Sunday, August 31, 2014

China mobile internet groups enjoy surge in revenues

Chinese smartphone users are taking to mobile ecommerce faster than expected, creating a boom for mobile internet companies.
Alibaba, one of the biggest beneficiaries, said on Wednesday that its mobile revenueshad climbed 10-fold in the three months ended June 30 – from Rmb240m in the second quarter of 2013 to Rmb2.4bn ($391m).
“We didn’t start monetising [mobile users] until the middle of last year,” said Victor Koo, chairman and chief executive of Youku Tudou. “The conversion to mobile is so fast that it is taking everyone by surprise,” he said, adding that 60 per cent of their traffic today comes from mobile internet.Also this week Youku Tudou, China largest video hosting platform, said the percentage of its revenues coming from mobile devices has increased from 3 per cent in the third quarter of last year to 30 per cent in the second quarter of 2014.
Almost 500m of China’s internet users say they have accessed the internet using smartphones, which are very cheap in China, some costing as low as $70. Experts say this figure is destined to rise rapidly as China has 900m mobile phone users, many of whom still have not entered the 3G or 4G era.
Overall, mobile internet revenues in China doubled year on year in the second quarter of 2014, from Rmb21bn to Rmb44bn, according to a study published by iResearch, a Beijing-based internet consultancy.
It said that half of the Rmb44bn was accounted for by mobile shopping.
He said discounts and promotional activities by big ecommerce groups such as Alibaba are drawing in more consumers, and reinforcing the mobile shopping habit.Wang Xiaoxin, a mobile ecommerce expert at Beijing-based Analysys EnfoDesk, said the rapid growth over the previous year is a sign of the growing maturity of the mobile shopping market. Online retailers “are targeting this immense potential market”, he said.
Alibaba, which is listing in the US this autumn, declined to comment on its results, but in its most recent filing, the group said it expects “mobile monetisation rates will continue to approach the rates we realise on our personal computer interfaces”.

Monday, August 18, 2014

Building of smart cities taking shape

Prime Minister Narendra Modi's vision of building smart cities is set to take shape within the current financial year, with the Centre readying to invite bids for Dholera investment region in Gujarat in the next three months and for integrated industrial townships in Greater Noida and Vikram Udyogpuri in Madhya Pradesh along the Delhi-Mumbai Industrial Corridor (DMIC) by March next year.

We are ready to roll out two projects and an industrial zone. We are progressing very fast. A lot of countries including Germany, UK, USA and Korea have shown interest to participate in the industrial townships," said Talleen Kumar, CEO of Delhi-Mumbai Industrial Corridor Development Corporation.

Japan is providing support of $4.5 billion in the first phase of these projects through lending by Japan International Cooperation Agency (JICA) and Japan Bank for International Cooperatio, Agency (JICA) and Japan Bank for International Cooperation (JBIC). Kumar added that the government would invite bids for another project, Shendra Bidkin industrial zone in Maharashtra, by mid-2015. 

 An industry consultation workshop last month saw participation from companies including Oracle, Microsoft, TCS, Cisco, Accenture and L&T, among others. Modi has promised 100 smart cities and industrial corridors to make India a manufacturing hub. In his Independence Day address, he urged countries to 'Come, Make in India'.

The Vikram Udyogpuri township will consist of automotive and auto components, IT/ITeS and engineering services industries and educational institutions. Greater Noida township, on the other hand, is envisaged to have new age sectors such as biotechnology, high-tech electronics industry, and research & development. It will also support key sectors such as telecom, electronics, automobile, food, pharma, healthcare and defence research. The move to invite bids isin keeping with the ruling BJP's poll manifesto promise that work on freight corridors and attendant industrial corridors would be expedited.

About 35-40 per cent of projects are trunk infrastructure, for which funds are provided by the DMIC Trust while the rest of the 60-65 per cent projects are being structured under the publicprivate partnership model. The department of industrial policy and promotion is currently discussing guidelines for smart cities to qualify a city to be called 'smart'.

A smart city must have three of the five infrastructure requirements - energy management, water management, transport and traffic, safety and security and solid waste management. At the same time, it must have three of the five application domains - healthcare, education, inclusion, participative governance and community services. "We have submitted the guidelines proposal to DIPP, which will discuss and take a final call," said Kumar.

Meanwhile, in the Chennai-Bangalore industrial corridor, JICA has taken up master planning for three of the eight nodes - Punderi (Karnataka), Krishnapatnam ( Andhra Pradesh) and Tumkur (Karnataka). "Land acquisition for the new industrial regions is at an advanced stage. Land availability is essential for the corridors, and we are working with the state governments for that," said a DIPP official. Japan has also shown interest in setting up industrial parks in India, on lines of Chinese industrial parks. 




Bajaj looks to reposition Discover with two new models

In a bid to re-position its struggling Discover brand of motorcycles, Bajaj Auto has launched two new versions of the two-wheeler.
The new Discover 150 F and Discover 150 S models have been launched at an aggressive price range of Rs 52,030 to Rs 60,277 (ex-showroom, New Delhi) to compete against Honda Shine (Rs 54,041), Honda Unicorn (Rs 63,400 approx) and Hero Glamour (Rs 55,375.)
Admitting that the Discover brand is under pressure, Rajiv Bajaj, managing director, Bajaj Auto, explained that the company was not pro-active enough to react to the competition. The new Discover 150cc models are the company's answer to arrest the slide in market share, he said.
"The 100-125cc segment is the largest segment in the market, so naturally there will be more competition. Over the last two years it has further intensified with Honda entering the fray.
"You have two choices, either to compete on price or to compete through better products. With the Discover 150 we aim to offer a better product and create a new category altogether," Bajaj said. 
Priced almost Rs 10,000 lower than its sports motorcycle Pulsar, the company says this segment has a potential of drawing customers from 6,00,000 units mass market (100cc) to 125cc) on one hand and 1,00,000 potential premium bike customers from the 150cc segment.

