Chinese stocks may sink further

Updated 30 November 2012
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Chinese stocks may sink further

SHANGHAI: Chinese retail stock investors once believed domestic equities markets were a chance to cash in on the economic growth miracle of the century, but now fear they are pouring their savings into a bottomless money pit.
The country’s key stock market indices slid to a four-year low in November, ignoring improved economic indicators and increasingly desperate pleas from the country’s regulators that now is a golden opportunity to buy low.
The trouble is many market watchers think the Shanghai Composite Index has further to fall.
“I don’t think this is the bottom,” said David Cui, China strategist for Bank of America Merrill Lynch, adding that markets had been buoyed artificially high during the recent party congress that saw a new generation of leaders take the reins of power.
At the root of the problem is the half-reformed condition of China’s bourses.
On one hand, speculators accustomed to gambling on policy moves by the central government have been disappointed by Beijing’s refusal to pour more cheap cash into the economy like it did during the 2008/2009 global financial crisis.
On the other, value-oriented investors are still put off by enduring market distortions that favor the interests of issuers over ordinary shareholders.
In the absence of either more stimulus or more reform, market observers say there is little reason to look for a sustained rebound in domestic indexes in 2013.
Putting additional negative pressure on the index in the short term is the fact that a net 190 billion yuan ($ 30.51 billion) worth of locked up shares held by key investors are set to be freed up for sale in coming weeks.
The Shanghai exchange, considered the most significant indicator of market sentiment by most mainland investors, fell through the symbolically important support level of 2,000 points on Nov 27. It has lost 4.9 percent this month alone, leaving it down 10 percent for the year and on track for its third-straight annual loss.
Many investors had previously assumed that Beijing would step in to defend this line in sand by ordering state-controlled asset management companies to start buying up shares.
It did not, and the index remained below 2,000 for the rest of the week — the first time the SSEC has traded below 2,000 for multiple days since February 2009 — driving sentiment to new lows.
Mainland tickers with dual listings in Hong Kong, which have historically traded at a 20 percent premium to their offshore counterparts (H shares), are now trading at a discount.
The China Enterprises Index of top Chinese listings in Hong Kong has gained 7 percent so far this year, while the benchmark Hang Seng Index, heavily exposed to activity in China, has surged around 20 percent.
“How many people have to jump out of buildings before the state steps in to support the market?” wrote an investor posting under the tag “Fulushou Yuqi” on microblog Sina Weibo.
“How can the market be so cruel?”
But despite robust economic growth, Chinese stock markets have been cruel to mainland investors for years.
A study of 8,438 Chinese households by China’s Southwestern University of Finance and Economics published in May found that 77 percent of those who had invested in Chinese stocks failed to see a profit.
Disillusioned, Chinese retail investors, who account for around 80 percent of the transactions on domestic exchanges, have begun seeking other channels for their money.
At the end of October, 44 percent of trading accounts with positions had been dormant for a year, compared to a mere 2 percent at the end of 2007, wrote Jing Ulrich, chairman of global markets China at JP Morgan in a November research note.
“(This) may be a sign that retail investors have simply lost interest in the markets.”
At the same time, thanks to the successful introduction of instruments like bond funds and high-yield wealth management products, retail investors have an increasingly wide selection of alternatives to stocks to choose from.
Wealth management products, for example, have consistently produced inflation-beating returns, and most retail investors believe they are tacitly guaranteed by the state; neither is true of stocks.
Reuters latest monthly fund poll on Friday showed Chinese fund managers further reduced their recommended equity weightings in November, while suggesting increases in bond holdings.
As a rule, those who have profited from Chinese equities markets have done so by betting on policy winds, not economic or company fundamentals.
Economists argue that Chinese equities tend to react most positively to monetary easing or news that Beijing will increase spending in a particular sector such as clean energy or rail.
Such policies helped drive the SSEC up 80 percent in 2009, while the CSI300, which tracks China’s largest-caps in Shanghai and Shenzhen, gained 97 percent over the same period.
But there is little sign that another massive government spending spree is in the pipeline.
The government has repeatedly warned investors it has no intention of reenacting the stimulus package from 2009, which spurred inflation and saddled the financial system with unsustainably high levels of bad loans, which continue to weigh on the banks in 2012.
Backing up the rhetoric, interest rate swap rates show that markets no longer expect much in the way of monetary easing in 2013.
Officials from the China Securities Regulatory Commission (CSRC) have repeatedly lambasted policy speculators and entreated Chinese investors to buy and hold large-cap high quality shares, arguing that current price-to-earnings (PE) ratios mean that such shares are a bargain.
But analysts warn that low PEs at banks — some of which are trading below their book value — drag down the weighted-average PE of the wider market, masking the real cost of Chinese shares.
“Around 18 companies make up 60 percent of the net income (of listed companies in China),” said Shawn Liu, chief investment officer for AZ Investment in Shanghai.
“So if you look at Shanghai, it’s at around 10 times PE; it looks very cheap. But if you took out those companies, or just used a simple average, then Shanghai is probably at more like 25 PE and Shenzhen at 27. Is that cheap? I don’t think so.”
And then there is the question of Beijing’s commitment to further reform.
With the leadership change in mind, the CSRC has proceed with caution against the stock markets in 2012, focusing mainly on incremental reforms, cutting transaction costs and taxes, and expressing rhetorical support.
This has done little to fan market sentiment, and economists say China needs to do much more before the investor community Beijing wants — namely fundamentals-oriented investors looking for long-term growth — will come back to the markets.
“Before we’re going to see any upward movement, China needs to make a thorough change to problems like IPOs and dividends for investors,” Chen Yi, senior analyst at Xiangcai Securities in Shanghai said.
“At the moment investors have paid out money but aren’t getting anything back, so it’s not going to work.”


