Wednesday, August 16, 2017

THTI Reports Losses, Negative Cash Flow, and More Debt in the Second Quarter of 2017.

THT Heat Transfer Technology Inc. (Nasdaq: THTI) is a total solution provider in the heat exchange industry with primary operations in China. In the three months ended June 30, 2017, the company generated sales of $7.5 million, down 3.4% over the same period in the prior year.

In addition to negative top-line growth, the company booked US$732K in negative net income and generated negative cash flow from operations. The company disclosed that it had repaid in full a one-year loan for CNY32 million at 4.78% interest with Agricultural Bank of China (HKEX:  1288) in May, 2017. However, in June, 2017, Agricultural Bank of China extended another one-year loan for the same amount at the same interest rate to the company. The company reported the U.S. dollar value of this loan as $4.7 million. As of June 30, 2017, a few weeks after the loan was granted, the company only had $4.2 million in cash on hand, meaning its entire cash position came from that one loan.

Agricultural Bank of China is rolling over its own loan at the same interest rate and collateral to a non-profitable company with a negative cash flow from operations. Without the ability to expand artificial credit at suppressed interest rates, the bank would not be able to support further misallocation of capital. Without this loan, the company would have insufficient cash on hand. To correct its cash position, it will need to reverse the $4.1 million increase in net inventories and $1.1 million decrease in accounts payable during the six months ended June 30, 2017. Although that will help in the short term, its position in the Chinese heat exchange technology industry might not be profitable.

Tuesday, August 15, 2017

Debt and Negative Free Cash Flow Drives Chinese Auto Industry in Second Quarter of 2017.

In the second quarter of 2017, the Chinese auto industry has seen significant growth in sales, but many companies have not been able to convert this into free cash flow. Both banks and suppliers are providing the industry with artificial credit that is misallocating capital.

China Auto Logistics, Inc. (Nasdaq:  CALI) reported $138.7 million in net sales in China during the three months ended June 30, 2017, up 47.9% over the prior year. However, the company had negative net income and generated negative cash flows from operations. Loan agreements from two Chinese banks facilitated these results. Agricultural Bank of China (HKEX:  1288) loaned the company CNY35.0 million, bearing interest at a rate of 4.79% over a borrowing period of six months. China Zheshang Bank (HKEX:  2016) loaned the company CNY54.0 million, bearing interest at a weighted average rate of 5.50% over six-month borrowing periods.

SORL Auto Parts, Inc. (Nasdaq:  SORL) generated US$70 million in China during the three months ended June 30, 2017, up 25.9% over the same period in the prior year. Sales within China accounted for 77.6% of total sales. Although the company reported US$14.2 million in net income, a US$16.8 million increase in accounts receivables was the largest contributor to negative US$3.2 million operating cash flows. To accommodate this, the company increased short-term bank loans from US$27.4 million on December 31, 2016 to US$47.0 million on June 30, 2017. These short-term loans were obtained from Bank of China (HKEX:  3988), Bank of Ningbo (Shenzhen:  002142), Agricultural Bank of China, China Zheshang Bank, and China Construction Bank (HKEX:  0939). The annualized interest expenses paid in the three months ended June 30, 2017 equate to an average interest rate of 4.6% on those loans.

China Auto Logistics, Inc. generated impressive sales growth, but was unable to due so profitably or convert that growth into free cash flow. SORL Auto Parts, Inc. grew sales revenue quickly and profitably, but grew debt faster and generated negative free cash flow. This indicates that the growth in the Chinese auto industry is disproportionately driven by cheap credit, which in this case was particularly driven by China Zheshang Bank.

Monday, August 14, 2017

China-Related Annual Reports for the Week Ended 2017-08-11.

Maxim Integrated Products, Inc. (Nasdaq:  MXIM) designs, develops, manufactures, and markets  linear and mixed-signal integrated circuits. In the year ended June 24, 2017, the company generated $843.3 million worth of net revenues from unaffiliated customers in China, its largest geographic reporting segment. Compared to the prior fiscal year, revenues grew 0.7%. The company stated that almost all of its global sales are denominated in U.S. dollars.

Landec Corporation (Nasdaq:  LNDC) designs, develops, manufactures and sells differentiated health and wellness products for food and biomaterials markets. In the year ended May 28, 2017, the company generated sales of $12.1 million in China, up 45.7% over the prior fiscal year. 

Sunday, August 13, 2017

2017 Relaunch.

Mao Money, Mao Problems is being relaunched. The primary goal of this effort is to provide readers with timely updates and analysis of China’s business cycle asrelevant data becomes available. The basic framework of these writings is that China, like all other economies, has a structure of production that is more important than the size of aggregate economic activity. A re-adjustment is overdue, and that adjustment will most likely manifest itself in a massive devaluation of the Chinese renminbi. When that adjustment happens, a few quality companies and assets will be excessively undervalued. Ideally, those opportunities are identified early.

On a monthly basis, readers will have updates on the stock market valuation, private sector interest rates, relative price trends, and money supply data.  On a daily basis, readers will have updates on China-related disclosures of U.S.-listed companies.

Thursday, August 11, 2016

Flashback: "Two Prisms for Looking at China's Problems"

Introduction:  The Chinese economy began to show signs of a downtrend in the business cycle long before the current troubles.  Instead of welcoming the adjustments, Chinese policy makers opted for more Keynesian stimulus.  Did lower interest rates, more artificial credit, and more fiscal spending delay the adjust process?  Yes.  Did it eliminate the need to adjust?  No.
The New York Times - August 11, 2012 - Tyler Cowen - "Two Prisms for Looking at China's Problems"

China is confronting some serious economic problems, and how Beijing does — or doesn’t — respond to them could bend the course of the global economy.

