Chart of the Week: China's Energy Needs

All indications are that China will see a GDP growth slowdown through the end of 2010 as the Beijing government works to take some of the heat out of property prices in the country’s key cities.

We see this short-term slowdown as a good thing in the longer term because, by acting before there’s an economy-wrecking crisis, China can position itself for a more sustainable growth pace going forward. This means a lesser reliance on exports and fixed-asset investment, and more emphasis on the domestic sector.

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Tongjitang Chinese Medicines Buyout Update

Tongjitang Chinese Medicines Company (NYSE: TCM) reported that it is still considering the buyout offer from a JV comprised of its Chairman/CEO and Fosun Industrial, the Hong Kong conglomerate. The JV offered $4.50 per ADS on April 8, 2010 for every share its members do not already own. Mr. Xiaochun Wang, Tongjitang’s Chairman and CEO, now has a 51% stake in the company and Fosun owns an additional 32%.

In reporting its Q2 results, Tongjitang reiterated that Morgan Stanley Asia Limited is advising an independent group of directors on the sale. It also said CITIC Ka Wah Bank Limited has authorized a term loan facility up to $25 million for the share purchase, more than enough for the $20 million worth of stock still outstanding (at $4.50).

Investors do not seem to believe the transaction will take place. Tongjitang is currently trading hands at around $3.50 per share, a 22% discount to the current offer.

Tongjitang made its IPO in 2007 at a price of $10 per ADS. Although the company had been growing at a CAGR of 44% for the three years before the IPO, its growth rate dropped to almost zero after the event. Tongjitang is dependent on XLGB, its barrenwort treatment for osteoporosis, which supplied 77% of the company’s revenue at the time of the IPO.

XLGB has suffered a number of problems since then, but the greatest seems to be that it doesn’t interest the public. In Q2 of 2010, revenues from the QLGB fell 8% from year-earlier numbers to 74 million RMB ($10.9 million), which represents about half of Tongjitang’s total sales.

The company now holds out hope that XLGB, a member of the Essential Drug List, will get a boost from China’s healthcare reform. But Tongjitang complains that local governments are slow to adopt the EDL, and no sales bump has ensued.

Tongjitang’s Q2 revenues rose 3% to 1378 million RMB ($20.3 million). Net income fell to a loss of 4.7 million RMB ($0.7 million) from a year-earlier profit.

The company has made numerous acquisitions to decrease its dependence on XLGB, but none of them has provided game-changing levels of income. Most recently, Tongjitang paid $18 million to acquire Guiyang Liquor Factory. In Q2, the liquor business generated just 2.1 million RMB ($300,000) of business. In China, liquors are applied orally or topically to treat bone-related diseases.

The current funding commitment from CITIC remains viable until September 24, 2010. However, two earlier funding agreements each expired, only to be succeeded by new ones.

Disclosure: none.

About the author: ChinaBio Today

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China Distance Education CEO Discusses F3Q2010 Results - Earnings Call Transcript

Oppenheimer

China Distance Education Holdings Limited (DL) F3Q2010 Earnings Call Transcript August 19, 2010 8:00 am ET

Operator

Good evening and thank you for standing by for the China Distance Education Holdings Limited third quarter fiscal 2010 earnings conference call. Today, you will hear from Mr. Zhu, Chairman and CEO of the company; and Ms. Ping Wei, the CFO. During the prepared remarks, all participants will be in listen-only mode. After that, the company management will be available to answer your questions.

Before we start, we would like to remind listeners that this conference contains forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Among other things, the outlook for the fourth quarter of fiscal year 2010 and oral statements from management on this call, as well as the company's strategic and operational plans, contain forward-looking statements.

Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements. Further information regarding these and other risks is included in the company's annual report on Form 20-F and other documents of the company as filed with the Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

As a reminder, this conference call is being recorded. A summarized presentation can be downloaded from the company's IR website and which we will be referring during the course of the call. In addition, a webcast of this conference call is available on the company's Investor Relations website at ir.cdeledu.com.

I will now turn the call over to Mr. Zhu to discuss the operational highlights. Mr. Zhu, please go ahead.

Zhengdong Zhu

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Yingli CEO Discusses Q2 2010 Results - Earnings Call Transcript

Wells Fargo

Yingli Green Energy Holding Co. Ltd. (YGE) Q2 2010 Earnings Call August 19, 2010 8:00 am ET

Operator

Hello, ladies and gentlemen. This is Erica. I will be the operator for this conference call. I would like to welcome everyone to Yingli Green Energy Holding Company Limited Second Quarter 2010 Financial Results Conference Call. All lines have been placed on mute to prevent background noise. After today’s presentation, there will be a question-and-answer session. Please follow the instructions given at that time, if you would like to ask a question.

Now, I would like to transfer the call to the host for today’s call, Arthur Chen of Yingli Green Energy. Arthur, please proceed.

Arthur Chen

Thank you, Operator. And thank you everyone for joining us today for Yingli’s second quarter 2010 financial results conference call. A few hours ago, Yingli issued its second quarter 2010 earning release, which can be found on the company’s website at www.yinglisolar.com. I trust you all had a chance to review it by now.

On call today from Yingli Green Energy are Mr. Miao Liansheng, Chairman and Chief Executive Officer; Mr. Bryan Li, Director and Chief Financial Officer; Mr. Wang Yiyu, Chief Strategy Officer; Mr. Stuart Brannigan, Managing Director of Yingli Green Energy Europe; Mr. Robert Petrina, Managing Director of Yingli Green Energy Americas; Ms. Miao Qing, IR Director.

The call today will feature a short presentation from Mr. Miao covering business and operational developments. And then Mr. Li will take you through a discussion of the company’s financial performance. After that, we will open the floor to questions from audience.

Before beginning, Yingli Green Energy’s management teams will like to remind audience that this presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, and similar phrases.

Such statements are based upon management’s current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond Yingli Green Energy’s control, which may cause Yingli Green Energy’s actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties or factors is included in Yingli Green Energy’s filings with the U.S. Securities and Exchange Commission. Yingli Green Energy does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law.

I would now like to turn the call over to Mr. Miao Liansheng. Please begin.

Miao Liansheng

Hello everyone thanks for joining us today. I will first discuss business highlights from the second quarter of 2010 before handing the call over to Mr. Bryan Li, our CFO, who will take you through our financial results.

I’m pleased to announce that in the second quarter of 2010, we achieved continuous growth in PV module shipment volume and reached new record high gross margin of 33.5%.

Firstly, I would like to highlight our assets and achievements and finding in marketing. As you know, we became official sponsor of the 2010 FIFA World Cup in South Africa on February 3rd this year. This sponsorship accompanied by a series of marketing activities has largely boosted our brand awareness among media, industry, players, customers and stakeholders.

For example, according to a statistic prepared by our marketing advisors, from the beginning of February to the end of July, Yingli was covered by 2,000 news reports including 807 from Chinese media and 1,193 from overseas media.

As the market of distributed electricity generation is expanding in major solar markets, the power of influencing and deciding the future of solar industries is profitably providing to the general public. As the leading PV product manufacturer, we believe that accelerating our brand building effort

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Verigy CEO Discusses F3Q2010 Results - Earnings Call Transcript

Cowen & Co.

Verigy, Ltd. (VRGY) F3Q2010 Earnings Call Transcript August 19, 2010 4:30 pm ET

Operator

Good day ladies and gentlemen and welcome to the third quarter 2010 Verigy earnings conference call. My name is Christine and I will be your operator for today. At this time, all participants are in listen-only mode, later we will conduct a question-and-answer session. (Operator instructions) as a reminder, this call is being recorded for replay purposes.

