Three or Four Horsemen

Date: Mon, 1 Aug 2011 12:11:24 +0800

Subject: Three or four horsemen


Obama says, Ladies and Gentlemen, we have a deal and it may avert the arrival of the Four Horsemen (our friends Pestilence, War, Famine and Death). But although heated negotiations have been carried out behind closed doors, the rank and file of both houses of Congress (around another 500 vote-wielding lawmakers) aren’t in the game and aren’t in the know.

This is a close replay to September 29th, 2008 when Congress at the last minute rejected a rushed bank bailout bill (TARP). Remember that surprise? The Dow fell to a 15-year low and had its biggest single-day point loss: 778 points straight down.

The whole thing was rushed and lawmakers weren’t informed or even on the same page. I am interested to see if we can rush this through as well. Either way, nothing really changes; the day of reckoning just gets pushed further down the road. Short term we should see risk appetite return but I will keep buying gold on dips, thank you.

Three Horsemen


Property analyst, Keith Yeung has looked at Hang Lung Properties (101 HK) Q2 results and isn’t impressed. He maintains his Hold rating with a target price of $30. The big issue is cost over-runs in 2nd tier cities in China. Their much hyped Shenyang Palace 66 initial yield is only 4% due to higher investment cost at HK$3.725 bn vs. the original estimated HK$2.5 bn, a nice 50% difference! HLP has 4 other projects under construction in China which now they forecast will cost HK$41.5 bn vs. October’s estimate of HK$32.5 bn.

That is a 28% jump and we haven’t even put in the carpets yet. At a discount to NAV of 23%, Hang Lung Props is not expensive, just in-line with historical averages but on a PER basis the stock trades at 32X 2012 recurring rental earnings and with the likelihood of further surprises on the cost side it may be prudent to wait for a better entry point. Note attached.


Commodities strategist, Henry Liu, takes a look at the on-again-off-again resource tax issue in China. Details of the impending tax are not public but they will impact all resource sectors in the country. The big issue is whether it will be based on volumes or prices.

The subject has been discussed in Beijing for 5 years now and the perfect window for its introduction – low inflation and high growth – has yet to present itself. The tax will be collected by local gov’ts and will help alleviate their deteriorating balance sheets so we should expect it sooner rather than later. After speaking to researchers “in country,” Henry comes to the following conclusions about the tax. It will be:

  • Positive for iron ore miners
  • Neutral for coal miners
  • Negative for base metal miners

Note attached.


I had lunch with a friend who works for a listed container shipping company. He says times are TUFF. Rates are low and there is way too much capacity. All carriers are hurting but nobody wants to be the first to leave the party even though the band has already gone home. He expects his company, and others, will begin to mothball carriers by Q4 unless they see a significant pickup in demand.

Interestingly, there are two ways to do this: “hot layup” and “cold layup.” Hot is when you throw out the anchor and send everybody home except for one lonely boatboy to make sure the newspapers are collected each morning. Ships can re-enter the fleet right away when they are put away “hot.” Cold layup is what you do when you can’t sell the damn thing and remove everything of value and decommission the vessel. It takes months to re-wire the karaoke lounge, etc, and re-enter the fleet this way.

Global corporates last week disappointed with results: the world’s biggest company, Exxon, missed. BASF, the world’s largest chemical company missed. UPS, the global package shipper, gave very weak guidance and forecast slowing growth. Will the eventual US debt agreement restore clarity and confidence to global demand? The boatboys would like to know.


You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA

Mirae Asset Securities: Risk is to the Upside

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