Tag Archives: Macro

Over 1.2 Billion Chinese can’t be wrong

Energy, On the cover, Sin categoría,
20091125112611china1
(Published in Cotizalia in Spanish on Nov 26th 2009). Chart shows monthly car sales in USA vs China.

“Data from China is not credible.” This phrase and similar ones have led many funds, especially traditional ones, to miss part of the rally in stocks and commodities, to give just one example. It seems to me that in 2009 many suffered from a bit of excess of caution and a lot of looking at the growth data in the wrong places (USA, Europe). And it’s already more than a year since the launch of China’s economic stimulus program and the data continue to surprise on the rise.

In 2010, China’s GDP will grow c9%. But more importantly, it is likely to do so with very moderate inflation, around 2.5%, thanks to the fact that OECD countries will continue to be in a difficult economic environment and therefore, prices of products imported by China will probably not increase dramatically, as has happened with oil, coal and gas between 2008 and 2009.

Remember that China imports 3.6 million barrels per day of oil, and growing. Well, that consumption is only 2 barrels a year per capita, c4% of global demand. Meanwhile the U.S. remains about 24 barrels a year per capita, 24% of the total, but falling. This scenario, moderate rise in prices of imported commodities as high domestic growth is financed, is ideal for China to deliver long term economic growth and credit expansion without causing major inflationary moves, and that will likely generate the next local stock market rally. Do you remember Europe in 1950? The same.

Investments in fixed assets in the country will continue growing by c30% in 2010. Over 300 projects implemented on a large scale in 2009 lead me to think that we will see an increase in infrastructure investment over several years. This investment will force Chinese authorities to keep the current loose monetary policy at least for the medium term. Thus, according to several analysts, the figure of bank loans will double in three years. And this expansion of credit obviously generates a massive increase in consumption and spending power of families. The increase in disposable income is what is leading car sales to exceed U.S. figures, and we will see the same for other assets.

The important thing to remember is that the figures for 2009 are the result of a recovery from a downward cycle, and do not include the results of credit expansion and domestic demand, so China will be able to harness the greatest growth in its history without depending so much on exports and with relatively moderate inflation.
And what keeps me comfortably optimistic about Chinese stocks and those companies exposed to the growth of the country is this period of expansion, which coincides with the decline of the OECD, which makes it impossible for Western Central Banks to raise rates in a relevant way, and which will likely make investors increase exposure to risk assets. Alternatively we might lose the other 50% rally worrying about data from mature economies in decline.

Bye bye Yen?

Energy, On the cover, Sin categoría

Just a thought, only marginally out of the energy sector, but given the surprise change of government in Japan, and what appears to be a growing sense in the market that this government is more focused, finally, on fiscal restraint (or least this threat of massive debt overhang to deal with) and less concerned about maintaining the weak-policy on JPY and even stating their ability to intermediate has declined, it looks like the JPY is keeping its bid. The market—big vocal guys like Jim O’Neil at GS for example—have been pounding the table that the JPY would decline back to 120 eventually on failing demographics and a larger global recovery, and it’s on its way, but slower. Maybe it’s because the US has usurped Japan as the ultimate source of funding and itself is now in a fiscal death spiral; maybe it’s these demographics and the start of deleveraging a bit, I’m not sure, it’s complicated. But whatever the root cause(s), the implication of a stronger than expected JPY (particularly against the $) absolutely HAS to be a weaker domestic industrial and manufacturing economy in Japan. Until China de-pegs, Japan’s opportunities for exports (at least market share risk) seem to be declining; in fact, what we are seeing are Japanese companies setting up shop in China (or elsewhere) instead, similar to the US. Therefore, the Japanese ‘equity market’ might be able to do ok, particularly if this increased JPY leads to a bit of insulation on domestic consumption, but the Japanese economy could be fairly troubled. Utilities would be in the cross hairs of declining consumption.

The key to figure out is: is this a currency issue primarily, or is it something else structural? We know that Japanese energy companies are short Yen in revenues and long Yen in expenses, eg, their costs fall when the JPY is strong, but now perhaps the JPY relative strength is enough to have structurally interrupted volumes and we know what slack does to prices on top of that!…

Afren: One to look into weakness

Energy, On the cover, Sin categoría,
The way I see it the stock has short term downside to 80p on fund flows (some large hedge funds are sellers) and technicals… but enters FTSE 250 January or February, RDS are looking to sell them some really cheap assets, small 40-50mnbbls type assets currently too small for the big guys to work and which benefi from better fiscal terms under a Nigerian entity .. ie netbacks go from 2.50-5 per bbl .. so if you are RDS, why not give the assets to Afren, let them get $5 per barrel and take a royalty of around $2 ..less hassle, no political issues , everyone happy !. Ebok field could add 35p/sh unrisked and I am hearing solid things from RDS people. Obviously Addax must have strong views on it too.Expect 6 well exploration program next year targeting 685 bbls vs 129 bbls 2P today (easy 95p valuation then)
The stock, at 80p, will be at 8xPE and 3.4x EV/EBITDA 2010 at $70/bbl, so looks undemanding once we pass the 2009 cornerstone.

ENI and its alleged break-up value

Energy, English, On the cover, Sin categoría
Over recent weeks,Knight Vinke has suggested that splitting the company into utility gas and traditional oil businesses would unlock significant value.
They value ENI between €27.8 and €32.
My biggest discrepancy with them is a) that the issue is not the Gas & Power business but the E&P, and b) I find it hard to believe that both parts would trade at top-of-subsector multiples if separate.
First in the Snam and Gas & Power business… They take the assumption of Snam trading at a 20% premium to RAB, which is crazy compared to other utility stocks. They also use the rest of the gas & power division at a 30% premium to Enel, Edison, Hera, Acea (which all trade at 5.6-6x EBITDA 1yr fwd). They totally disregard the constant process of de-rating of the Italian utilities in the past six years and the impact on power prices of stalled demand and excessive capacity from gas oversupply.
The refining business is put at Neste multiples, which is OK to me
Chemicals are valued at much higher than anyone can imagine (7.5x EBITDA)
Corporate charges are drastically reduced (probably as part o the assumption that, as separate entities, cost savings and job cuts would happen). This is difficult to believe in Italy, but can be acceptable as a thesis.
Then Knight Vinke value the E&P business at the multiples of a BG, which is too radical given the poor growth, high capex and returns.
In essence they use consensus Sum of the Parts, reduce the traditional Megacap oil discount (21% to 15%) to zero by cutting corporate charges and others, pumping up the valuation of the Italian G&P to multiples of non-Italian (and therefore more attractive) utilities and applying a premium to the Snam RAB that it has never enjoyed in the past (Snam is a mature asset and growth RAB is very limited versus maintenance RAB, something that KV seem to value in the same way).
The key, as some analysts (e.g Nomura) point out is that where Eni trades (a 40% discount to its invested capital) is no different to that of other large-cap oils (BP, RDS, FP and STL). I think the value argument can be applied equally to all these companies, but unlocking it is not about addressing a small part (Gas & Power is only 15% of Eni’s invested capital base) but about turning around the core E&P businesses where returns have fallen a staggering 400-500 basis points in four years (while oil prices rose).
That is why, even if separated, it is an illusion to believe that oil investors would see ENI as a high multiple E&P and see it trade at the same multiples as Tullow, Dana, etc… First, because it would still be a State owned entity and its resource base would still be heavily impacted by resource nationalism, low returns and OPEC quotas.
In the meantime, the bet on the stock from here is a full break up not only of the utility assets (which as Scaroni has said, would be regulaywise impossible) but also the disposal (at current market price, no discount) of the Saipem stake.