If the company gets the desired response, Bajaj may look at a full-faired version in 125cc or may be even 200cc segment in the future.
As part of its strategy to reposition of the brand, the company has already rationalised the Discover family portfolio from 6 to 3, and have discontinued, Discover 100 S and T and 125 ST and now have added the flagship Discover 150 S and 150-F
Having launched several Discover 100 cc variants, Bajaj Auto did not find enough takers. And that is one area, which is not going to see major action from the company going ahead.
"We are sure of one thing, 100 cc category was not created by us, it was category created by someone else. you will always see us giving more emphasis on Pulsar, a bigger Discover, three wheelers, four wheelers or KTM, than on 100 cc bike, that is not our category, in fact our strategy is to eliminate that category," asserted Bajaj.
The Discover family once enjoyed a sizeable market share of 24 per cent, but over the last 12 months the brand due to intense competition its share has come down to 12 per cent, it has been the only pain area for the company in the domestic market claimed Bajaj.
In a market which grew over 7.5 per cent, Bajaj Auto posted a decline of 14.79 per cent in FY-14 to 2.099 million units, its market share fell to 14.18 per cent lowest seen in recent years.
He further explained, Bajaj is trying to put in an appropriate solution by creating a new category, instead of fighting in a category that is intensely fought.
The senior company official explained that when the company launched Discover 125, the market for 125 cc was almost negligible, today almost 17 per cent of the overall motorcycle market (125 cc to 150 cc) falls in that space.
The segment has a potential of touching up to 21-23 per cent of motorcycle market and Bajaj could contribute about 30,000 to 40,000 units with its new Discover 150, the official added.
On constant speculation of entering the scooter space, Bajaj clarified, "The solution does not lie in making scooters because your motorcycle segment is facing challenge. There will be time, when your business goes through the difficult times; a correct or more astute response is to make even better motorcycle."
(Source: Economic Times)

Aditya Birla Group: Growing with India’s global ambitions

The roots of the Aditya Birla Group go back to almost a century before India’s independence from colonial rule. Indeed, its role in India’s economic history is tied inextricably with the nation’s quest for political freedom. The foundation of the Birla business empire, which was eventually divided among the members of the subsequent generations, was laid by Shiv Narayan Birla, who started cotton trading in Pilani, Rajasthan, in 1857. In the early years of the 20th century, his grandson, Ghanshyamdas Birla, established businesses in critical sectors such as textiles and fibre, aluminium, cement and chemicals. The Kolkata-based businessman became closely associated with Mahatma Gandhi and accompanied him to London on two occasions to attend the historic round table conferences. It was at a public prayer meeting in Birla house in Delhi in 1948 that Gandhi was shot dead by an assassin. Grasim Industries Ltd, the flagship of the Aditya Birla Group, was incorporated on 25 August 1947, just 10 days after India became independent. The firm then manufactured textiles from imported raw materials. Grasim is now a global leader in viscose staple fibre. Twists and turns Basant Kumar Birla —the youngest of Ghanshyamdas’ three sons—and his son, Aditya Vikram , were always the patriarch’s favourites. When Aditya Vikram returned after completing his education in the US in 1965 , he started Eastern Spinning Mills and Industries. In 1983, when Ghanshyamdas died, Aditya Vikram was appointed chairman of the Birla group of companies. Three years later, in 1986, the group’s firms were apportioned to family members and since Aditya Vikram and B.K. Birla managed many of the bigger companies, they got a lion’s share of the clan’s businesses. Aditya Vikram was a farsighted and enterprising businessman. In 1969, he started Indo-Thai Synthetics Co. Ltd, the Birla family’s first overseas venture. He went on to set up 19 companies outside India—in Thailand, Malaysia, Indonesia, the Philippines and Egypt. He also shifted his base from Kolkata, where business and industry was slowing, to Mumbai (then Bombay). He turned his companies around. Today, they include the world’s largest producer of carbon black and the largest refiner of palm oil. It is also the largest Indian multinational with manufacturing operations in the US, according to the group’s web site. At the time of his untimely death in 1995, the firms Aditya Vikram controlled had over Rs.8,000 crore in revenue globally, with assets of over Rs.9,000 crore, comprising 55 plants and 75,000 employees. Five years before Aditya Vikram Birla’s death, his son Kumar Mangalam had begun getting involved in the companies’ operations. In 1996, Kumar Mangalam consolidated all group companies under the umbrella of the Aditya Birla Group. Under Kumar Mangalam Birla, the conglomerate entered the businesses of copper, insurance, telecommunications, retail and software services. He consolidated, expanded and went on an aggressive acquisition drive. For starters, the group divested its stake in the oil refining business to Oil and Natural Gas Corp. Ltd (ONGC) in 2002 in a bid to sharpen its focus. After several rounds of mergers and demergers, Grasim acquired a controlling stake in the newly-formed cement firm, UltraTech Ltd, from Larsen and Toubro Ltd in 2004. Three years later, the group’s aluminium company Hindalco Industries Ltd acquired Atlanta-headquartered Novelis Inc., which made Hindalco the world’s largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia. Conglomerate@2014 Today, the Aditya Birla Group is a $40 billion (Rs.2.45 trillion) corporation and many of the group firms are in the league of Fortune 500 companies. It has over 120,000 employees from 42 nations, and operates in 36 countries. Notably, 50% of the Aditya Birla Group’s revenue comes from its overseas operations. The group has a presence in non-ferrous metals, cement, textiles, chemicals, agri-business, carbon black, mining, wind power, insulators, telecommunications, financial services, retail and trading solutions. The group owns one of the top three telecom companies in India, the nation’s largest cement manufacturer and one of its top retailers.