I would now turn the call over to your host for today Judy Davies, Vice President of Investor Relations and Marketing Communications. You may proceed.

Judy Davies

Thank you, Christine, and good afternoon everyone. Welcome to our financial teleconference for Verigy’s 2010 fiscal third quarter, which ended July 31. I am joined today by Keith Barnes, our Chairman and CEO and Bob Nikl, our CFO. Also joining us remotely is Jorge Titinger, our President and COO.

Our third quarter financial press release was sent out today via Business Wire and it is posted on the company’s website at verigy.com. If you are not able to locate the press release or need assistance in finding the information, please contact me directly at 408-864-7549. A replay of today’s call will be available via telephone and webcast from August 19 through September 2nd. You may access the replay by going to the Investor Relations section of our website. And as a reminder this conference call is being recorded.

We will be making forward-looking statements today that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Including uncertainties of the global economic recovery, the conditions of the semiconductor and semiconductor test industries, the strength of our customer’s businesses and foreseeing changes in the demand for our product and unanticipated delays and needing product demand and delivery requirements.

Additional factors that may cause our results to differ materially from the forward-looking statements are discussed mostly in our most recent periodic and current reports filed with the SEC. These forward-looking statements, including guidance, provided during today's call are only valid as of this date and Verigy undertakes no obligation to update the forward-looking statements.

In addition, during this call, we will discuss non-GAAP financial measures including non-GAAP net income, earnings per share, operating expenses and gross margin. You will find a reconciliation to the most directly comparable GAAP financial measures on our website.

Thank you all again, and now it is my pleasure to turn the call over to Keith Barnes.

Keith Barnes

Thank you, Judy. Good afternoon and thank you for joining us today on our third quarter 2010 conference call. Today I will review our quarterly financial highlights and market share data and Bob will provide more details on our Q3 financial performance and Q4 guidance. Jorge Titinger, our President and Chief Operating Officer will discuss his priorities as President and provide an update on our products.

We’re pleased to report our second consecutive quarter of profitability on a non-GAAP basis. And in Q3 we also returned to profitability on a GAAP basis. Further we exceeded both our revenue and EPS guidance for the quarter.

Total revenue for Q3 was $154 million, an increase of $34 million, or 28% from Q2. This growth was driven by continued demand for our SOC products. The last time we reported revenue of 150 million or more was in the fourth quarter of fiscal 2008. In that quarter, non-GAAP earning per share were $0.14 and on a GAAP basis we recorded a loss of $0.60 per share. With similar revenue in Q3 we delivered a significantly higher bottom line performance with non-GAAP earnings per share of $0.23 and GAAP earnings per share of $0.21.

Now I’d like to review some market share information. In the past we reported market share data based on hardware sales only while our competitors have included service and support revenues. To provide you with an apples-to-apples comparison we will now do the same.

When we took Verigy public in 2006 our overall SOC market share was 15% including service and support. For the first half of calendar 2010 our estimated overall SOC market share was approximately 21%. We expect to gain additional points of market share during the rest of this calendar year. By the end of 2010 we believe that we will have increased our market share by 8 to 10 points wherein our overall SOC share by more than 50%.

I would also like to point out that our share growth over this period of time has been almost entirely organic and reflects the success of our product development and market segment priorities. If we look at our core market, high-end SOC, our share was an estimated 33% for the first half of calendar 2010.

Before we move on to Jorge and a discussion of our products, I would like to give you some background on his new role. I joined Verigy over four year ago. I thought it was important to put a succession planning program in place, especially for our company officers. When Jorge joined Verigy in 2008 as our Chief Operating Officer, preparing him to assume the role of President became an important part of this succession plan. Since then Jorge has been instrumental in managing a large part of our company though the industry downturn. He has led the product groups that have maintained a very competitive product portfolio for Verigy and he has managed the successful transition from Flextronics to Jabil so that we could benefit from a more simplified outsourcing structure.

Additionally Jorge has developed excellent relationships with the rest of the executive team, chief customers and within his own organizations. For all these accomplishments plus Jorge’s extensive experience, I’m confident that he is the right person to help lead Verigy in today’s environment of change and opportunities. Jorge, again congratulations and thank you for everything you’ve done and are going to do in the future for Verigy. I look forward to continuing to work with you and the Verigy team.

With that I’ll turn over the next part of the presentation to Jorge.

Jorge Titinger

Thanks, Keith and thanks to all of you for joining us this afternoon. I’m excited to assume this new leadership role at Verigy and appreciate Keith and the Board of Directors’ confidence in me.

Today I will comment on two areas, first my priorities as President and second an update on our SOC and our memory product.

June, 2010 marked our fourth year as a public company. The priorities for the company during the first two years were to transition from Agilent and stabilize Verigy. The next phase of our plan was to focus on optimization. And while we made some progress in optimizing the company by moving to a more competitive cost structure and changing contract manufacturing partners, we had to quickly shift to keeping Verigy as healthy as possible during the downturn. We did this successfully and now that the industry is recovering we’re focusing on optimization again. This is a top priority.

Since becoming President we have taken some actions to further advance our product and operational excellence initiatives. For example, we moved all of the product divisions and worldwide customer team including service and support under my organization. This will enable Verigy to further leverage resources and strengthen the integration of our product development and customer oriented activities.

Second we are leveraging our R&D investments across multiple product groups and market segments. I believe this will help improve our cost structure, R&D efficiencies and responsiveness to customers as well as strengthen our technical foundation for future product roadmaps.

Ultimately these changes and others we are making will enable us to better leverage and align resources, increase our focus and accelerate execution of high-potential opportunities.

Now on to our product updates. I’ll begin with SOC. The SOC test market continued to show strength throughout the quarter and across our broad base of customers and applications. Including MPUs, GPUs, application processors, RF and consumer mixed signal.

In the quarter, we received multiple system orders from several customers who are ramping their devices into high-volume manufacturing to meet strong demand. This strong demand resulted in a record build from Jabil of more than 100, 93K systems during Q3, which exceeded the previous record set in Q3 of fiscal 2008.

Another indicator of strength was the utilization rate on the 93K, which remained above 90% throughout the quarter. In the wireless RF area, 93K sales continued to be extremely strong, driven by the ramp of our Port Scale RF customers. I will highlight three successes for our Port Scale RF product. Record shipments and growth, our new Direct-Probe solution, and willing sole source supplier status with our key customer.

In Q3, we set our new record for Port Scale RF shipments. Our installed base grew 20% quarter-over-quarter and doubled from one year ago. In Q3 Port Scale RF generated more than 50% of our total SOC revenue. Our Port Scale RF system has become an industry standard for wafer probe and package testing of 3G, 4G, wireless LAN and Bluetooth RF devices and RF transceivers.

It is being used to test a broad base of semiconductors ranging from low integration devices such as power amplifiers, tuners and transceivers to high integration RF devices containing integrated mixed signal, digital, power management and embedded and stacked memory. During the quarter, we received multiple system order from customers testing these types of devices.

We added a major fables company in China to our customer list due to Port Scale RF’s broad application use. This new customer will use our systems for high volume manufacturing of cellular transceiver devices. We believe this win is significant as it allows us to serve the fast growing RF market in China.

Now I would like to spend some time highlighting our Direct-Probe solution for the 93K. There is an increasing trend to move full performance testing from final test into wafer probe. We believe our Direct-Probe solution is the most advanced, totally integrated offering available for at speed functional test at wafer probe.

