Sunday, July 5, 2015

2015-06 Relative Equity Trends

In June, both the consumer goods and materials sectors lost momentum.  The materials sector, represented by CHIM, grew only 23.14% over the last 12 months, compared with 46.83% in May.  The value of the portfolio dropped 13% over the month.  The consumer goods sector, represented by CHIQ, grew almost exactly zero percent over the last twelve months, closing June at $14.40.

On the consumer goods side, ecommerce and the food and beverage industries led the news. Alibaba and were added to CHIQ holdings. The Financial Times published an article on’s rising popularity in China. Companies that make money in the long run talk about profit margin expansion. Companies that lose money in the long run talk about anything but profit margin expansion, such as revenues, market share, popularity, facility expansion, and service. In the 700 word article by the Financial Times, discussion of profit margins only took up 19 words: “’s net loss widened to Rmb710.2m in the first quarter, up from Rmb454.3m in the fourth quarter of 2014.”[1]

In the food and beverage industry, multiple state-owned enterprise mergers or reorganizations were announced. China Resources Enterprise Ltd. will sell its money-losing retail venture with Tesco Plc. to its parent company for HK$30 billion. This will allow the dividend to be raised from HK$12.30 to HK$11.50. The parent company announced it will also acquire up to 20% of the Hong Kong-listed company, up from 10% currently.[2] Bright Dairy & Food Co., China’s third-largest milk producer by market value, announced that it will buy China Modern Dairy, a cattle-breeding operation that owns 35,000 cows, from Shanghai Dairy Group, which is owned by the same parent company as Bright Dairy. Prior to that, Bright Dairy had also announced that it will purchase Israeli Tnuva Foods from its parent company, and merge with edible oil maker Shanghai Liangyou Group, which is also controlled by the Shanghai municipal government.[3]

On the materials side, there is one bright spot in the over-capacity story: China Hongqiao Group. China exported 410,000 tonnes of aluminum and aluminum products in May, a 21% increase compared to the previous year.[4] Despite the impressive growth in volume, prices have declined. China Hongqiao Groups biggest domestic rival, Aluminum Corporation of China, posted a ¥16.2 billion net loss in 2014 due to poor cost competitiveness and lower prices. Despite that, China Hongqiao has managed to make a net profit of ¥5.3 billion in 2014, and expects to see expanded profit margins in the first half of 2015.[5] The company is able to do this by passing on lower energy costs into the price of its finished goods.