(Source: LiveMint)

Friday, August 15, 2014

Tyre demand boosts Indian rubber imports, may help revive global prices

A revival in India's auto industry could lift imports of natural rubber for making tyres by a quarter this fiscal year, which would take inbound shipments to a record and may provide some support for global prices languishing at multi-year lows.
International prices of natural rubber have fallen by more than a quarter this year because of worries about weak economic growth in top consumer China and oversupply in the top Southeast Asian producers, Thailand and Indonesia.
"The growth in imports will continue in coming months," George Valy, president of the Indian Rubber Dealers' Federation, told Reuters. "Imports could rise to 400,000 tonnes this year as prices are lower in the world market and demand is rising."
India, which buys most of its natural rubber from Thailand, Malaysia, Indonesia and Vietnam, imported 325,190 tonnes in the last fiscal year to March 31.
Shipments in the first four months of the current fiscal year jumped nearly 48 percent from a year before to 133,789 tonnes.
Tyre makers are the biggest consumers of natural rubber and they are getting a boost as Indians buy more cars and other vehicles amid optimism about the economy under the new government of Narendra Modi.
Car sales grew for the third month in succession in July and are expected to rise between 5 and 10 percent this fiscal year, according to the Society of Indian Automobile Manufacturers.
"First signals of economic turnaround are in sight with the car industry registering growth in the last two months," said Raghupati Singhania, managing director at JK Tyre & Industries Ltd (JKIN.NS).
"Commercial vehicles are also showing signs of improvement. This augurs well for the tyre industry and coming quarters should see improved performance in terms of volumes and profitability."
India is the world's fifth-largest natural rubber producer but its imports have quadrupled in the past six years due to the rapid expansion of its auto industry.
Rajiv Budhraja, director-general of industry body Automotive Tyre Manufacturers Association, estimates natural rubber consumption could hit a record above 1 million tonnes in 2014/15, up from 981,520 tonnes last year.
"In the second half of the year, we are expecting higher growth in tyre sales than in the first half due to festivals," Budhraja said. India celebrates the religious festivals of Dussehra and Diwali in the next two months, when buying of vehicles is considered auspicious.
Budhraja expects tyre sales in the truck and bus segment to rise by 3-4 percent in the current financial year, while sales in the two-wheeler and passenger car segment could grow 6-8 percent.
The rubber price trend has boosted margins at tyre makers such as CEAT Ltd (CEAT.NS), Apollo Tyres (APLO.NS), JK Tyre and Industries, MRF Ltd (MRF.NS) and Balkrishna Industries BKLI.NS, as natural rubber accounts for more than 40 percent of the cost of a tyre.
Despite growth in the Indian market, the near-term support for global rubber prices could be limited since they are dominated by demand from China, which has imported 2.45 million tonnes of natural and synthetic rubber so far this year.
In addition, Thailand, which produces around a third of the world's natural rubber and exports around 90 percent of its output, is sitting on huge private and public stocks put at half a million tonnes at the end of 2013, including 200,000 tonnes bought by the government to support the market in 2012/13.
Thailand's military government is now trying to encourage farmers to cut down more rubber trees to restrict supply and help shore up prices.
However, the predicted surge in Indian demand could spur rubber imports and help prices more over the longer term.
Tracking the drop in global prices, Indian natural rubber hit a 4-1/2-year low of 132.5 rupees per kg on Tuesday.
That is still 15-20 percent dearer than overseas prices, but it is not enough for many farmers.
"Indian farmers are not interested in tapping due to lower prices," said N. Radhakrishnan, a dealer and former president of the Cochin Rubber Merchants Association. "They are not making money. This year production could drop by 10 to 15 percent if prices remain at the current level."
India is forecast to be the world's third-largest car market by 2018, up from sixth now, according to IHS Automotive. "With the rapid growth in the auto industry, the demand-supply mismatch will increase," Valy of the rubber federation said.

And as that happens, tyre makers could be forced in coming years to snap up more cargoes overseas.

Modi must act to return some sparkle to jewels of corporate India

No one ever said it was going to be easy. Even so, rumblings of discontent over Narendra Modi’s first months as India’s prime minister are growing louder.
Following an overwhelming election victory in May, cheerleaders for Mr Modi predicted bold measures to tackle everything from investment logjams to subsidy reform. Thus far, however, little has materialised – and the lack of progress has been especially striking in one particular area: India’s lumbering state-backed enterprises.

