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● CS China Economist Dong Tao has cut CY12 GDP growth
estimates from 8.9% to 8.5%. At the same time, CS China
Strategist Vincent Chan downgraded prospects for the Chinese
stock market. They give the highest probability to a sluggish landing
(2-3 years of suppressed growth), and believe commodity demand
will slow.
● They fear inflation to stay higher for longer, supported by
structural factors. Further, with stimulus over the last two years
and local government debt being higher than anticipated, even if
inflation falls, relaxation will be slower than market expectation.
● New data from the PBoC shows total system credit grew much
faster than earlier thought in 2009-10, and monetary tightening
was not very effective in 2010. In particular, Vincent flags the risks
of NPL formation in rail investments and in the property market.
● It is difficult to say if Chinese steel exports would surge—tariff
controls may keep them range-bound. The risk in our view is on
ore and coal (China is 45-50% of steel consumption), and a fall in
those could hurt mining profits for steelmakers. SAIL would be the
worst impacted, followed by Tata (Figure 1). We stay UW.
Valuation metrics
Company Ticker CS Price Year P/E (x) P/B
rating Local Target T T+1 T+2 (x)
Tata Steel TATA IN U 572.3 525.0 03/10 5.9 8.5 1.5
SAIL SAIL IN U 136.6 150.0 03/10 11.6 8.4 1.5
JSW Steel JSTL IN U 866.5 815.0 03/10 11.8 9.6 1.3
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM
Source: Company data, Credit Suisse estimates
CS China team revising down estimates
CS China Economist has cut his CY12 GDP growth forecast from
8.9% to 8.5%. Parallelly, CS China Strategist Vincent Chan has
downgraded prospects for the Chinese stock market (see note
published on 20 June). Key takeaways:
● Tight credit conditions and poor operating cash flows are
impacting growth, particularly the small and medium enterprises.
● Inflation higher for longer: Compared to previous cycles, inflation
may be stickier on the way down given higher services inflation. The
team believes that even if agricultural prices ease in 2H11, inflation
is unlikely to fall significantly given the structural pressures in the
Chinese economy (labor shortages, high FAI) in the next 3-5 years.
● Larger-than-planned stimulus: While the central government
originally planned for about Rmb4 tn of stimulus in two years, total
investment during this period was 4x that at Rmb18.3 tn, of which
Rmb14.5 tn was invested by local governments.
● They flag data from Chinese central bank’s (PBoC) recently
published “total system financing for non-financial enterprises”
data in 1Q11 (includes non-bank financing): While new loans in
2009 and 2010 were only about 31% and 21% of GDP, new
system credit funding (including ‘trust’ type investments used by
banks to securitise their property/LGFV loans, but excluding equity
and insurance financing) amounted to 39% and 34% of GDP.
Trust loans (where banks act as distributors between issuers and
investors) continued to balloon into 2011: Monetary tightening in
2010 was not very effective.
● Total system credit financing in 2009-10 was Rmb27 tn, up 71%
from the two-year period ending 2008. Credit-to-GDP ratio thus
jumped by 46 p.p. from 120% in end-2008 to 166% by Mar-11. As
per Basel norms (Jul-10), a 10% gap from normal trend makes the
banking system vulnerable. Thus, even if inflation drops, credit
relaxation is unlikely.
Implications
● Even if inflation falls, Vincent believes pace of relaxation will be
much slower than what the market expects. Local government
debt was earlier estimated to be Rmb9 tn, but the PBoC report
puts the number at Rmb14 tn, 50% higher.
● Total investment in railways in 2006-10 amounted to Rmb2.3 tn, of
which about 1.7 tn is likely to have been loans. Unless high-speed
rail becomes very profitable, the quality of these loans should
worry banks and bond holders.
● In the property market, Vincent’s base case assumes that the
property market correction will not mingle with the general
slowdown in the economy. If that happens, the negative impact on
the economy could be severe. Instead, he believes NPL formation
could be 15% in loans to developers and in loans via trusts.
He concludes with a 55% chance of a sluggish landing (2-3 years of
suppressed growth), a 35% chance of a soft landing (9%-plus growth),
and a 10% chance of a hard landing. He has cut his market EPS
growth target and believes that global commodities will be subject to a
bigger correction than the China market.
Mining profits at risk for steel makers
It is yet uncertain whether a slowdown in China will result in higher
Chinese steel exports—they have largely remained range-bound, with
tariff changes (export VAT rebates transitioning to export taxes)
controlling the level of exports. Thus, it is difficult to say whether this
feared slowdown will result in higher steel exports out of China.
However, given the currently high levels of steel production in China, it
is likely that if demand slows, the demand for iron ore and coking coal
would surprise on the downside. In this light, it is worth flagging the
mining vs smelting profit split for Indian steel-makers (Figure 1). If iron
ore prices were to correct, SAIL would be the worst impacted,
followed by Tata and JSW. We define smelting profits as profits made
if the steelmaker were buying ore and coal at market prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● CS China Economist Dong Tao has cut CY12 GDP growth
estimates from 8.9% to 8.5%. At the same time, CS China
Strategist Vincent Chan downgraded prospects for the Chinese
stock market. They give the highest probability to a sluggish landing
(2-3 years of suppressed growth), and believe commodity demand
will slow.
