Director’s Cut News Corp and China’s red flags :: Macquarie Research

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Director’s Cut
News Corp and China’s red flags
Two corporate governance stories grabbing the headlines right now are News
Corp and Moody’s report that uses red flags to assess potential governance or
accounting risks for some 60 listed Chinese companies.
On the first story, Alex Pollak cut News Corp (NWS US) to Underperform
yesterday, and poor corporate governance appears to play a large part in his
decision. He also thinks the US$5 billion buyback, which is really an extension
of the existing buyback, does not detract from the high level of regulatory risk. In
his mind this risk will remain for the foreseeable future. >> Read Report
Turning to China, Michael Kurtz says Moody’s report has had a strong market
impact in part because it taps into current concerns regarding the sustainability
of China’s investment driven growth model. Having said that, he believes risk
assessment framework of the report is debatable in many cases. For example, it
automatically labels the inevitable multi-business structures in the conglomerate
space as a negative even though that’s not necessarily true. It’s also important
to note the report is written for bond investors, not equity investors.
Instead, we refer you to the 120-page report on corporate governance written by
Jake Lynch, as it not only tells you the types of companies to avoid but also the
“green flags” that serve to highlight companies with good corporate governance.
As we pointed out last week, we think the market has painted too many
companies with the same dirty brush, and some that look oversold are Home
Product Centre (HMPRO TB), Dah Chong Hong (1828 HK), Man Wah (1999
HK) and ARA Asset Management (ARA SP). >> Read Report
To help you separate our short-term noise and to refocus on our fundamental
views, Michael Kurtz and our China team have prepared a report on China
companies under our coverage cited in the Moody’s report. >> Read Report
Highlights
 Alessandro Roccati rates Intesa Sanpaolo (ISP IM) as the strongest Italian
bank, with BP (BP IM) and BPM (PMI IM) in the weakest position.
 With French temp headcount up for the 17th consecutive month, Kevin
McVeigh expects a good second quarter result from Manpower (MAN US).
 Kevin Smithen sees value in Motorola Mobility’s (MMI US) patent portfolio
and recommends buying ahead of the Bionic launch in August.
 Polina Diyachkina likes Mitsui (8031 JP) and Mitsubishi (8058 JP) as they
derive 70% of their net profits from favoured commodities like copper.
 Lisa Soh remains negative on China Unicom (762 HK) due to concerns over
rising handset subsidies for the low cost ZTE V880 handset.