Public sector companies remain hugely important to Asia’s third-largest economy. More than 60 sit among the Bombay Stock Exchange’s 500 largest listed entities, making up about a fifth of its market capitalisation, and dominating sectors such as banking, energy and natural resources.
In the mid-1990s, nine were dubbed the ‘navratna’ – meaning a ring or necklace studded with nine precious gems. These larger companies, including miner Coal India and explorer Oil and Natural Gas Corporation, were given special operational freedoms, in the hope they would grow into world-beating businesses.
No such luck. The original navratna have since delivered a far from glittering performance. With management dominated by retired bureaucrats, saddled with social obligations and beset by political interference, almost all have lagged well behind private sector competitors.
Just five years ago, state-backed companies made up a third of the value of India’s stock market – a level that has dropped steeply almost ever since, according to Ambit, a broker. Corruption has proved a problem too, as shown by the arrest this month of the chairman of Syndicate Bank, a midsize state lender, on charges of soliciting bribes.
The hope was that Mr Modi would change all this. During his tenure as chief minister of Gujarat, he had a solid record of shaking up fusty public sector bodies – typically by installing new management and setting simpler business objectives.
Some analysts even hoped Mr Modi would consider more radical steps, such as breaking up and privatising Coal India, or selling down government holdings in state-backed banks below 50 per cent. Since taking office, his administration has made clear that such measures are unlikely. Facing potentially angry trade unions, and wary of public opinion, India’s family silver is not for sale.
However, having rejected this path, Mr Modi looks set to take arguably a more problematic alternative: selling off small chunks of larger public companies – almost all of which are partially listed – without introducing changes to the way they are run.
Minority divestments can do little to improve business performance, and therefore represent a bad deal both for India’s government and its taxpayers
Next month, for example, the government is to sell a stake in steelmaker Steel Authority of India before moving on to larger entities such as Coal India and ONGC, in a drive to raise more than $10bn during this financial year.
Such sales are not a new idea. India’s previous government did much the same thing, as it tried to plug a growing fiscal deficit. But it did so with mixed interest from international investors, who fretted about weak operational performance and political meddling.
These worries are understandable. Minority divestments can do little to improve business performance, and therefore represent a bad deal both for India’s government and its taxpayers – given the much larger amounts that could be raised were management reforms to be introduced first.
A better path is set out in a recent Reserve Bank of India review of public sector banking reforms, led by former Morgan Stanley India head PJ Nayak. This suggests giving lenders greater operational independence, while also bringing in new management, paid at market rates and appointed free from political interference.
A similar template could be used to relaunch almost any public-sector company, allowing greater commercial focus while persuading politicians in New Delhi to view themselves as investors seeking returns, rather than owners.
Suitably revamped, there is no reason why energy groups ONGC and Oil India could not rival more efficient state-backed global players such as Petronas of Malaysia. Lenders such as State Bank of India could grow to resemble China’s giant policy banks. Even Coal India could shake off its basket case reputation.
But this will not happen by accident. At present, India’s navratna are in a woeful state, shackled by political tinkering and lacking the operational independence to turn their businesses around. Providing that freedom, and returning some sparkle to these jewels of corporate India, could be one of Mr Modi’s most important legacies.

JLR shores up Tata Motors’ Q1 results

Tata Motors, India’s oldest automotive group, beat forecasts on Monday, reporting that net profits tripled in the first quarter of this year as strong demand for the luxury Jaguar Land Rover brands made up for weakness in the domestic market.
Tata Motors reported consolidated profits after tax of Rs53.98bn ($882.39m) in the three months to June, up from Rs17.26bn a year earlier, on revenues of Rs646.83bn, up from Rs467.96bn

Economic growth and industrial activity remain weak in Asia’s third-largest economy, weighing on the crucial commercial vehicles segment. As a strong new government takes charge in New Delhi, however, investor sentiment has turned positive and car sales are slowly returning to growth after two consecutive years of decline.
“I see a shift happening in the trucks sector,” said Deepesh Rathore, director of Emerging Markets Automotive Advisors, a New Delhi-based research group. “I think the market is turning around and this long slowdown has also created some pent up demand in the system.”
On Tuesday Tata Motors is launching its new Zest model, a compact sedan that has received good reviews. Industry analysts say it is vital for the group to refresh its passenger vehicles portfolio, given the brand’s negative image.
Amid the wider slowdown in the industry, the group faces additional internal instability. Tata Motors is yet to appoint a new head to replace Karl Slym, who died suddenly in January, leaving a committee of executives as an interim replacement.
Shares in Tata Motors closed up 3.2 per cent at Rs446.55 ahead of the results.
JLR, the luxury British carmaker acquired by the Indian group in 2008, shored up Tata Motors once again in the first quarter of this year.
Retail volumes at JLR grew 22 per cent year-on-year to 115,596 units in the three-month period, driven by demand for revamped Range Rover models and the Jaguar F-Type. JLR posted profit before tax of £924m ($1.55bn) in the quarter, on revenues of £5.35bn.
The Chinese market has been crucial for JLR but late last month the company announced plans to cut the price of three models in the country, after the National Development and Reform Commission launched an investigation into the industry.
“It is the market regulator cracking down and companies just want to avoid this,” said Anil Sharma, senior research analyst at IHS Automotive. “Going forward I don’t see a very big impact because the company is going to localise the production, it is going to source locally and what we also see is that it’s going to be a market-wide phenomenon.”
At a press conference following the results, Ralf Speth, chief executive of JLR, said the voluntary price cut was mutually beneficial for carmakers as well as the Chinese government, while confirming that the group will open its first factory in China later this year.
JLR was a late entrant to the Chinese market, where Audi, BMW and Mercedes-Benz dominate the segment, but industry analysts have highlighted concerns that a slowdown in the economy could hit sales of the luxury British brands.
“I am absolutely convinced that the Chinese government is absolutely able to increase the economy and make the economy more stable,” Mr Speth added. “We are a small player, a very very small player in China and we are trying to do everything, we are dotting the ‘i’ and crossing the ‘t’ to make sure it is all correct there.