Our solution enables customers to meet technology and cost of test challenges required by 3D ICs, AGB

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Baidu: Buy Now or Regret Later

First of all, let’s point out the many things a skeptic could say about Baidu (BIDU). The online search industry is expanding in China, and as such, is attracting competitors at an increasing rate. An alliance between China Mobile (CHL) and Xinhua News Agency seems poised to provide some competition for BIDU in the search business. China has 500 million subscribers and Xinhua is largely known for their cutting edge news services. So, many analysts believe leveraging both brands and their current services they will be able to provide a superior user experience to BIDU. I believe this is overblown, as neither firm has experience in the internet realm or online search. They are entering a realm where one of their major advantages (CHL’s massive subscriber base) will have to compete in a mobile search market where Baidu already has a 30% share.

Mightier foes than CHL and Xinhua have attempted to dislodge Google (GOOG), for example, with terrible results. Also, consider that BIDU already has a 70% Chinese share, which is comparable to Google’s formidable 66% share in the United States. It will take years before these two entrants can create the technology platform that is attractive enough to take share away from Baidu. By the time this happens, if it ever does, I expect BIDU to be embedded in China in much the same way Google is in other markets.

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China Looks to Finish Off Post-WWII Reign. Better Learn Mandarin

The world’s greatest economies have always competed fiercely to reign supreme. From Egypt to the Iberian Peninsula, to Great Britain and the United States: when a King of the Hill got sloppy-drunk on power, a more hungry rival was ready to pounce.

Over the past decade, China has made huge strides toward the economic throne of the world. They’ve joined the WTO, repurposed their entire country into the greatest manufacturing machine in history, embraced as good a derivative of capitalism as any, and, most importantly, been on the right side of the wealth transfer pipeline.

Now, in recent months, China has pressed their heel into the throat of their debtors. They have sharply pared back purchases of US Treasuries, they have further diversified into Gold, and they are helping foreign companies such as McDonald’s (MCD) offer hordes of yuan-denominated bonds.

What does this mean for the US Dollar? A guaranteed near-death-experience.

While we’re all sitting here using prayer as an economic policy, China is using all the wealth we’ve exported to them. How much wealth is that? Take a look (click to enlarge) at the Trade Deficit:

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CNOOC Posts Robust First Half

CNOOC Ltd. (CEO) reported its first-half 2010 results. Net profit in the period increased 109.6% year over year to 25.99 billion yuan ($3.8 billion).Earnings per share were 58 yuan per ADR ($8.5).

Total revenue in the period was 83.16 billion yuan ($12.2 billion), up 104.6% from the year-earlier level. Oil and gas sales were 67.64 billionyuan ($9.9 billion), up 108%. The robust results were driven by solidproduction growth and strong oil price realizations. The realized crude oilprice in the first half was $76.59 per barrel, up 55.2% year over year.

Based on these results and a sound financial position, the company's boardhas decided to pay an interim dividend of $2.7 per ADR.

CNOOC’s results have set the stage for its domestic peers such as ChinaPetroleum & Chemical Corp. (SNP) and PetroChina Co. Ltd. (PTR), both are scheduled to report on August 23.

CNOOC achieved a total net production of 149 million barrels of oil equivalent (BOE), an increase of 40.8% from the year-ago level. Net oil production was 120.3 million barrels or approximately 81% of total production. The production growth can be credited to the projects that came online in the recent times and to the contribution from the existing fields.

In the first half, CNOOC and its partner made 9 new discoveries and 7 successful appraisal wells. In offshore China, the company has made several breakthroughs including discoveries of Penglai 9-1 and mid-sized oil fields including Kenli 6-4, Enping 24-2 and Liuhua 16-2.

Cash balance at the end of first half was 31.8 billion yuan ($4.7 billion) and long-term debt stood at 13.8 billion yuan ($2 billion), representing debt-to-capitalization ratio of 6.7%.

Based on the company's rich resource base, CNOOC has created a solid foundation for future growth. The company believes that it will be able to maintain a growth rate of 6%-10% CAGR over the next five years.

While continental shelf offshore China and deepwater South China Sea remain the company's core areas for future growth, we believe that international projects and acquisitions will also play an important role. In the first half of 2010, production of the Nigeria Akpo oil field ramped up steadily.

CNOOC has been active in balancing reserve and production growth. In addition, its strong cost-control measures will assist in maximizing shareholder value. We recommend a short-term (1-3 months) Neutral rating for CNOOC ADRs with Zacks #3 Rank (Hold).

We believe that CNOOC's attractiveness for its premium assets portfolio, its excellent execution strategy and unique position as a pure oil player have already been reflected in its valuation. Since there are only a few promising domestic exploration prospects left, we see more acquisitions going forward. However, we are concerned about the profit margins from these acquired projects due to increasing costs and a high tax regime.

Consequently, our long-term recommendation is Underperform.

About the author: Zacks.com

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A Solid First Half for Sinopec

China Petroleum and Chemical Corporation (SNP), aka Sinopec, reported its interim results for the six-month period ended June 30, 2010. Earnings per share in the period were 0.403 yuan ($5.91 per ADS), up 6.1% year over year.

Net income in the period increased 5.0% from the comparable 2009 level to 34.9 billion yuan ($5.1 billion). The increase can be attributable to robust results from the Exploration and Production segment.

Sinopec’s domestic peer, CNOOC Ltd. (CEO) reported an impressive first half with net profit leaping 109.6% year over year to 25.99 billion yuan ($3.8 billion).

Operational Performance
Sinopec’s crude oil production during the reported period rose nearly 0.05% year over year to 149.19 million barrels, while natural gas volumes increased 40.7% to 200.55 billion cubic feet. Owing to a substantial increase in crude oil prices, the Exploration and Production segment’s operating profit was 22.0 billion yuan ($3.2 billion), indicating an increase of 299.7% from the comparable period in 2009.

The company’s refining business recorded crude oil processing volumes of 101.45 million tons (a 16.7% year-over-year increase) and production output of refined oil products of 60.52 million tons (a 12.0% year-over-year increase). However, operating profit from the refining business declined 71.4% year over year to 5.7 billion yuan ($0.8 billion), as the increase in crude oil price outweighed the sales price of refined products.

The Marketing and Distribution segment sold 68.15 million tons of refined oil products, reflecting an 18.1% year-over-year increase, while the segment’s operating profit was 14.5 billion yuan ($2.1 billion), up 15.5% from the corresponding 2009 period.

The output of ethylene from the Chemicals segment reached 4.2 million tons. Operating profit from this segment decreased 14.5% year over year to 8.3 billion yuan ($1.2 billion).

Crude oil price realization in the period was 3,422 yuan ($502) per ton, an 89.3% increase from the year-earlier level. Realized natural gas price climbed 10.2% year over year to 1,059 yuan ($155) per thousand cubic meters.

Capital expenditures in the six-month period totaled 34.796 billion yuan ($5.1 billion), out of which expenditures on exploration and exploitation stood at 15.348 billion yuan ($2.3 billion). In the Refining segment, Sinopec spent 4.875 billion ($715 million) for the product quality upgrades, refinery revamping projects to process low grade crude, as well as storage facilities and pipeline construction projects.

Capital expenditures in the Marketing and Distribution segment were 7.659 billion yuan ($1.1 billion). Capital expenditures in the Chemicals segment totaled 6.543 billion yuan ($960 million), mainly due to the completion of the ethylene project in Zhenhai, along with the ethylene project in Wuhan that progressed well.

Guidance
For the second half of 2010, Sinopec guided production of 21.54 million tons of crude oil and 6.32 billion cubic meters of natural gas. The company also intends to process 102 million tons of crude oil and plans 68.15 million tons of total domestic sales volume of oil products.

