Watching Godzilla Backwards

By Derek On November 15, 2011 Under Broker Notes

From: Derek Hillen
Sent: November 15, 2011 11:05 AM

To: Derek Hillen
Subject: Watching Godzilla Backwards

Juliet calls out to Romeo, despondent about his family name, the sworn enemy of hers:

‘Tis but thy name that is my enemy…What’s in a name? That which we call a rose by any other name would smell as sweet;”

News today that China’s ambitious goal of completing 10 mn units of “social housing” by the end of the year is not going to happen, hardly surprises. Just last month China was firmly “on track” to reach that number and now, a few weeks later, up to one third of the 10 mn future hovels are “just holes in the ground.” if that.” What happened? It all comes down to your definition of the words, “construction starts.” With real estate construction accounting for over 10% of GDP and a major consumer of steel and cement, this is not welcome news for those hoping for China to become an engine of growth in a faltering world economy. Policy at the same time is to direct credit away from the housing sector giving us a bit of a contradiction here. The reality of the credit starved property sector was brought home when I met the chairman of a listed HK property developer last week and he told me that he sees “…a rough 9 – 12 month.” Fair enough. He also said that bank funding in China and Hong Kong has dried up. “Thank God I raised money in a placement last year!” he exclaimed.

The same question should be asked of NPLs in the banking sector; what is an NPL? To some it is “Nigerian Premier League.

It’s all about perspective:

Will the real level of NPLs, as opposed to that reported, smell as sweet to investors? An NPL is whatever a bank decides to call it. Interest payments on bank loans in China are supposed to be paid from the cash flow the funded project, whether housing, a toll road or airport generates. But the banks don’t check. With the severity of the credit drought increasing NPL levels at banks are sure to increase going forward. I expect them to be called many things. But unlike Juliet’s Romeo, they won’t be called NPLs and they won’t smell that sweet. We remain underweight the China banking sector and would sell the rally.

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Eric Wen downgraded Ctrip (CTRP US) to Hold on the back of weak Q3 results. The threat to Ctrip is their focus on the low end of the market where price wars dominate. 40% of revenue comes from the hotel segment and Ctrip is being decimated in a price war with Tencent-backed eLong. The race to the bottom represented by the recent group buying, or “tuan gou” (团购) phenomenon is also a long term threat. Eric has written in the past of future disruptive technologies such as O2O (online to offline) as well as mobile LBS (location based services); two more negatives looming on the horizon. In its weakening position with weaker guidance ahead, Ctrip is more vulnerable to these threats than before. The stock fell 12% last night on massive volume as investors adjust to a less buoyant reality. Note attached.

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

Cheers.

Derek Hillen, CAIA

www.stockbroking101.com

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