Tata Steel net profits drop 70% as imports hit European division

Tata Steel blamed a glut of steel imports for the slower than expected recovery of its European division, as net profits at India’s largest private sector steelmaker fell 70 per cent in the first quarter.
The Mumbai-based group said higher taxes and provisioning charges also ate into its bottom line, with net income dropping to Rs3.4bn ($55m) compared with the same period last year, well below the forecasts of industry analysts.
Even taking into account one-off charges, underlying performance at the group’s European division barely improved, dashing hopes that falling input prices and a recovery in steel demand would translate into a faster recovery in earnings.

Tata’s European operation, the legacy of its $13bn purchase of Corus in 2008, has launched a series of cost-cutting drives and redundancy programmes, as it attempts to recover from a protracted slump in steel demand, dating back to the global financial crisis in 2008.
Karl-Ulrich Köhler, Tata Steel Europe chief executive, said these efforts had helped to deliver a “slightly” better financial performance in the quarter, but blamed rising foreign competition for his division’s slower than expected improvement.
“European steel demand is moving in the right direction . . . [but] Europe’s position as the world’s most open market is bringing in a rising tide of imports. While we fully support free trade, all trade must be fair and international rules fully respected and enforced,” he said.
Tata’s European division accounted for slightly more than half of group revenue in the quarter, which rose to Rs364bn year-on-year, but contributed less than one-fourth of group-wide earnings before interest, tax and amortisation, a measure of underlying profitability.
Overall performance was also hit by a one-off impairment charge of around Rs16bn, relating to a stake the company owns in a troubled coal mining project in Mozambique.
Production at the facility had been affected by “logistical issues and security considerations”, the company said.
Tata Steel’s gradual recovery follows a grim period of heavy losses, which saw the company take a $1.6bn writedown last year, amid speculation that it would be forced to sell assets to stem mounting losses.
But despite the weak performance in this quarter, analysts said the group would benefit from further improvements in European steel demand, supported by the strong performance of its smaller but more profitable Indian division.
“The fear that investors had about their survival, their ability to repay debts, those concerns are clearly passed, the question is about the extent of improvements, and what they do next,” says Kawaljeet Saluja, a Mumbai-based metals analyst at Kotak, a broker.
Tata Steel is also midway through one of the largest debt restructuring exercises in Indian corporate history, as it seeks to refinance loans taken on during the 2008 purchase of Corus.
In July the company raised $1.5bn in new bonds, while Koushik Chatterjee, chief financial officer, told the Financial Times this month that he also planned to refinance around £2.9bn of debt on Tata Steel Europe’s balance sheet.
“We are in the process of discussing with various banks on the refinancing of the European debt, which will pan out over the next few months,” he said.
Shares in Tata Steel closed down around 1 per cent in Mumbai at Rs537, although the group’s results were released after market hours.

Chinese medical demand fuels private hospital takeovers

Private equity firms engaged in an unusual bid battle earlier this year: slugging it out over a chain of high-end private hospitals in China.
TPG, together with a consortium that included Shanghai Fosun Pharmaceutical, emerged the victor in the battle for US-listed Chindex International after sweetening its bid and shelling out $461m. Chinese media and people close to the deal named Carlyle as the rival bidder, although Carlyle declined to comment

Chindex is top of the pyramid of hundreds of potential private hospital deals, as investors target the new Chinese gold rush. Guo Guangchang, chairman of Fosun Group, parent of Fosun Pharma, said recently that the group may invest in as many as 500 hospitals in China – although people close to the company say this was more an expression of enthusiasm than an exact number.
Either way, more investment is set to pour into the sector, continuing a trend that began when Beijing lifted restrictions on foreign investment in China’s private hospitals in 2012, making healthcare one of the country’s hottest investment targets.
In a country where demand for medical care has risen exponentially in line with prosperity, demand for investment opportunities has spilled over into other appendages of a wealthier lifestyle: dentists, rehabilitation clinics and cosmetic surgery centres.
While many are eyeing hospitals that are already private, dozens of other local and foreign private equity investors are looking into the harder task of privatising public hospitals or building new ones.
The total value of healthcare deals in China rose to more than $10bn last year, nearly five times the level of 2006, according to statistics from Dealogic.
China healthcare deals
Sweeping reforms of the sector are under way, including doubling the private hospital share in treating Chinese patients to 20 per cent by 2015.
China’s spending on healthcare is about 5 per cent of gross domestic product, compared with about 9 per cent in Japan and nearly 18 per cent in the US, according to a recent report from McKinsey.
“Perhaps an even bigger difference is that in China, services account for only 30 per cent of spending versus 70 per cent in Japan and the US,” says Gordon Orr of McKinsey.
According to a survey by Bain & Co, healthcare was identified by private equity funds as the most attractive sector for greater China investment this year.
“We are seeing a lot of interest in medtech and private hospitals but the challenge in China is that there are few large deal opportunities,” says Vinit Bhatia, head of China private equity for Bain & Co.
Several investors say it may prove hard to identify potentially profitable deals in a sector where corruption is rife among doctors and hospital administrators, and where hospital finances are opaque.
Physicians’ views of private hospitals in China
The poor reputation of private hospitals exacerbates the problem, and many patients think the quality of care is lower than in renowned public hospitals. The shortage of investment opportunities in big cities has left many investors looking at smaller cities, although attracting good doctors to those cities may be difficult.
Perhaps the biggest problem is that private hospitals must stick to low prices fixed by the government or risk losing their eligibility for public reimbursement.
Improving management and achieving economies of scale in drug procurement may help increase profitability; but attracting high-quality doctors, retraining staff in a more service-orientated culture and matching doctor salaries inflated by bribes may all prove costly, health analysts say.
Furthermore, suggests Alexander Ng of McKinsey, the pay-off could take longer than the normal time horizon of a private equity fund.
“If you have an investment horizon of 20, 30, 40 years, China is the right place but if you have a seven-year timeframe then, unless you buy cheap, it may not be the place to be as the valuations are going up because of more bullish expectations.”