● They fear inflation to stay higher for longer, supported by
structural factors. Further, with stimulus over the last two years
and local government debt being higher than anticipated, even if
inflation falls, relaxation will be slower than market expectation.
● New data from the PBoC shows total system credit grew much
faster than earlier thought in 2009-10, and monetary tightening
was not very effective in 2010. In particular, Vincent flags the risks
of NPL formation in rail investments and in the property market.
● It is difficult to say if Chinese steel exports would surge—tariff
controls may keep them range-bound. The risk in our view is on
ore and coal (China is 45-50% of steel consumption), and a fall in
those could hurt mining profits for steelmakers. SAIL would be the
worst impacted, followed by Tata (Figure 1). We stay UW.
Valuation metrics
Company Ticker CS Price Year P/E (x) P/B
rating Local Target T T+1 T+2 (x)
Tata Steel TATA IN U 572.3 525.0 03/10 5.9 8.5 1.5
SAIL SAIL IN U 136.6 150.0 03/10 11.6 8.4 1.5
JSW Steel JSTL IN U 866.5 815.0 03/10 11.8 9.6 1.3
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM
Source: Company data, Credit Suisse estimates
CS China team revising down estimates
CS China Economist has cut his CY12 GDP growth forecast from
8.9% to 8.5%. Parallelly, CS China Strategist Vincent Chan has
downgraded prospects for the Chinese stock market (see note
published on 20 June). Key takeaways:
● Tight credit conditions and poor operating cash flows are
impacting growth, particularly the small and medium enterprises.
● Inflation higher for longer: Compared to previous cycles, inflation
may be stickier on the way down given higher services inflation. The
team believes that even if agricultural prices ease in 2H11, inflation
is unlikely to fall significantly given the structural pressures in the
Chinese economy (labor shortages, high FAI) in the next 3-5 years.
● Larger-than-planned stimulus: While the central government
originally planned for about Rmb4 tn of stimulus in two years, total
investment during this period was 4x that at Rmb18.3 tn, of which
Rmb14.5 tn was invested by local governments.
● They flag data from Chinese central bank’s (PBoC) recently
published “total system financing for non-financial enterprises”
data in 1Q11 (includes non-bank financing): While new loans in
2009 and 2010 were only about 31% and 21% of GDP, new
system credit funding (including ‘trust’ type investments used by
banks to securitise their property/LGFV loans, but excluding equity
and insurance financing) amounted to 39% and 34% of GDP.
Trust loans (where banks act as distributors between issuers and
investors) continued to balloon into 2011: Monetary tightening in
2010 was not very effective.
● Total system credit financing in 2009-10 was Rmb27 tn, up 71%
from the two-year period ending 2008. Credit-to-GDP ratio thus
jumped by 46 p.p. from 120% in end-2008 to 166% by Mar-11. As
per Basel norms (Jul-10), a 10% gap from normal trend makes the
banking system vulnerable. Thus, even if inflation drops, credit
relaxation is unlikely.
Implications
● Even if inflation falls, Vincent believes pace of relaxation will be
much slower than what the market expects. Local government
debt was earlier estimated to be Rmb9 tn, but the PBoC report
puts the number at Rmb14 tn, 50% higher.
● Total investment in railways in 2006-10 amounted to Rmb2.3 tn, of
which about 1.7 tn is likely to have been loans. Unless high-speed
rail becomes very profitable, the quality of these loans should
worry banks and bond holders.
● In the property market, Vincent’s base case assumes that the
property market correction will not mingle with the general
slowdown in the economy. If that happens, the negative impact on
the economy could be severe. Instead, he believes NPL formation
could be 15% in loans to developers and in loans via trusts.
He concludes with a 55% chance of a sluggish landing (2-3 years of
suppressed growth), a 35% chance of a soft landing (9%-plus growth),
and a 10% chance of a hard landing. He has cut his market EPS
growth target and believes that global commodities will be subject to a
bigger correction than the China market.
Mining profits at risk for steel makers
It is yet uncertain whether a slowdown in China will result in higher
Chinese steel exports—they have largely remained range-bound, with
tariff changes (export VAT rebates transitioning to export taxes)
controlling the level of exports. Thus, it is difficult to say whether this
feared slowdown will result in higher steel exports out of China.
However, given the currently high levels of steel production in China, it
is likely that if demand slows, the demand for iron ore and coking coal
would surprise on the downside. In this light, it is worth flagging the
mining vs smelting profit split for Indian steel-makers (Figure 1). If iron
ore prices were to correct, SAIL would be the worst impacted,
followed by Tata and JSW. We define smelting profits as profits made
if the steelmaker were buying ore and coal at market prices.
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