(Aug 14): Pyongyang has announced, through its state media on Aug 10, that it is working on a plan to fire four missiles into the sea off Guam, and that the plan would be ready to be presented to North Korean leader Kim Jong Un by mid-August. This latest pronouncement comes as a war of words between North Korea and the US escalates, with the despotic nation threatening strikes against the US territory, and US President Donald Trump promising “fire and fury” in return. North Korea has been, in recent times, accelerating its missile tests, launching 18 missiles in 12 tests so far this year. It is also said to have successfully miniaturised its nuclear warheads to fit on missiles. Its latest launches appear to have the range to hit the US mainland, according to experts.
The global financial markets’ response to rising geopolitical tensions has largely been muted. Japanese and US stocks, as well as US Treasury yields and the greenback, took a hit early in the week. But equities later regained some of their losses. The price of gold, traditionally a favoured safe-haven asset in times of turmoil, has risen less than 2% since the beginning of the week.
But some market players are expecting more buying of gold if political tensions worsen. “In the event that war should break out, and that leads to an acceptance of further loose monetary and fiscal policy in the US, we would expect a falling US dollar real yield environment, giving renewed, and sustainable, impetus to monetary metals prices,” says Ned Naylor- Leland, a fund manager at Old Mutual Global Investors. “Current institutional allocations are at their lowest, relative to historic levels. Should the North Korea situation develop, it may just prove to be the catalyst to push the institutional world to commit flows back to this asset class on a sustained basis.”
Noble Group posts US$1.9 billion loss
Shareholders of commodity trader Noble Group seemed to be holding their breath ahead of the release of its 2QFY2017 results after market close on Aug 10.
For the period ended June, Noble posted a net loss of US$1.9 billion ($2.6 billion), which includes US$1.3 billion of exceptional items. These relate to adjustments to valuations on the group’s net fair value gains on commodity contracts and derivative instruments, Noble said in its filing to the stock exchange. Revenue for the six months amounted to US$22.69 billion, 5% lower than the year before.
Noble had prepared the market for the staggering loss. On July 26, it issued a profit warning saying it expected to post a net loss of US$1.7 billion to US$1.8 billion for 2QFY2017. That would include expected write-downs from adjustments to net fair value gains valuations on parts of its business, particularly hard commodities.
Consequently, Noble’s share price slumped more than 31% and has continued to decline over the fortnight. The profit guidance came after a strategic review of the company’s operations. Noble has also announced the sale of a number of its assets, including its US energy business, and measures to cut debt. Additionally, its founder Richard Elman has stepped down as chairman, and its senior management has been replaced.
To many observers, Noble’s troubles are a validation of the points made by independent firm Iceberg Research, which had issued a series of reports in early 2015 attacking the company’s accounting practices. Iceberg had highlighted the substantial fair value gains on Noble’s long-term contracts to trade commodities, mainly coal, some of which were based on in-house predictions of commodity prices.
Noble’s management had denied and dismissed those claims at the time, and subsequently took legal action. But the damage was done and investors dumped the stock.
Yangzijiang rises on results
Shares in Yangzijiang Shipbuilding (Holdings) rose sharply after it posted better-than-expected earnings for the period ended June 30. The shipbuilder had released its results on Aug 7; on Aug 8, its stock closed 4.7% higher. It hit a new high in trading on Aug 10 when markets reopened after the National Day holiday. It is now trading at about 14 times forward earnings.
Yangzijiang recorded a 61% y-o-y jump in earnings for 1HFY2017, to RMB1.39 billion ($284 million). Turnover for the period rose 49% to RMB8.48 billion. It states it is in a net cash position.
The company said that it has secured 19 shipbuilding orders in 1H2017, worth some US$450 million. In July, it had an additional 14 shipbuilding orders come into effect, with an aggregated contract value of US$381 million. That brought its new order wins in the year to date to 33 vessels, worth US$832 million. As at June 30, it had an outstanding order book of US$4 billion, comprising 85 vessels.
The company also noted that the global shipbuilding market is recovering, particularly in segments such as dry bulk carriers, which is supported by the higher volume of iron ore being transported. Still, Yangzijiang’s order book is lower than in previous years. It secured orders of US$850 million last year, and some US$2.25 billion worth of contracts in 2015. Analysts who track the company and industry note that the shipbuilding sector is still facing overcapacity, and that it remains to be seen if the recovery can be sustained. Still, Yangzijiang’s stock has done well this year, doubling in value from the start of the year. As such, at current levels, its valuations could seem stretched, analysts say.
mm2 Asia expansion on track
Entertainment producer mm2 Asia moved from the Catalist to the Mainboard on Aug 7. The first two trading sessions have been robust, with on average six times as many shares changing hands as in the last few sessions on the secondary board.
Meanwhile, mm2’s management says it is still in talks to acquire the Golden Village cinema business in Singapore. The company had been in discussions with Village Cinemas Australia for its stake in the Singapore operations, held under Dartina Development. The Australian company holds a 50% stake in Dartina.
However, the acquisition did not go through as Village Cinemas Australia was unable to “procure fulfilment of certain conditions” from their co-shareholder. mm2 says it has obtained a full refund of the $8 million deposit that it had paid Village Cinemas Australia.
“While the deal with Village Cinemas would have fit well with mm2 Asia, our cinema-growth strategy is not dependent on this one acquisition alone,” says mm2’s executive chairman Melvin Ang in a statement. “At this moment, we are constantly pursuing other opportunities in parallel to these discussions with Village Cinemas Australia.”
The Wharf (Holdings) rally shortlived
Hong Kong-listed Wharf (Holdings) is set to shed its “conglomerate discount” as it plans to spin off some HK$230 billion ($196 billion) worth of landmark Hong Kong investment properties, including its Times Square office and retail property. Its other businesses span container terminals and the Star Ferry operations in the territory to investment properties in China, property development and retail.
Following its announcement, the stock surged more than 14.6% to a high of HK$80.15 on Aug 9. It pared much of those gains when trading resumed on Aug 10. At current levels, however, Wharf is still trading more than 43% above its price at the end of last year.
Analysts note that the share price already takes into account the property spin-off and highlights a number of risks instead. For one, the pared down Wharf would be smaller than its peers and could have a lack of stable recurring income after the spin-off.
For the six-month period ended June, the group’s investment properties accounted for 66% of its total underlying earnings. The segment generated core earnings of HK$4.8 billion, 3% higher y-o-y, driven by high occupancy and positive rental reversions.
What to look out for
There are a few companies left that are scheduled to report their earnings for the period ended June 30. Palm oil producer Golden Agri-Resources will release its 2QFY2017 results on Aug 14. Construction crane supplier Tat Hong Holdings reports its 1QFY2018 results on the same day.
On Aug 17, the government is expected to release non-oil domestic export figures for July