Russian shadow unsettles German business confidence

Ulf Schneider admits his clients are “really worried”.
“Things have changed dramatically,” says the founder of Russia Consulting, which advises more than 100 German companies doing business with Russia. “I have received many calls from clients that they want to freeze certain projects. They feel very uncomfortable.” 

Even though Russia accounts for just 3 per cent of Germany’s exports and Ukraine less than 1 per cent, the shadow cast by the crisis has had an unsettling effect on German business confidence.
Given its huge momentum, the EU’s economic locomotive is not about to run out of steam any time soon. But the combination of the Ukraine crisis, a slowdown in other emerging markets, and domestic concerns, notably about energy costs, have left Europe’s largest economy sputtering.
The 0.2 per cent decline in Germany’s gross domestic product for the second quarter of 2014, compared with the first three months of the year, was worse than the expected 0.1 per cent drop. Since the first-quarter figure was boosted by good weather, the decline in the second three months is not as severe as it appears.
But, nonetheless, economists are now forecasting Germany’s GDP growth could be as low as 1.5 per cent for 2014, compared with estimates of 2 per cent at the start of the year. As Germany’s economics ministry said this week: “Overall, the mood in the economy has worsened perceptibly.”
While Russia’s share in total exports is limited, the absolute numbers are still sizeable. Eric Schweitzer, president of DIHK, the association of German chambers of commerce, says: “Three per cent may sound small, but that is €36bn. There are €20bn of German investments in Russia . . . [and] 400,000 people are employed in Germany in companies exporting to Russia.”
He adds: “Not all of this is at risk, of course. But this is not the end [of the crisis] with 280 [Russian] lorries on the [Ukrainian] border. So there is escalation going on. We do not know when it might be ended or how.”
Company chiefs echo these views. Joe Kaeser, chief executive of Siemens, warned last month that geopolitical tensions posed “serious risks” for Europe’s growth this year and next.
Smaller businesses agree. EBM-Papst, a maker of industrial fans and motors based in Baden-Württemberg, notes that Russia sales are down 15 per cent since June. “We see uncertainty in the market,” the company says.
The Russian economy was stagnating before the Ukrainian crisis. But the conflict has exacerbated the country’s problems and now led to the imposition of EU sector-wide sanctions in finance, defence equipment and oil-related technologies.
Companies are still working out the impact, for example in establishing what dual-use machines are covered by the defence equipment ban.
Machinery exporters would be less concerned about Russia if other markets were stronger. But the outlook is patchy. Ralph Wiechers, chief economist of VDMA, the German machine tools association, says sales to Brazil are down 20.6 per cent in the first five months – even more than Russia’s 19.5 per cent.
While sales to the US are strong, those to China are flat, he says, meaning overall growth in machine tool exports for the first half is “just under zero”.
Overall German exports are up on 2013, with, for example, carmakers’ exports rising 7 per cent in the first half of the year. But what had been forecast to be a strong year for exports is turning out to be only a moderate one, with the DIHK this week cutting its export growth forecast to 3.5 per cent.
At home, German consumers remain buoyant, with demand boosted by declining unemployment, rising wages and a surge in net immigration. Wolfgang Schäuble, finance minister, says it is consumption – not external demand – that is now driving the German economy.
But companies remain wary of investing. The share of investment in the economy in Germany is 17.5 per cent, compared with an average of 21.5 per cent in developed countries.
The government is partly responsible, delaying infrastructure investments to help cut public debt which mushroomed in the 1990s with the cost of absorbing the former Communist East Germany. But companies are also holding back. Some groups are investing less at home because they are investing more abroad, mainly in emerging markets. But others are simply sitting on cash.
Executives are also worried about energy costs, which have been boosted by a government-led focus on green energy that is financed by subsidies generated by electricity surcharges. They are also concerned about labour shortages and some of Chancellor Angela Merkel’s more costly economic policies, including a mandatory minimum wage and early retirement for certain long-serving workers.