Market unsure over Shire's backing of $64 billion Takeda bid

Updated 25 April 2018
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Market unsure over Shire's backing of $64 billion Takeda bid

  • Takeda shares fell 7 percent on news of possible deal.
  • Combined company would have its primary listing in Tokyo and also offer American Depository Receipts

Rare disease specialist Shire has announced it was willing to recommend a sweetened $64 billion offer from Japan’s Takeda Pharmaceutical Co. to shareholders, in what would be the biggest acquisition of a drug company this year.
But shares in Takeda extended recent losses, tumbling 7 percent as investors fretted over its ability to buy a company twice its size, raising doubts about whether Shire shareholders will accept a bid that is 56 percent in new Takeda shares.
The stock slide — 18 percent since the news of a possible bid broke — makes the cash-and-share deal less appealing to Shire shareholders, some of whom may be reluctant or unable to hold Takeda shares.
“While this offer represents a solid improvement over Takeda’s third bid (38 percent cash), we still wonder if it is enough to satisfy Shire shareholders,” said Jefferies analyst David Steinberg.
Shire shares slipped 0.8 percent to 39 pounds by 0850 GMT, well below Takeda’s 49 pounds offer, signalling skepticism about the deal as Takeda’s falling stock price erodes the bid’s $64 billion headline value.
Without a deal, Shire shares could fall back to mid-March levels of 30-32 pounds, pressuring management to find other ways to realize value. Prior to Takeda’s approach, Shire was already considering divestments and a split in its operations.
It is now four weeks since Takeda first revealed it was considering a bid and the absence of firm interest from rivals means investors see only a low chance of an interloper emerging.
The latest development, first reported by Reuters, comes after London-listed Shire rejected four previous offers from Takeda.
The fifth offer is worth 49.01 pounds per share, comprised of 27.26 pounds per share in new Takeda shares and 21.75 pounds per share in cash. That represents a 4.3 percent premium to Takeda’s fourth proposal on April 20 and an 11.4 percent premium to its first approach on March 29.
Shire, a member of Britain’s benchmark FTSE 100 stock index, said its board agreed to extend a Wednesday regulatory deadline to May 8 so Takeda can conduct more due diligence and firm up its bid. Shire added the deadline may be extended further if needed.
Any deal is subject to the resolution of several issues, including completion of due diligence by Shire on Takeda, the Dublin-based company said.
A deal would significantly boost Takeda’s position in gastrointestinal disorders, neuroscience, and rare diseases, including a blockbuster haemophilia franchise.
If successful, it would be the largest overseas acquisition by a Japanese company and propel Takeda, led by Frenchman Christophe Weber, into the top ranks of global drugmakers.
Weber, who became Takeda’s first non-Japanese CEO in 2015, has said publicly it was looking for acquisitions to reduce its exposure to a mature Japanese pharmaceutical market.

FINANCIAL STRETCH
The combined company would have its primary listing in Tokyo and also offer American Depository Receipts — a move that would give Shire investors an opportunity to cash out more easily.
But the transaction would be a huge financial stretch, and Takeda investors have been skeptical about the merits of a Shire deal, given the size of the potential purchase and concerns that a large share issue will be needed to fund it.
Moody’s said the deal would pile up debt and hit Takeda’s credit ratings. “This huge acquisition bodes a spike in leverage that could result in a multi-notch downgrade,” said analyst Yukiko Asanuma.
Ambitious cost cutting is also seen as necessary to make the deal pay, and the uncertainties facing an enlarged group would spell a big change in the investment case for holding Takeda.
“Takeda’s shares have been valued for their stability and relatively high dividend,” said Daiwa Securities analyst Kazuaki Hashiguchi, adding this made them attractive even to investors without specialist knowledge of the drug sector.
Takeda, now worth $33 billion by market value, had 466.5 billion yen ($4.3 billion) in cash and short-term investments as of the end of December. It said yesterday it intended to maintain its dividend policy and investment-grade credit rating following the deal.
Dealmaking has surged in the drug industry this year as large players look to improve their pipelines. A Takeda-Shire transaction would be by far the biggest.
Shire has long been seen as a likely takeover target.
Botox-maker Allergan Plc said last week it was considering making a rival offer, only to scrap it hours later due to pushback from shareholders. Shire was also nearly bought by US drugmaker AbbVie Inc. in 2014, until US tax rule changes caused the deal to fall apart.
Shire traces its roots back to 1986, when it began as a seller of calcium supplements to treat osteoporosis, operating from an office above a shop in Hampshire, southern England. Since then, it has grown rapidly through acquisitions to generate revenues of about $15.2 billion last year.
But it has been under pressure in the past 12 months due to greater competition from generic drugs and debt from its $32 billion acquisition of Baxalta in 2016, a widely criticized deal.
It announced last week a sale of its oncology business to unlisted French drugmaker Servier for $2.4 billion.