication of demand picking up in the short run.

However, any meaningful recovery of the world economy, whenever it happens, is bound to let the oil-price explode. Supply simply cannot go far beyond 2008 production levels. Right now, world oil demand is probably 5 % or so below its 2008 peak due to the severe production drop in most energy-intensive industries. But I don't think the world economy will keep falling off a cliff. Rather, I believe it will start stabilising soon and then return to moderate growth, particularly in emerging markets. And this will mean that oil demand also stabilises and then starts to increase a bit. Once that happens, supply constraints aren't far away.

It might already happen next year. Or it might happen a bit later. But unless the world will be stuck in a really bad depression, it won't take more than 2-3 years, IMHO.

HSH Nordbank: Same old Story...

This was bound to happen:

According to the FTD, the shareholders of HSH Nordbank are fighting about the terms of the upcoming capital increase.

Flowers and the Sparkassen think the price is too low. Sure, because they don't want to participate. Apparently, the last injection in 2008 was priced at 55€/share, valuing HSH at nearly 5 bn €. Now, PWC is valuing the shares at 11-20€, i.e. 1-2 bn € for 100 %.

I'm in no position to value HSH. But considering that the bank has a book equity of 2.1 bn €, has lost lots of money in 2008, business prospects and further loss exposure are (at best) uncertain, worldwide bank sharse (with the exception of China) trade far below book value, and HSH is anyway only alive at this point due to massive state guarantees, this already sounds like a rather generous valuation to me.

And anyway: Capital increases are usually priced at a discount to entice shareholders to participate. All the more so if a company is in trouble. If Flowers thinks it is too cheap, he should participate. Or find somebody else who is happy about getting the chance of participating at such an irresistible, rock-bottom price. But no, he doesn't want to do that.

Instead, he gets a second opinion from Deloitte arguing that HSH has a higher fundamental value. And he argues that a low valuation will cause a ratings downgrade, because rating agencies will take it as proof that the owners have no faith in the business model. This will increase financing costs, and therefore isn't in the shareholders best interest. Wow! So let's all pretend that the bank is worth more than it is, because ratings agencies and the customers will of course believe us, and this will lower financing costs. Great idea! And what a coincidence that it benefits Flowers and hurts the taxpayer...