Our View
China’s impressive economic growth has significantly increased its demand for oil, natural gas and chemicals. This growth momentum presents attractive opportunities for industry players that can meet the country’s fast-growing energy needs. Being one of the two integrated oil companies in China, Sinopec is well positioned to capitalize on these favorable trends.

For the second half of 2010, Sinopec intends to adjust its business structure, create marketing channels, control costs and record a robust performance. However, we remain concerned about the company’s exposure to the heavily regulated downstream sector.

The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

About the author: Zacks.com

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China: Where Micro Cap Growth Opportunities Abound

The demographics of China (population 1.34 billion) and India (population 1.19 billion) make them areas equity investors can not ignore. These two countries account for approximately 36.8% of total world population, while the United States ranks as a distant third with a population of 310 million or 4.5% of total world population.

In the future, the U.S. will benefit tangentially from the tremendous economic growth anticipated for China and India. Hopefully this will partially offset the negative economic headwinds fostered by the confluence of “Big Government,” “Big Business” and “Big Labor” (or should I say "Big & Corrupt"). I feel certain that most of us are not happy with the direction of the country, which began years before the current administration in Washington D.C. The recent actions are merely bringing a future crisis to a head at a quicker pace. It is unconscionable that the U.S. keeps falling deeper into debt and at an accelerating pace. We are becoming more and more beholding to China and other foreign nations to bail out our fiscal irresponsibility, which can only end up badly in the future.

I generally advise most individuals to invest in mutual funds to get the proper diversification of investments for areas like China, India and other emerging markets. However, I have come across a number of micro-caps in China that I find appealing for those with a speculative appetite. Recently we purchased shares of a small and rapidly growing Drug Store chain trading under the symbol CJJD.

China Jo-Jo Drugstores, Inc. (CJJD), through contractually controlled affiliates, operates a retail pharmacy chain in China offering both western and traditional Chinese medicine. The chain currently has 42 stores in Zhejiang Province. The Company had a public offering on 04-28-10, when they sold 3.5 million shares at $5.00 per share and the net proceeds to CJJD amounted to $15.45 million.

The company has a fiscal year that ends on March 31. Prior to raising the new capital in April 2010, they grew the number of directly operated drugstores from 9 at March 31, 2008, to 16 at March 31, 2009 and 25 at March 31, 2010. Since April 1, 2010 to date, they added another 17 stores bringing the current total up to 42 stores in Zhejiang Province. The company’s immediate goal is to have 60 drug stores in Zhejiang Province, which is an area of 39,300 square miles and having a population of 52 million. The Company’s longer term goal is to operate more than 200 drug stores by sometime between the fiscal years ending March 31, 2014 and March 31, 2015.

Other interesting demographics about Zhejiang Province include (source: Wikipedia List of China administrative divisions by GDP):

“Zhejiang is an eastern coastal and best developed province, its annual average GDP growth rate of 12.7% ranked the 2nd from 1978 to 2007, while its GDP per capita in 2007 was 112.2 times in 1978, it ranked 1st in all provincial-level divisions. In 1978, Zhejiang's GDP was only CNY12,372 million (US$7,347 million) and ranked the 12th in all 50 provincial-level divisions, then Its GDP has been Ranking the 4th since 1994, also Zhejiang became the 4th province to reach a GDP of over CNY1 trillion in 2004. In 2008, Zhejiang's GDP rose up to CNY 2,148,692 (US$309,677 million) and it was the first time to reach over CNY2 trillion. Zhejiang's GDP was CNY 2,283,243 million (US$334,247 million) in 2009.”

As of June 25, 2010 the company operated 31 stores. Each of their stores typically carries approximately 2,500 to 7,500 different products. In addition to these products, they have licensed doctors of both western medicine and TCM onsite for consultation, examination and treatment of common ailments at scheduled hours. Two of their stores have adjacent medical clinics offering urgent care (to provide treatment for minor ailments such as sprains, minor lacerations and dizziness which can be treated on an outpatient basis), TCM (including acupuncture, therapeutic massage and cupping) and minor outpatient surgical treatments (such as suturing). Included in their Q-1 2010 press release was the following announcement:

“Another milestone for us was that we are the first non-state-owned enterprise in Zhejiang Province to be able to sell pharmaceutical products online. The online drugstore will not be an immediate revenue generator for us, but over the long term we will use this to further establish our presence throughout Zhejiang Province.”

In the company’s conference call they played down the current impact of getting licensed to sell pharmaceuticals online but indicated this could have a big impact in the more distant future.

Their store locations vary in size, and the 31 stores operated as on June 25, 2010 averaged approximately 3,592 square feet. I believe the larger store size is one of the distinguishing factors, which accounts for the better operating results of CJJD versus other drug store chains operating in China, such as China Nepstar Chain Drugstore Ltd. (NPD), whose ADS shares are traded on the NYSE.

Sales of CJJD grew from $31.3 million in the FYE 03-31-08 to $44.8 million (up

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How the Western Equity Markets Will Benefit From Chinese Growth

After the slowdown we had in the western economy, China has become the key economic engine for the global growth. Most of the time US equity markets look out for the Chinese market for its direction hoping that a continued growth in China will help the US companies. In my view Chinese economy has little to do with how the US companies will do in the short term. In my view structural changes taking place in China will help the US and European companies in the long run as these companies are better prepared to benefit from these changes.

Short term: It is US economic recovery that will drive the market, not the emerging market recovery

By looking at the most recent full year numbers available for S&P500 companies, it is clear that more than half of the revenue for US companies is generated within the US itself. Interestingly the numbers suggest that the significance of the US market increased over the last 3 years. So for the earnings growth of the US companies what matters are the developments taking place in the home market, not in the emerging markets.

Table 1: Geographical breakdown of revenue

2007

2008

2009

US

55%

56%

59%

EU

10%

12%

10%

UK

2%

1%

1%

Other

33%

31%

31%

100%

100%

100%

Source: Bloomberg

(Click charts to enlarge)

Chart 1: The significance of US market for the US companies


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China Looks to Finish Off Post-WWII Reign. Better Learn Mandarin

The world’s greatest economies have always competed fiercely to reign supreme. From Egypt to the Iberian Peninsula, to Great Britain and the United States: when a King of the Hill got sloppy-drunk on power, a more hungry rival was ready to pounce.

Over the past decade, China has made huge strides toward the economic throne of the world. They’ve joined the WTO, repurposed their entire country into the greatest manufacturing machine in history, embraced as good a derivative of capitalism as any, and, most importantly, been on the right side of the wealth transfer pipeline.

Now, in recent months, China has pressed their heel into the throat of their debtors. They have sharply pared back purchases of US Treasuries, they have further diversified into Gold, and they are helping foreign companies such as McDonald’s (MCD) offer hordes of yuan-denominated bonds.

What does this mean for the US Dollar? A guaranteed near-death-experience.