Europe's Economy Is Broken

Investors were expecting bad numbers, but not this bad: Europe'seconomies stalled in the second quarter, new figures show. How much longer will Europe's policy makers just stand there?
Since the global financial crisis of 2008, the U.S. and the U.K. have seen output grow more slowly than in previous recoveries. That's nothing to boast about. Still, six years on, gross domestic product is higher in both countries than it was at the pre-crisis peak. Europe's output remains 2.4 percent below that benchmark. And the gap isn't closing.
All three of the euro area's biggest economies -- Germany, France and Italy -- are failing. Germany's output actually fell in the second quarter. So did Italy's, for the second consecutive quarter. (Whether this is a new recession for Italy or a continuation of the old one is debatable.) The European Central Bank currently forecasts a rise in euro-area output of 1 percent this year. Expect that to be revised down next month.
With inflation in the euro area running at 0.4 percent -- way below the ECB's target of less than but close to 2 percent, and far too close to outright deflation -- why isn't the ECB trying harder to ease monetary policy? Its official answer is that it adopted new measures in June, including an expanded program of support for bank lending. These, it says, should be given time to work.
Patience is often a virtue in central banking, but not in this case. TheECB's measures in June were timid, and the risks are increasingly skewed toward deflation and further prolonged stagnation or worse. The euro area needs quantitative easing of the kind applied by the U.S. Federal Reserve and the Bank of England. The case for this has been strong for months; now it's overwhelming.
The ECB is nervous because outright QE faces political and legal obstacles. One way or another, those issues will have to be resolved -- and that's what ECB President Mario Draghi needs to start saying. Whatever it takes, Mr. Draghi.
Monetary easing, though, isn't enough. The euro area also needs to rethink its fiscal policy. France just did -- demanding that its deficit-reduction target for 2014, imposed by the European Union, be relaxed. This makes sense. In a stagnating or shrinking economy, fiscal austerity can be self-defeating: If it slows economic growth even more, a fiscal squeeze can add to the burden of public debt.
German policy makers have resisted proposals to loosen the euro area's agreed fiscal targets. The European Commission has echoed the same line, insisting that supply-side reforms are the key to recovery. This is short-sighted. Europe needs both demand-side and supply-side stimulus -- but the first is both more urgent and can be delivered more promptly.
Europe's economy is in a dangerous place. Its fiscal and monetary policies need to change, and there's no excuse for further delay.
(Source: Bloomberg)

Saturday, August 9, 2014

India’s Rajan sounds alarm on asset bubbles

The world is at risk of another financial crash following a steep rise in asset prices, according to Raghuram Rajan, governor of the Reserve Bank of India – and one of the few people to have warned of the last financial crisis.
“Some of our macroeconomists are not recognising the overall build-up of risks,” Mr Rajan, a former chief economist at the International Monetary Fund, said in an interview in the Central Banking Journal. “We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost.”

Mr Rajan – whose words carry weight because he issued a warning about risk-taking in the financial sector three years before the 2008 financial crisis and the collapse of Lehman Brothers – expressed “alarm” about the build-up of financial sector imbalances.
“The problems arising are not so much from credit growth, which is relatively tepid in the industrial markets and has been much stronger in emerging markets, but from asset prices due to financial risk-taking and so on . . . 
“Financial sector crises are not as predictable [as those of economic growth]. The risks build up until, wham, it hits you.”
Mr Rajan, who has previously criticised the central banks of developed economies for extending and then withdrawing liquidity without consulting potential victims in the emerging markets, said investors were talking as if they were gambling.
“Investors say, ‘we will stay with the trade because central banks are willing to provide easy money and I can see that easy money continuing into the foreseeable future’. It’s the same old story. They add, ‘I will get out before everyone else gets out’.
“They put the trades on even though they know what will happen as everyone attempts to exit positions at the same time. There will be major market volatility if that occurs. True, it may not happen if we can find a way to unwind everything steadily. But it is a big hope and a prayer.”

“Of course, there is the age-old mantra ‘let the exchange rate do the talking and then you are insulated’,” he said. “That advice is garbage. A number of emerging markets are not insulated – you are affected, regardless of what kinds of policies you follow.”Mr Rajan has said his current challenge as India’s central bank chief is to tackle the country’s high inflation to ensure sustainable growth – he kept the country’s key interest rate unchanged at 8 per cent this week – but he is acutely aware of India’s vulnerability to inflows and outflows of fast-moving foreign capital seeking better yields at a time of historically low interest rates in developed economies.

The eurozone was similarly affected at present by “a whole lot of money pouring in”, Mr Rajan said. “It may bring down yields and push up asset prices, but it also pushes up the exchange rate. That creates a self-fulfilling process as more money comes because returns have gone up and the exchange rate has gone up.”

Thursday, August 7, 2014

China Home Glut May Worsen as Developers Avoid Price Drop

The biggest immediate risk facing China’s economy is about to get worse.
A reluctance among some developers to sell units at prices lower than they could fetch just months ago threatens to cause aswelling in unsold properties. The worsening glut would extend a slide inconstruction that’s already put a drag on the world’s second-largest economy, and counter policy makers’ efforts to stimulate the real-estate industry with loosened rules.
In Nanjing, eastern China, nine housing projects originally planned for sale in the first half of 2014 were held for later this year, consulting firm Everyday Network Co. says. The number of homes added to the MARKET in July in 21 major cities dropped 25 percent from June, according to Centaline Group, parent of China’s biggest real-estate brokerage.
“The completed apartments will be in the marketplace sooner or later, and potential buyers will continue to expect prices to fall,” said Hua Changchun, China economist at Nomura Holdings Inc. in Hong Kong. “The property-MARKET weakness hasn’t changed, despite the policy adjustments.”
July economic data due over the next week, starting with tomorrow’s trade numbers, will give a sense of how well growth is holding up after accelerating to 7.5 percent in the second quarter from a year earlier. The statistics bureau releases inflation figures Aug. 9, followed by industrial production,fixed-asset INVESTMENT and retail sales on Aug. 13. 

