May 20 Huawei & SMIC, Softbank, Deals in China?


Markets in Asia mixed
Japan opened higher on better than expected Machinery Orders and has tracked higher.
S Korea opened flat but markets have tracked higher
Taiwan opened higher but trended lower, found support at yesterday’s closing level and then trending higher
HK open higher, despite ADR’s indicating lower. China left the Prime Loan rate unchanged (many were saying they would cut) and I think there was a lot of short covering on the Chinese banks as a result. After an initial spike to 24,515 the HSI sold down to 24,315 before a small bounce into lunch. PM trading has been sideways.
China opened lower and traded sideways in choppy trading for most of the morning before selling down into lunch. PM saw it spike back up but currently trending lower. I think Team China trying to support the market but investors disappointed by not cut in the Prime Rate and worried that is an indication of less real stimulus to be announced at the the NPC.


Attack on Huawei threatens suppliers ‘Surgical’ US sanctions mean top chipmakers look set to halt production for the China tech group. Key here are TSMC and SMIC. TSMC has already said it will halt new orders. For SMIC its a question of will it respect the US action or stick with China? To stick with China would put it on Washington’s black list which could restrict its ability to but future manufacturing equipment that it will need to meet China’s ambitious chip production targets.
To give an idea of the reach the article says 'Any company that wishes to manufacture computer chips to Huawei’s designs with US tools now needs to apply for a licence.
US machines from the likes of Applied Materials and Lam Research are used by about 40 per cent of the world’s chip-makers, while software from the likes of Cadence, Synopsis and Mentor is used by 85 per cent, according to Credit Suisse, which said it would be almost impossible to find a fabrication plant, or fab, that could still work with Huawei'
That really demonstrates the leverage that the US over China.

SoftBank considers $20bn T-Mobile US share sale. Softbank in the news again for the wrong reasons. The potential sales of T-mobile and whist they are saying the deal will only be done if it can be done at an attractive price. But when you are desperate surely almost anything is an attractive price? This is in addition to the potential sale of $11.5bn of Alibaba.

LEX Sony Financial buyout: Third Point deflected. But views the acquisition as +VE

Global labour market warned of shake-up. An interview with Hiroaki Nakanishi, chairman of Hitachi and head of the Keidanren business lobby looking at the longer term changes for Japan and possibly the rest of the world. The Keidanren head has traditionally looked to protect corporate Japan’s interests but Mr Nakanishi realised that the world is changing and covid-19 if it lasts for a significant period of time will mean change and that its better to make those changes now. He was already anti the office face time culture and so seeing greater flexibility in the work place to him makes sense. He has been encouraged that the Japanese government has taken steps to make the changes but more needs to happen. Worth a read, I think part of the issue for him will be persuading other, older members of the Keidanren of the need to change. Changes to working arrangements are only part of what Japan needs key is that at least it's being talked about openly, that is a first step.

Dictator mystery shows peril of investing on Korean peninsula Traders and analysts rely on networks of local contacts to gauge risk from Pyongyang. An interesting read about how what goes on in N Korea impacts the market in S Korea. Its all about true risk and the fact that those in the South (and I would guess most in the North too) just don’t know what will happen next. Mentions that Vietnam could be impacted to because of its strong supply chain linkage with S Korea.

Nasdaq plans tougher listing rules after scandal at China’s Luckin Coffee Obviously not mentioning China but…. Comes at the time when it was announced that Luckin Coffee would be delisted from the Nasdaq over the accounting scandal.
Key points mentioned in the article.
1. Requires companies to raise at least $25m in equity capital in an initial public offering or a sum equivalent to a quarter of the value of the group once listed.
2. mandated that companies from these regions hire an adviser familiar with the levels of transparency and accountability required of US public companies if they do not have senior management that have worked at US-listed groups.
It also notes that 'Close to a quarter of the 59 Chinese IPOs on Nasdaq since the end of 2016 were smaller than $25m, according to Dealogic data, accounting for just 2 per cent of the funds raised by Chinese companies on the exchange during the period. However, these listing's have performed poorly, losing on average 67 per cent of value from their IPO price.'

China’s flood of distressed businesses leads to mere trickle of deals. Looks at how there have been few opportunities for buying distressed Chinese companies despite the fact that many Chinese companies should in theory at least be in distress. Notes the exceptions of China Auto Rental; whose share price was hit down by its association with Luckin Coffee and saw Warburg Pincus increasing its stake although it paid a premium to increase its skate. That was strange considering the fall it value its original stake had seen had already decreased significantly. Another opportunity was Blackstone buying Soho, but that was pulled recently. It thinks the reason is the lack of a clear restructuring policy.
It notes that many businesses are cash strapped and PE firms have cash yet private investment in China dropped. A similar story for venture capital. It says 'Sellers may be in denial about the need to sell while buyers are waiting for bargains; it takes a while for the gap between price expectations on the two sides to narrow.’
But it then gives one more reason; the entrepreneurs in China are worried about their future as the pandemic gives the Chinese government and the SOE's more power to acquire smaller competitors. That, it suggests, is making the Chinese entrepreneurs look to sell their companies overseas.
I am sure many would love to get their money off shore but there are difficulties in doing that.
I think the reason a lot of companies have not gone bankrupt or faced disaster is that, as suggested in the article they are ‘acquired by an SOE which usually only occurs when there is government pressure. Others are kept going by the banks because they don’t want a bad loan issue. Some do collapse but they are not publicised as China doesn’t want negative press, others are kept going in name only again to avoid the bad publicity. The reality is that private equity and venture capital firms are only looking for good companies and the government generally has first dibs one those. Last year it introduce having to have a party member on the board of private companies so it knows what is going on. In the current environment jobs are crucial and so firms in difficulties are not going to feature in he news I am sure there should be more and I expect we will see more defaults but whether that leads to opportunities in China for foreigners I doubt. In the property sector we are more likely to see ‘mergers’ or ‘acquisitions’ of those in trouble by the larger companies and that may well be the same in other sectors too.

For Interest
Deflation is the real killer of prosperity by Stephen Moore a member of Donald Trump’s economic recovery task force and co-founder of the Committee to Unleash Prosperity. Basically thinks that the Fed hasn’t done enough and should do more. You can certainly tell where his loyalties lie.

Why inflation might follow the pandemic by Martin Wolf We experienced an almost universally unexpected surge in the 1970s and it could happen again.. He gives a more reason approach and thinks that the chances of inflation have risen but at this stage the signs are modest.

Private equity owned groups miss out on bailout loans Companies fall foul of state aid rules Debt levels trigger ‘distress’ clause. It is interesting to see some of the clever financial engineering that some private equity companies have used to make leverage buyouts more efficient is now come back to hurt them. To quote
'EU state aid rules say companies deemed to be in financial distress whose accumulated losses exceed 50 per cent of their share capital should not have access to the support.
Many private equity-backed companies fall into this category because buyout groups’ use of debt tends to minimise their share capital. Meanwhile, interest payments on that debt can result in statutory losses even if their operations are generating cash. That structure, which is typical in leveraged buyouts, has helped lower rates of corporate taxation.’ It mentions the use of shareholder loans note which are often use and are also tax deductible. Whilst I am sure many of the firms would say they should be eligible in order to keep the company going. But surely this is tax payers money being put to use. If you have not actually paid tax or have sought to minimise the amount of tax you pay, then you can’t really expect the benefits that go to those that have paid their taxes in full. Or am I missing something?

I hope you found it useful.
Feedback welcome