While we’re all sitting here using prayer as an economic policy, China is using all the wealth we’ve exported to them. How much wealth is that? Take a look (click to enlarge) at the Trade Deficit:

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Hung Australian Parliament Raises Questions About Forex Sentiment

The weekend news of a hung Australian Parliament, after general election votes showed no clear winner on Friday, leaves the market with an initial fundamental challenge to overcome, on a week that is relatively light on planned macro-economic releases. The high correlation between AUD and the S&P 500 may be tested at the open of trade, as speculative interest monitors the tests of upside resistance at 1075 on the S&P, and compares that to the 200-day SMA resistance on Aud/Usd at 0.8950. A failure of both asset classes to break higher could instigate a solid test of 0.8830 and then maybe a visit to the July low around 0.8550 on Aud/Usd. As traders witnessed with the value of Gbp after the U.K. election failed to produce a clear-cut winner, the market does not tend to get too bullish on currencies that are backed with political question marks.A sell-resistance outlook may be the best approach in the near-term.
Disclosure: None About the author: The LFB

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The Case for a Sovereign Debt Default in Japan - Kyle Bass

Hedge fund manager Kyle Bass, managing partner at Hayman Investments, earned his claim to fame by predicting the crash in housing prices and the financial crisis that would follow. Now, he has focused his cold stare on the bubbles in sovereign debt in developed economies. The folks at CNBC’s Strategy session interviewed Bass last week to give him a chance to restate his case for his biggest target: Japan.

Now that the U.S. dollar is hovering at 15-year lows against the Japanese yen, it is understandably difficult for anyone to believe that Japan’s sovereign debt bubble will blow anytime soon. Yet, Bass has the composed, patient, and deliberate demeanor of someone who is well-accustomed to explaining himself to a skeptical and doubtful audience.

Bass’s current investment position places 90% of his capital betting long the U.S. on special situations. Because he believes global GDP growth might soon drop to -4 or -5%, he is not long stocks. I believe the rest of his capital (“the tail”) is betting on sovereign defaults in Japan and Europe.

Bass describes the case against Japan in the video clip posted below. Here are some highlights:

Japan’s weakening fiscal situation

40 trillion yen in tax receipts is the same level from 1985 in nominal terms.Expenses have increased 200% since 1985 to 97 trillion yen.1 quadrillion yen in total credit market debt

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John Hussman: Why QE Could Trigger a Collapse of the Dollar

Excerpt from the Hussman Funds' Weekly Market Comment (8/23/10):

A week ago, the Federal Reserve initiated a new program of "quantitative easing" (QE), with the Fed purchasing U.S. Treasury securities and paying for those securities by creating billions of dollars in new monetary base. Treasury bond prices surged on the action. With the U.S. economy predictably weakening, this second round of quantitative easing appears likely to continue. Unfortunately, the unintended side effect of this policy shift is likely to be an abrupt collapse in the foreign exchange value of the U.S. dollar.

...

In short, quantitative easing is likely to induce what the late MIT economist Rudiger Dornbusch described as "exchange rate overshooting" - a large and abrupt shift in the spot exchange rate that occurs in order to align long-term equilibrium in the market for goods and services with short-term equilibrium in the capital markets.

...

Frankly, I've always thought Dornbush's use of the word "overshooting" was unfortunate, because it implies that the exchange rate move is an overreaction, when that is not at all the case. Overshooting refers to the tendency of the spot exchange rate to move beyond its long-term PPP value, but this move is in fact approprate, efficient, and required in order to align the returns that investors can expect in each currency. So it is important to avoid misinterpretation - the policy of quantitative easing is likely to force a large adjustment on the U.S. dollar because the Federal Reserve is choosing to lay a heavier hand on the Treasury bond market than would result from economic conditions alone. The resulting shift in interest rates and long-term inflation prospects combine to dramatically reduce the attractiveness of the U.S. dollar. A significant and relatively abrupt devaluation is then required, in an amount sufficient to set up expectations of a U.S. dollar appreciation over time.

...

My impression is that Ben Bernanke has little sense of the damage he is about to provoke. A central banker who talks about throwing money from helicopters is not only arrogant but foolish. Nearly a century ago, the great economist Ludwig von Mises observed that massive central bank easing is invariably a form of cowardice that attempts to avoid the need to restructure debt or correct fiscal deficits, avoiding wiser but more difficult choices by instead destroying the value of the currency.

About the author: John Hussman

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Monday FX Interest Rate Monitor

Treasury market investors appear to be having second thoughts on Monday morning following a seesaw session on Friday that witnessed record lows for U.S. 10-year yields. Having reached 126-08 in the September contract (yield 2.53%) profit-taking and a siren voice offering some sage advice in the form of a 2% interest rate increase from a former IMF economist, has forged a downwards path for the contract to 125-10 this morning. Other global bond markets are little changed as some semblance of optimism returns in the form of rising stock markets around the world.

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Planning for 2 Significant Market Events This Week

I haven’t seen much discussion on these, and how to plan for the likely outcomes. Here’s what you need to consider.

1-Greek Bond Sale

On Tuesday July 20th, EU sovereign credit concerns are again tested as Greece attempts another 1.5 billion euro auction of 13-week bills July 20th.

There is only a low probability of failure given close EU monitoring and support. A failed sovereign auction is the most likely cause of an EU crisis, and everyone knows it by now.

However, if the demand is somehow low OR rates continue to climb, markets could freak once again

2-EU Bank Stress Tests – Questions The EU Must Answer

There haven’t been so many unanswered questions surrounding a key risk event since…. the first EU Greek rescue plans early this year. Remember those? The EU would spare no expense to save Greece – but no cash would be needed

A plan was in place – to make a plan at some point if needed, details to follow when needed (?) There was an agreement… somewhat The cash was ready…pending approval of the legislatures, courts, etc.

We hope the EU has learned its lesson and will leave no significant ambiguities this time. Still, the EU has resisted publication of these until now – a fact which is in itself troubling.

Here are just some of open questions the EU MUST answer if markets are to regain any trust in the EU banks and relieve the ECB of responsibility of sole lender

What specific criteria will be used to determine whether a bank has passed the stress test? How clear are the definitions / classifications of different types of assets/liabilities, and what safeguards were in place to prevent misleading financial statement classification? The question is far from theoretical. In the US this past week, Citigroup revealed how they actively misrepresented their financial statements How will the EU calm markets about the numerous regional banks that are not covered yet have the higher failure risk Will there be detailed grades or a simple pass/fail? If not, will there be detailed notes to fill in the blanks? If a bank fails the test, how long will it have to raise the funds, where it will come from, and what measures will be taken in the interim period to protect the bank, its depositors, investors, and creditors? For sovereign bond holdings, by what amount should bonds of different governments be written down to account for default risk? Is there a clear mapping of interbank exposure? That is, if one fails, what others are at risk.

There are other questions of course, like how badly rising rates would hurt their lending revenues, etc. Results are widely expected to paint a rosy picture, and EU officials have been uniformly confident, including the Spanish. This seems incongruous given that Spanish banks have been forced to rely so heavily on the ECB for short term funding

What To Do

Given the number of questions that remain outstanding at this time, both the results and market reaction to them remain impossible to predict.

What we can do is make plans for each contingency.

If The Questions Are Not Answered

The market’s reaction to ambiguity will be quite predictable - further declines for risk assets, especially anything associated with the EU, like the euro and European stocks, though most risk assets will follow them down given the importance of the EU and uncertainties regarding systemic risk.

Expect gold to soar, ditto the safe-haven JPY and even the US Dollar, despite its own recent fundamental troubles. While the CHF is also a safe haven, and Swiss National Bank (SNB) has stopped intervening to keep the CHF from appreciating vs. the EUR, the Swissie may well sell off given Switzerland’s dependence on European export markets. The GBP might suffer a bit due its close ties to Europe as well.

If Canada continues to raise rates as expected, and its economy continues to improve, the CAD could start to take more of a safe haven role despite its ranking as the #3 risk currency.