First, China’s real estate bubble is deflating. But its economy also seems to be suffering from what we economists call excess capacity — an overinvestment in capital goods, whether in factories, retail stores or infrastructure. So what now? The answer depends in part on your school of economic thinking.

Keynesian economics holds that aggregate demand — the sum of all consumption, investment, government spending and net exports — drives stability, and that government can and should help in difficult times. But the Austrian perspective, developed by the Austrian economists Ludwig von Mises and Friedrich A. Hayek, and championed today by many libertarians and conservatives, emphasizes how government policy often makes things worse, not better.

Economists of all stripes agree that China may be in for a spill. John Maynard Keynes emphasized back in the 1930s the dangers of speculative bubbles, and China certainly seems to have had one in its property market.

Keynesians would argue that Beijing has the tools to stoke aggregate demand. It could, for example, adjust interest rates and bank reserve requirements, instruct state-owned banks to maintain lending, or deploy some of its $3 trillion in foreign exchange reserves. The government also appears to have many shovel-ready construction and infrastructure projects that could help the economy glide to a soft landing and then bounce back.

The Austrian perspective introduces some scarier considerations. China has been investing 40 percent to 50 percent of its national income. But it is hard to invest so much money wisely, particularly in an environment of economic favoritism. And this rate of investment is artificially high to begin with.

Beijing is often accused of manipulating the value of its currency, the renminbi, to subsidize its manufacturing. The government also funnels domestic savings into the national banking system and grants subsidies to politically favored businesses, and it seems obsessed with building infrastructure. All of this tips the economy in very particular directions.

The Austrian approach raises the possibility that there is no way for China to make good on enough of its oversubsidized investments. At first, they create lots of jobs and revenue, but as the business cycle proceeds, new marginal investments become less valuable and more prone to allocation by corruption. The giddy booms of earlier times wear off, and suddenly not every decision seems wise. The combination can lead to an economic crackup — not because aggregate demand is too low, but because the economy has been producing the wrong mix of goods and services.

To keep its investments in business, the Chinese government will almost certainly continue to use political means, like propping up ailing companies with credit from state-owned banks. But whether or not those companies survive, the investments themselves have been wasteful, and that will eventually damage the economy. In the Austrian perspective, the government has less ability to set things right than in Keynesian theories.

Furthermore, it is becoming harder to stimulate the Chinese economy effectively. The flow of funds out of China has accelerated recently, and the trend may continue as the government liberalizes capital markets and as Chinese businesses become more international and learn how to game the system. Again, reflecting a core theme of Austrian economics, market forces are overturning or refusing to validate the state-preferred pattern of investments.

For Western economies, the Keynesian view is much more popular than the Austrian view among mainstream economists. The Austrian view has a hard time explaining how so many investors can be fooled into so much malinvestment, especially given the traditional Austrian perspective that markets are fairly effective in allocating resources. But China has had such an extreme and pronounced artificial subsidization of investment that the Austrian perspective may apply there to a greater degree.

The optimistic view is that Chinese excess capacity and overbuilding are manageable — that the current overextensions of investment will be propped up, but they won’t have to be propped up for long. In this view, the Chinese economy will fairly soon grow rather naturally into supporting its current capital structure, and its downturns will be mere hiccups, not busts.

The pessimistic view is that the problems are so large that the government’s attempts to prop up its investments with further subsidies could so limit consumption, and so distort resource allocation, that the Chinese economy will stagnate. In this view, the political means for allocating investment would grow to dominate market forces, the proposed “economic rebalancing” of the Chinese economy toward domestic consumption would become a distant memory, and China would have an even tougher time opening its capital markets and liberalizing its economy. Given that China already faces competition from nations where wages are lower, and that its population is aging, the country might not return to its previous growth track.

The jury is out. But to my eye, we may well find a significant and lasting disruption, closer to what the Austrian theory would predict. Consider a broader historical perspective: How often in world history have countries enjoyed 30-plus years of extremely rapid growth without a major economic tumble somewhere along the way? One can be optimistic about China for the long term and still be fearful for the next turn in its business cycle.

In any case, China has surprised the world many times before — and is likely to surprise it again.

Sunday, January 31, 2016

Apparently, the China Century Already Ended.

Back in June, 2015, I asked the question:  "Will the China Century end in 2019?"  That article analyzed International Monetary Fund projections to point out in that year China will contribute less nominal gross domestic product than the United States.

According to Bloomberg, this already happened in 2015.
For the first time in almost a decade, China has lost ground in catching up with the U.S. economy, when output is measured in dollars.
U.S. gross domestic product increased $590 billion in 2015 from a year earlier, according to data released Friday. China’s economy, while reporting 6.9 percent growth for the year, added $439 billion, as a weaker yuan sapped the value of output gains in dollar terms, according to data compiled by Bloomberg. [Read more...]

Monday, November 23, 2015

Bloomberg: "Devaluation Watch May Force China to Pay Premium on Dim Sum Debt"

Fion Li.  Bloomberg.  November 22nd, 2015.
China is set to pay more to sell sovereign bonds in Hong Kong than in the onshore market for the first time, as investors brace for the possibility of another yuan devaluation.

The Ministry of Finance will sell 14 billion yuan ($2.2 billion) of Dim Sum notes in the city this week, including 2 billion yuan to individuals. The yield on offshore yuan securities due 2020 was 3.39 percent on Nov. 20, 25 basis points higher than debt of the same maturity in Shanghai, suggesting the government will have to pay more to borrow outside of the country.