Credit Measure

The central bank reports lending and MONEY-supply figures by the middle of August. China’s broadest measure of new creditrose in June to the highest level for the month since 2009, underscoring the role of debt in supporting expansion. Home-price data for cities are due from the statistics bureau on Aug. 18, after June prices fell from the previous month in 55 of 70 cities tracked by the government.
China’s home sales slumped 9.2 percent in the first half of this year from a year earlier, following a full-year 26.6 percent increase in 2013, while new-property construction plunged 16.4 percent. Developers are responding with sales delays and discounts as well as incentives including no-down-payment purchases and buyback guarantees.
Developers’ sales delays in the first half were “very widespread” because prospects were poor given weak demand and tight credit conditions, said Donald Yu, a Shenzhen-based analyst at Guotai Junan Securities Co. “Will the increased supply lead to declines in prices in the second half? That for sure will happen.”

Unsold Homes

The inventory of unsold new homes in 20 large cities jumped to an average of more than 23 months of sales in June, according to Shenzhen World Union Properties Consultancy Inc. data compiled by Bloomberg News. The floor space of unsold new apartments nationwide on June 30 surged 25 percent from a year earlier, government data show.
“Should future demand for property be met increasingly from running down these inventories rather than from new supply, construction activity would also slow significantly,” Moody’s Investors Service said in a report last week.
Developers seeking to sell yet-to-be-completed homes in China must apply for local government approval first. In July, the companies gained permits to sell about 7 percent less housing space than they received in June, according to data on 40 cities compiled by Centaline.

On Sidelines

“Developers have been unable to build up adequate client interest as buyers are still waiting on the sidelines,” said Zhang Haiqing, Shanghai-based research director at Centaline. “They’re also worried that excessive price adjustments may reinforce the wait-and-see mood, and therefore they’re choosing to put out small amounts to test MARKET demand.”
Developers are normally required to begin selling within two weeks of obtaining pre-sale permits, Zhang said.
The average new-home price in 100 cities tracked by SouFun Holdings Ltd., owner of a real-estate website, fell 0.8 percent in July from June, the third consecutive month of declines.
Twenty-eight Chinese cities have eased home-purchase curbs through Aug. 4, according to SouFun. The loosening hasn’t boosted sales, as mortgage restrictions from the central government remain in place and buyers are still hesitant, data provider China Real Estate Information Corp. said last week.
“All of these will be helpful in mitigating near-term pain, but the combined impact will be unlikely to reverse the downtrend,” Societe Generale SA economists, led by Yao Wei in Paris, wrote in a report yesterday. “Recent trends appear to indicate precisely how concerned local governments are about the current pace of deterioration of the property sector and how grim the outlook seems.”

‘Worst Times’

Construction is slowing and inventories of unsold homes will keep rising without an increase in sales, Standard Chartered Plc said in a report yesterday, citing its quarterly survey conducted in June and July of 30 developers, most of which are small and unlisted. “Our survey suggests that the worst times for China’s real-estate sector are still ahead,” economists Lan Shen and Stephen Green wrote.
Shimao Property Holdings Ltd. (813), a Hong Kong-based developer, delayed sales in the first half in cities with high inventories including Ningbo and Hangzhou due to weak demand and cut prices for some homes, said Tammy Tam, a spokeswoman.
The company also brought forward sales at higher prices in some cities including Nanjing, Tam said. The average price at Shimao’s Junwangshu project rose to 17,500 yuan ($2,850) per square meter in July, from 17,100 yuan in June, according to Inc.’s real estate portal.

Cash Flow

Some developers are deciding to offer only a portion of homes built instead of entire projects. In central Wuhan, developers since April have typically offered less than 70 percent of homes in projects with pre-sale approvals, while some companies in Shanghai are selling homes in small batches, according to Centaline.
The delays mean lower cash-flow for developers. Smaller ones face “massive” debt-repayment pressures, as cash and equivalents at 137 mainland China-listed real estate companies, excluding four of the largest, were sufficient to cover just 74 percent of their short-term liabilities in the first quarter, according to Shenzhen World Union. That’s less than half the average ratio of the other four, including China Vanke Co. (2202)
Greentown China Holdings Ltd. (3900), a developer based in the eastern city of Hangzhou, said this week that first-half profit probably fell more than 65 percent from a year earlier, due in part to “relatively lower gross profit margin” on property sales. Its shares have dropped 16 percent this week in Hong Kong and Moody’s lowered its outlook for the company’s credit rating to stable.

Stocks Gauge

gauge of property stocks in the Shanghai Composite Index fell 0.6 percent at 2:12 p.m. local time, headed for the third straight daily decline.
“Property INVESTMENT will remain the biggest macroeconomic risk in the second half,” even as a deceleration in investment is less severe than in the first half, said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. “It’s a quite natural response from property developers to delay sales and land purchases amid a weak MARKET, and this may affect investment activity in the future.”
(Source: Bloomberg)