Those not wishing to play the currencies or stock indices themselves can use the related ETFs. Some are better surrogates than others, so do your homework. These include:

For the S&P 500: SPY

For Gold: GLD but only in the short term

Forex: From Lowest to Highest Risk

JPY FXJ

USD (long) UUP

USD (short) UDN

CHF FXF

GBP FXB

EUR FXE

CAD FXC

NZD BNZ

AUD FXA

If The Results Are Essentially Clear

If there are relatively few failing banks and clear plans on how to deal with the troubled ones and as yet unknown troubled banks: expect a rally in risk assets, particularly the euro and other EU related assets like the CHF.

Significant numbers of failing banks, borderline banks: unclear how markets will respond. That will depend on what contingency plans are revealed for protecting depositors, creditors, and those depending on these banks for credit.

Also, markets may well respond positively just because uncertainty is removed and the EU appears to be confronting the issue of problem banks rather than avoiding it.

No concrete plans to deal with untested regional banks: market response to depend on estimates of how many banks are at risk. If the number is substantial, that failure to address the issue could rattle markets. Market response will depend on how serious the risk is. I really don’t know how that would be gauged.

Disclosure: No Positions

About the author: Cliff Wachtel

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China Is Not a Currency Manipulator

… at least not according to the U.S. Treasury (see the Treasury’s Interim Report on Exchange Rate Policy).

According to the Treasury’s report:

China’s continued foreign reserve accumulation, the limited appreciation of China’s real effective exchange rate relative to rapid productivity growth in the traded goods sector, and the persistence of current account surpluses even during a period when China’s trading partners were in deep recession together suggest that the renminbi remains undervalued.

It was easy to overlook the recently released Treasury report in the wake of the G20 summit, where much of the debate centered on austerity versus stimulus rather than China’s mercantilist policies (see Agreeing to Disagree).

In this sense then, China’s strategy of publicly announcing a more flexible yuan policy in the days leading up to the G20 summit effectively deflected the debate away from the yuan. What’s more, China’s announcement was seemingly rewarded by a Treasury now more reticent to label it a currency manipulator. And the timing of the report’s release (after months of delay) seemed rather coincidental: It was released after the conclusion of the G20 meetings, and only after China seemed to mollify critics with its announced policy shift.

The interesting thing to me about the whole thing is that the yuan has barely budged since the announcement, rising less than 1% since late June. For a currency that some claim is undervalued by as much as 40%, that’s not likely to make much of a dent in persistent trade imbalances.

Now I’m as much a proponent of free trade as anyone (see Globalization Revisited and Globalization Discontents), but my view is that trade should be allowed to take place in an environment in which economies adjust as a consequence. Explicit policies that prevent such adjustment can be damaging to all parties.

With my bias now laid bare, it seems to me that China is simply paying lip service. It wants to appear accommodating, publicly declaring its intention to allow the yuan to strengthen against the dollar, while continuing to rely on exports to the US as its main growth engine.

Given the recent turmoil in Europe (China’s second largest trading partner), maintaining its exports to the U.S. has taken an even heightened importance (see Revaluation Postponed and Revaluation and Euro Weakness). And in a world where everyone suddenly wants to play beggar-thy-neighbor (China, Japan, and now even Europe), the U.S. is now everyone’s neighbor (for a brilliant treatment of the issues see Capital Tsunami).

This cannot continue indefinitely.

Against that backdrop, don’t be surprised if the trade deficit and cries of unfair trade practices begin to occupy a more prominent place in political discourse.

About the author: Robert Salomon

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Tuesday FX Interest Rate Monitor

Bond prices responded to flexing Asian equity markets on the prospect of a rethink by China on its restrictive policies now the pace of expansion has moderated. However, equity index futures buckled on disappointing earnings headlines from Goldman Sachs whose numbers look worse thanks to a recent SEC fine and British banking tax. Bonds have since regained their upward move as equity prices weaken while a sliver of optimism was to be found in a construction report reflecting an increase in the number of building permits.

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Switzerland Under Siege: France Threatened From Within

Efforts are underway to undermine Switzerland’s rock solid reputation as a safe haven. The alpine nation, famous for its readiness against enemies with citizens storing military assault rifles at their homes, is under attack. The attack, however, comes from one of their own, the guardian of the Swiss franc: the Swiss National Bank (SNB). In any other country, a central bank may have the power to derail the currency; in Switzerland, however, efforts to undermine the franc may be more appropriately characterized as a Don Quixotian battle by a lone warrior, a warrior armed with a license to print money.

Prices, be they for goods and services, stock prices or currencies, are best set by free markets. The euro and the Swiss franc are traditionally two highly correlated currencies; however, there are rational reasons why each currency has periods of strengths and weakness. SNB Chairman Philipp Hildebrand does not appear to see it that way; he was on a mission against “speculators” that gauged the Swiss franc to be a safer place than the euro. As his influence rose in early 2009 (his promotion from Vice President to Chairman was announced in early 2009, but did not take effect until early 2010), Switzerland began to intervene in the currency markets, apparently with the aim of pegging the Swiss franc to the euro. Below is a chart of the Swiss franc versus the euro over this time period (a rising trend reflects Swiss franc strength versus the euro); sharp moves downward tend to coincide with larger interventions to “punish” speculators:

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Jeremy Grantham: Deflation Has Won (Near-Term)

In Jeremy Grantham's latest quarterly newsletter (which is always a must-read, IMHO), he says he's throwing his hat in the deflation camp for the near future, at least:

Well, I, for one, am more or less willing to throw in the towel on behalf of Inflation. For the near future at least, his adversary in the blue trunks, Deflation, has won on points. Even if we get intermittently rising commodity prices, which seems quite likely, the downward pressure on prices from weak wages and weak demand seems to me now to be much the larger factor. Even three months ago, I was studiously trying to stay neutral on the “flation" issue, as my colleague Ben Inker calls it. I, like many, was mesmerized by the potential for money supply to increase dramatically, given the fl oods of government debt used in the bailout. But now, better late than never, I am willing to take sides: with weak loan supply and fairly weak loan demand, the velocity of money has slowed, and inflation seems a distant prospect. Suddenly (for me), it is fairly clear that a weak economy and declining or flat prices are the prospect for the immediate future.

The emphasis on government debt reduction in Europe is what apparently flipped Grantham - he continues:

The worrying news is that most European countries, led by Germany (not surprisingly in this case), are coming on more like Hoover than Keynes. More surprisingly, Britain and half of the U.S. Congress are acting sympathetically to that trend, which is to emphasize government debt reduction over economic stimulus. Yet, after a relatively strong initial recovery, the growth rates of most developed economies are already slowing, despite the immense previous stimulus. You don’t have to be a passionate follower of Keynes to realize that to rapidly reduce defi cits at this point is at least to flirt with a severe economic decline. We can all agree that we had a financial crisis, a drop in asset values, and an economic decline, all three of which were global (although centered in the developed countries), and all three of which were the worst since the Great Depression.

You can read Grantham's complete quarterly newsletter here.

Grantham made a very prescient call right around the March 2009 lows that the S&P was tremendously undervalued, and due for a rally. At the time, he said he believed the S&P's fair value was around 900 (it was trading in the high 600's when he wrote this):

Remember that you will never catch the low. Sensible value-based investors will always sell too early in bubbles and buy too early in busts. But in return, you may make some important extra money on the roundtrip as well as lowering the average risk exposure.

Ironically he did basically catch the low! So, with open arms, we welcome Grantham to the small but growing deflation camp!

Looking to fine tune your Deflation Investing Strategy? Here's some further reading for you:

The Globe and Mail: Deflation requires new strategy for investors Deflation Investing Strategy - 5 things you should know

Disclosure: No positions

About the author: Brett Owens

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Is Now a Good Time to Buy Gold?

