In this week’s issue China rediscovers Australian timber, Oppo ditches chip design and noodle maker Nissin finds savory flavor in falling flour prices. On a scale of 1 to 100, we give the week a 45 for offshore-listed China stocks.

Doug Young, Editor in Chief

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MACRO

China Pumps Up Economy with Cash, But Nobody’s Borrowing

China’s old playbook of propping up the economy with economic stimulus is facing headwinds, largely because there’s no one to borrow the huge funds that state-run banks have been told to lend. The latest data show China’s central bank injected big liquidity into the financial system for a sixth straight month in May, aiming to boost the economy amid weak signals all around.

Now, if only the banks would lend some of that money. The problem is there aren’t that many qualified borrowers out there, leading banks to simply salt away any of the new cash being injected into the economy. Last year’s stiff Covid controls drove many companies out of business, and many of those remaining are hardly the kinds of solid borrowers that banks like.

China Rediscovers Australian Timber

On the diplomatic front, China has taken another big step towards mending fences with Australia, one of the biggest suppliers of natural resources that feed the Chinese economic machine. In the latest move, the country resumed its imports of Australian timber last week, as talks were underway for a trip to Beijing by Australian Prime Minister Anthony Albanese.

China’s relations with one of its most important resource suppliers have been in deep freeze since the first year of the pandemic, after Canberra called for a global inquiry into the origins of the novel coronavirus. China subsequently banned a number of Australian imports, but has been slowly lifting those bans as it hopes to move relations back onto a more positive footing.

Offshore China Stocks Slump as ‘Revenge Spending’ Slows

The latest deluge of quarterly earnings is showing that economic activity rebounded in the first quarter for many Chinese companies after the lifting of most Covid restrictions last December. But investors have been looking past that to a cloudier future now that an initial round of post-pandemic “revenge spending” is largely in the past.

The Hang Seng China Enterprises Index fell 1.1% last week, while the iShares MSCI China ETF rose 0.1%. The broader Hang Seng Index closed down 0.9% for the week as well. China is trying desperately to stimulate the economy through measures like pumping more cash into the system. But markets are likely to remain weak until the economy starts showing signs of improvement.

Industry

China Takes Global Car Export Crown

First China made history 2010 when it passed Japan to become the world’s second largest economy, behind only the U.S. Now 13 years later, China has stolen another crown from its neighbor to the east, this time taking the global title for the world’s largest car exporter. The latest data show China exported just over 1 million cars in the first quarter, versus 954,185 for Japan.

China accomplished the feat with car exports that have soared in the last couple of years, including a 58% rise in this year’s first-quarter compared with a year ago. This development shouldn’t come as a huge surprise, since China is already the world’s biggest car market and also its largest car maker, with nearly all the world’s big names engaged in local manufacturing.

Oppo Ditches Chip Design

Oppo may be the world’s fourth largest smartphone maker, but it’s giving an official “no thanks” to the business of chip design. The company based in South China’s Guangdong province announced the move last week, citing uncertainty around the global smartphone industry behind its decision for shuttering its Zeku unit.

We’ve included this item in our “industry” rather than “company” section as we’re almost certain to see other Chinese firms follow Oppo’s lead. Chip design was once all the rage for China firms wanting to burnish their high-tech chops. But U.S. restrictions have made such efforts more difficult, and expenses are also very high for a product that is easily available from third-party sellers.

Chinese Battery Makers Cut Production

Oppo isn’t the only one cutting things these days. Across the aisle in the new energy sector, battery makers that have been sprouting up like weeds in China these past few years are also cutting production to stem a supply glut. Producers cranked out 47 gigawatt hours of EV batteries in April, down 8.3% from March and off 40% from a year earlier.

When we say that battery makers are cutting production, we’re not at all implying the cuts are voluntary. To the contrary, most of these battery makers are taking the step because they probably have huge amounts of unsold inventory in their warehouses after China provided its usual government largess to build up the sector. Let the consolidation begin!

Company

Foxconn Breaks Ground on India Plant

Apple’s top iPhone manufacturing partner Foxconn broke ground last week on a new plant in the southern Indian state of Telangana that will eventually soak up $500 million in new investment. Reflecting the importance of the investment, the Telangana information technology minister attended a launch ceremony and tweeted about the plan on his Twitter account.

Foxconn has learned the dangers of putting too many eggs in the China basket, after facing huge issues at one of its main complexes in the central city of Zhengzhou at the height of efforts to control Covid last year. Many other companies, both high tech and from traditional industries, have been taking similar diversification steps to avoid future overreliance on China as well.

Alibaba Gets Set for IPO Bonanza

Alibaba isn’t wasting any time executing a plan to break itself up into six pieces, which it first unveiled in March. In announcing its latest quarterly results last week, the company revealed it will fully spin off its cloud unit in the next 12 months, and that it will make IPOs for its Cainiao logistics and Freshippo supermarket units in the next 12-18 months and 6-12 months, respectively.

Investors who like Alibaba will now have lots of choices to pick from, as most of the other units are likely to make future IPOs as well. Alibaba itself will remain as a holding company and controlling shareholder of the six units. Of the six, only the company’s China e-commerce division is squarely profitable, though the cloud business is profitable on a non-GAAP basis.

Aston Martin Finds Friend in Geely

James Bond must be breathing a sign of relief, following news last week that his favorite car brand, Aston Martin, is set to get a new major shareholder with a 234 million pound ($291 million) investment from Chinese car giant Geely. The deal will see Geely’s stake in the struggling Aston Martin roughly double from the 7.6% it initially acquired last year to 17%.

Geely seems to have a thing for foreign car brands, with a stable of names that also includes British sports car maker Lotus, as well as Sweden’s Volvo. While Volvo seems to be doing relatively well since Geely acquired it, we suspect the Lotus purchase and now this big Aston Martin investment may be part of a fascination with European sports cars by Geely founder Li Shufu.

AND FROM THE PAGES OF BAMBOO WORKS

Falling Flour Prices Rescue Instant Noodle Maker

A story on our pages last week looked at Nissin Foods, which was one of the relatively few beneficiaries from the pandemic due to its status as a leading maker of instant noodles for both the Hong Kong and mainland China markets. As the pandemic fades and people eat out more, Nissin’s revenue fell 3.6% in the first quarter.

But the company got an unexpected lift from another direction, namely flour prices, which have fallen back to earth after spiking last year at the time Russia invaded Ukraine. As a result of those falling prices, Nissin was able to post a 22% net profit increase for the quarter, showing that even a lowly noodle maker is subject to many of the major forces tugging at the world.
Atour Revenue Soars on ‘Revenge Travel’

While Nissin was looking weak in the first quarter, the opposite was true for hotel operator Atour, whose exploding revenue was in line with similar trends seen among consumer-facing businesses with the end of China’s Covid controls. Atour’s revenue rose 71% for the quarter from a year earlier, as travelers returned to the road after three years of Covid-induced homestays.

But investors are already worried that this revenge spending won’t last, and Atour’s stock actually fell around 6% after the results were announced. The analyst community seems to feel the same way, and a look at data from U.S. giant Marriott seems to show that growth tapers sharply after an initial period of travel euphoria when a country emerges from the pandemic.

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