While we’re convinced gold and gold stocks are destined for much higher levels, buying when prices are low can mean the difference between a double or triple and a ten-bagger... a week in Malibu vs. a week in Milan.

There’s no secret formula to buying low, and we aren’t holding the right hand of Midas, but there are periods when prices tend to be lower than others. And if those tendencies play out, it can give us the opportunity to snag a high-quality asset at a bargain price.

So, how do you get a bargain price? You cheat.

I think the secret to getting a low-cost basis on all your gold and gold stocks is this: only buy on significant price pullbacks.

And this can be done without trading or using technical analysis.

I think there’s a good chance we can cheat this summer. For example, here are the average monthly increases in gold since our bull market began in 2001.

click to enlarge images

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Wednesday FX Interest Rate Monitor

Not enough buyers turned up to a German bond auction today as investors feared an impending capital loss after the recent slump in yields drove borrowing costs to an all-time low. But global fixed income markets continue to push yields down during this summer lull, ever hopeful that Chairman of the Board Ben Bernanke might tip his hat in Washington to evidence lurking somewhere beneath an unturned rock indicative of an end to the current slowdown.

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Bank Stress Tests May Compound Losses for Swiss National Bank

The Swiss National Bank's intervention efforts aimed at weakening the franc relative to the euro has resulted in $13.3 billion dollars in losses. However, the real pain may still await the central bank ahead of the eurozone's stress test results slated for Friday release.

Unlike other central banks, the SNB issues shares and is publicly traded. Bloomberg estimates that the bank suffered a second quarter loss of 5.5 billion francs compared to a 1.5 billion franc gain in the first quarter. Final results are scheduled for release on August 13.

Over a two-year period, the SNB has purchased several billion euros to counter gains in the Swiss franc. The measure aimed at reducing deflationary risks while protecting the country's export industry.

The intervention efforts have temporarily halted, leaving market participants to guess at the next level at which the SNB will intervene. Many are speculating that the 1.30 handle will be the next level that the SNB protects. However, that opinion is not uniformly held.

According to Giovanni Staunovo, a currency analyst at UBS, "We don’t expect the SNB to intervene in currency markets unless the franc appreciates toward 1.25 against the euro. It would also depend on the pace of appreciation."

The EUR/CHF is last priced at 1.3475, having bounced off its all-time low of 1.3072 reached on June 30. In recent weeks, the euro has gained ground against its major counterparts. However, the shared currency may have reached a top, as it traded above the $1.30 level earlier in the week. The EUR/USD is last priced at 1.2810.

The next major test for the euro will come later in the week as the European Union releases its stress tests results. High Frequency Economics' chief economist, Carl Weinberg, notes that the stress tests present a "lose-lose situation" for the euro.

According to Mr. Weinberg, "“If any banks fail, the market reaction will be bloody. If no banks fail, the market will sour because no one will believe the results. We think the week will end with a renewed sense of imminent banking sector-crisis” in the eurozone.

For the SNB there exists a real concern of ballooning losses tied to its euro holdings insofar as the central bank answers to its shareholders. The stress tests present something of a wild-card for the central bank's euro position, as market participants are already questioning the metrics used in the EU's hypothetical construction of a stressful environment.

Reports have surfaced indicating that the stress tests assume a 23% haircut on Greek debt and a mere 3% haircut on Spanish debt.

JP Morgan, however, estimates that at 25% haircut on Greek debt and a 10% haircut on Spanish debt would present an "optimistic scenario". The bank offers a "base scenario" that calls for a 30% haircut on Greek debt and a 15% haircut on Spanish debt.

The results of the EU stress tests are scheduled for Friday release, offering investors a weekend to reflect on the meaning behind the numbers. For the SNB, it may prove a weekend of lost sleep considering the level of exposure to the euro that the central bank maintains.

More troubling, however, are the prospects of heightened euro-exposure that the SNB may be forced to undertake should the market react poorly to the results. In addition to frantic selling of global bank shares, the central bank may find itself short of investors.

Disclosure: Author is Short EUR/CHF

About the author: Ophir Chador

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Thursday FX Interest Rate Monitor

Chairman of the Board Ben Bernanke’s concerns expressed in Washington on Wednesday rocked investors’ nerves helping to send equity indices plunging and bond yields lunging. His warning that it might take “a significant amount of time” to restore the 8.5 million jobs lost throughout 2008 and 2009 were reinforced today by an unexpected uptick in a reading of firings. But beneath the surface the labor news isn’t as bleak as bears need to sink confidence and proving the patchy nature of the recovery is a slew of corporate earnings demanding of the Chairman, “what slowdown?”

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Baidu: Expecting Strong Q2 Results, Slower Q3 Growth

Expecting strong Q2 results. Chinese search engine operator Baidu (BIDU) will report 2Q10 results on July 21 after market close. For the quarter, I estimate Baidu generated $280 million revenue (up 48% Q/Q) and $0.33 GAAP EPS, significantly above management guidance of $268.1-274.0 million and consensus of $271.4 million. I attribute the strong growth in Q2 to three factors: advertisers ramping up spending after Chinese New Year, Baidu gaining market share after Google (GOOG) exited China mainland in late March, Phoenix Nest system achieving higher penetration among Baidu's advertising clients.

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Ctrip: Industry Data Suggest Strong Q2 Results

Chinese travel-booking company Ctrip.com (CTRP) will report 2Q10 earnings on August 9 after the market closes. Recent industry data from airlines, hotels, and travel destinations suggest Ctrip's Q2 growth was pretty strong. Based on strong data points, I estimate that Ctrip's total revenue and GAAP EPS will come in at $99 million and $0.22 for Q2, representing strong revenue growth of 42% year-over-year. I also expect Ctrip to provide a conservative Y/Y revenue growth guidance for 3Q10, which could prove to be at least 10 percentage points lower than the actual result.

According to data from Air China, China Southern Airlines, and Hainan Airlines, these three major Chinese airlines' combined passenger volume rose 17.5% Y/Y in 2Q10. This represents a 3.3-percentage-point acceleration from 14.2% Y/Y growth in 1Q10, during which Ctrip's total revenue grew 46% Y/Y. Historically, Ctrip's total revenue growth has more than doubled airline passenger growth, so it's reasonable to expect Ctrip to grow revenue by 42% Y/Y in Q2.

In addition to airline data, hotel and Shanghai World Expo data also imply strong growth momentum for Ctrip's business in Q2. According to a major Chinese travel-booking service provider, pricing for economy hotel rooms rose significantly in Q2 in popular travel destination regions such as Shanghai, Shandong, Xinjiang, Liaoning, Hainan, Jiangsu, with Shanghai leading all regions with 16% Q/Q growth.

Since May 2010, Shanghai World Expo has stimulated sharp growth of hotel rooms' pricing and sales volume in Shanghai, with an overall occupancy rate of 93% and 100% occupancy rate for economy hotels. According to the official website of Shanghai World Expo, visitors to this mega event have reached 29.5 million since May 1, with daily traffic reaching a new high of 557.2K on July 17 (see chart below).

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China Is Not a Currency Manipulator

… at least not according to the U.S. Treasury (see the Treasury’s Interim Report on Exchange Rate Policy).

According to the Treasury’s report:

China’s continued foreign reserve accumulation, the limited appreciation of China’s real effective exchange rate relative to rapid productivity growth in the traded goods sector, and the persistence of current account surpluses even during a period when China’s trading partners were in deep recession together suggest that the renminbi remains undervalued.

It was easy to overlook the recently released Treasury report in the wake of the G20 summit, where much of the debate centered on austerity versus stimulus rather than China’s mercantilist policies (see Agreeing to Disagree).

In this sense then, China’s strategy of publicly announcing a more flexible yuan policy in the days leading up to the G20 summit effectively deflected the debate away from the yuan. What’s more, China’s announcement was seemingly rewarded by a Treasury now more reticent to label it a currency manipulator. And the timing of the report’s release (after months of delay) seemed rather coincidental: It was released after the conclusion of the G20 meetings, and only after China seemed to mollify critics with its announced policy shift.

The interesting thing to me about the whole thing is that the yuan has barely budged since the announcement, rising less than 1% since late June. For a currency that some claim is undervalued by as much as 40%, that’s not likely to make much of a dent in persistent trade imbalances.

Now I’m as much a proponent of free trade as anyone (see Globalization Revisited and Globalization Discontents), but my view is that trade should be allowed to take place in an environment in which economies adjust as a consequence. Explicit policies that prevent such adjustment can be damaging to all parties.

With my bias now laid bare, it seems to me that China is simply paying lip service. It wants to appear accommodating, publicly declaring its intention to allow the yuan to strengthen against the dollar, while continuing to rely on exports to the US as its main growth engine.

Given the recent turmoil in Europe (China’s second largest trading partner), maintaining its exports to the U.S. has taken an even heightened importance (see Revaluation Postponed and Revaluation and Euro Weakness). And in a world where everyone suddenly wants to play beggar-thy-neighbor (China, Japan, and now even Europe), the U.S. is now everyone’s neighbor (for a brilliant treatment of the issues see Capital Tsunami).

This cannot continue indefinitely.

Against that backdrop, don’t be surprised if the trade deficit and cries of unfair trade practices begin to occupy a more prominent place in political discourse.

About the author: Robert Salomon

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How to Play the Changing Shape of Energy Consumption

by Lara Crigger

It's official: China, not the U.S., is now the world's top consumer of energy, according to a report released Monday by the International Energy Agency.

Last year, China consumed 2.252 billion tons of oil-equivalent (which is a sum-total measure of all forms of energy, including crude oil, natural gas, coal, nuclear and even "green" energy sources like wind or solar). That's about 4 percent more than the U.S., which used 2.169 billion tons.

Granted, the U.S. still consumes the most energy per capita, with the average American consuming five times more energy each year than the average Chinese. And the U.S. still uses the most oil worldwide, consuming roughly 19 million barrels per day, compared with China's 9.2 million barrels per day. But these data haven't stopped the IEA from waxing philosophical.

"The fact that China overtook the U.S. as the world's largest energy consumer symbolizes the start of a new age in the history of energy," IEA chief economist Fatih Birol told the WSJ.

Strong words, indeed. But there's more to the story than meets the eye.

Behind The Numbers

At some level, what the IEA's data truly represent is just how hard the U.S. was hit by the 2008 global recession—a recession that China escaped mostly unscathed. After all, the IEA had predicted China would eventually assume the top energy consumption spot anyway, but not until 2015 or so. The recession just sped things up.

But on a more positive note, the numbers also reflect the U.S.' increasing energy efficiency, at least compared with China. Since 2000, the U.S. has improved its energy efficiency by 2.5 percent each year, while China has only improved by 1.7 percent, according to the Financial Times.

Indeed, many analysts have argued that increasing energy efficiency has led to the peak of energy demand in the States (and developed Western nations as a whole), and usage will flatten out in the future. Obviously, more efficient energy usage means less total energy being used.

At the same time, however, you can't dismiss the Chinese growth story from these numbers. For nearly a decade, China's energy consumption has grown by double digits annually, propelled by the nation's souped-up industrial capacity. Keep in mind that just 10 years ago, China's energy consumption was only half that of the U.S.

And that expansion shows no signs of slowing, either: The IEA also predicts that over the next 15 years, China will add about 1,000 gigawatts of electrical generation capacity—or the equivalent of the entire current U.S. capacity.

The end result of this growth is that China's particular energy demands have begun to redefine the way energy is used worldwide, from the kinds of cars that get made to how many solar panels or wind turbines are constructed.

It also means that global energy consumption will continue to stem from inefficient sources, at least for the time being. China's swelling energy usage isn't exactly efficient: The country may be the world leader in wind, solar and hydropower investment, but it still gets most of its electricity from coal. In 2007, China surpassed the U.S. as the world's top emitter of greenhouse gases.

Disputes

Of course, Chinese authorities—who have become increasingly touchy about claims that the country is swinging global energy prices or contributing to global pollution—have already disputed the IEA's data.

On Tuesday, the Chinese Cabinet's National Energy Administration released a report claiming that the IEA data was "unreliable," adding that the IEA still "lacked understanding about China's relentless efforts to cut energy use and emissions, notably the country's aggressive expansion of new energy development."

Instead, the Chinese NEA said the country consumed just 2.132 billion tons of oil equivalent last year, or 2 percent less than the IEA's figure for the U.S. (Interestingly, though, according to their statistics, China was the world's largest energy producer.)

So who is right?

The IEA claims they hadn't changed their sourcing or methodology to calculate the 2009 statistics, but at the same time, the Chinese government isn't exactly known for its data transparency. As recently as this month's oil market report, the IEA lamented the quality and coverage of Chinese data regarding refining activity and crude oil stockpiles. And back in its December 2009 report, the IEA wrote that "Chinese apparent demand data feature some odd trends. The most glaring is the seeming mismatch between subdued gasoline demand and surging car sales."

Playing The Chinese Trend

Regardless, the march toward increasing Chinese dominance in the global energy scene seems set to continue, and for investors looking to hone in on that trend, there are two main options available at present.

The Global X China Energy ETF (NYSE Arca: CHIE) is perhaps the purer play on the space; it tracks energy companies that conduct the bulk of their business or are domiciled in China. It's dominated by big names like oil giants CNOOC (CEO, 10.52 percent) and PetroChina (PTR, 9.89 percent); Sinopec (SHI), the nation's largest oil refiner (10.39 percent); China Shenhua Energy Co (CUAEF.PK)., the world's top coal producer (9.79 percent); and Kunlun Energy Co., a Chinese oil and natural gas E&P firm (5.32 percent).

Although Russia dominates the Emerging Global Shares DJ Emerging Market Energy Titans ETF (NYSE Arca: EEO) at 34.62 percent of assets, China still comprises a substantial portion (14.47 percent).

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Historical Price-Reaction Patterns Following Baidu Q2 Earnings

Chinese search engine operator Baidu (BIDU) will report 2Q10 earnings on July 21 after market close. My research has revealed some interesting price-reaction patterns following its earnings releases: First, Baidu has released 20 quarterly earnings reports since its IPO, and its share price has risen 12 out of 20 times for the next trading day following the earnings announcements, representing a 60% "winning percentage" (see chart below). Second, since 1Q07, Baidu has released 13 quarterly reports, and its shares have risen 10 out of 13 times for the next trading day, representing a 77% winning percentage. Third, since 1Q07, for three

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China's Coal Intensive Economy Reaches New Milestone

China’s spectacular economic growth over the past decade has been accompanied by a major increase in energy consumption. In 2009, China consumed more energy than the United States for the first time according to a report from the International Energy Agency which was discussed in a recent Wall Street Journal article. China consumed 2.252 billion tons of oil equivalent last year which was 4 percent higher than U.S. consumption. The United States was the world’s largest energy user for over a century.

One interesting aspect of China’s energy picture is the fact that coal accounts for two-thirds of supply compared to 57 percent of the total in 2000. The following graphic from the Wall Street Journal compares energy sources for the United States and China in 2009.

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