China Calm Shattered: Probe Sparks Selloff in Stocks

  • Citic Securities leads losses after revealing investigation
  • Industrial profits drop 4.6% in October as slowdown deepens


  • China’s stocks tumbled the most since the depths of a $5 trillion plunge in August as some of the nation’s largest brokerages disclosed regulatory probes, industrial profits fell and two more companies said they’re struggling to repay bonds.

    The Shanghai Composite Index sank 5.5 percent, with a gauge of volatility surging from the lowest level since March. Citic Securities Co. and Guosen Securities Co. plunged by the daily limit in Shanghai after saying they were under investigation for alleged rule violations. Haitong Securities Co., whose shares were suspended from trading, is also being probed. Industrial profits slid 4.6 percent last month, data showed Friday, compared with a 0.1 percent drop in September.

The probe into the finance industry comes as the government widens an anti-corruption campaign and seeks to assign blame for the selloff earlier this year. Authorities are testing the strength of a nascent bull market by lifting a freeze on initial public offerings and scrapping a rule requiring brokerages to hold net-long positions, just as the earliest indicators for November signal a deterioration in economic growth. A Chinese fertilizer maker and a pig iron producer became the latest companies to flag debt troubles after at least six defaults this year.

Brokerages Plunge

“The sharp decline will raise questions whether the authorities’ confidence that we are seeing stability in the Chinese markets may be a tad premature,” said Bernard Aw, a strategist at IG Asia Pte. in Singapore. “The rally since the August collapse was not fundamentally supported. The removal of restrictions for large brokers to sell and the IPO resumptions may not have been announced at an opportune time.”

Friday’s losses pared the Shanghai Composite’s gain since its Aug. 26 low to 17 percent. The Hang Seng China Enterprises Index slid 2.5 percent in Hong Kong. The Hang Seng Index retreated 1.9 percent.

A gauge of financial shares on the CSI 300 slumped 5 percent. Citic Securities and Guosen Securities both dropped 10 percent. Haitong International Securities Group Ltd. slid 7.5 percent for the biggest decline since Aug. 24 in Hong Kong.

The finance crackdown has intensified in recent weeks and ensnared a prominent hedge-fund manager and a CSRC vice chairman. Citic Securities President Cheng Boming is among seven of the company’s executives named by Xinhua News Agency as being under investigation. Brokerage Guotai Junan International Holdings Ltd. said Monday it had lost contact with its chairman, spurring a 12 percent slump in the firm’s shares.

An industrial explosives maker will become the first IPO to be priced since the regulator lifted a five-month freeze on new share sales imposed during the height of the rout. Ten companies will market new shares next week. The final 28 IPOs under the existing online lottery system will probably tie up 3.4 trillion yuan ($532 billion), according to the median of six analyst estimates compiled by Bloomberg.



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DRYSHIPS Analysts Update

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Shares of DryShips (NASDAQ:DRYS) was the target of some unusual options trading activity on Friday. Stock investors acquired 21,588 call options on the stock, reports. This is an increase of approximately 179% compared to the average volume of 7,726 call options.

DRYS has been the subject of a number of recent research reports. Analysts at Zacks reiterated a “neutral” rating on shares of DryShips (NASDAQ:DRYS) in a research note to investors on Friday. They now have a $3.00 price target on the stock. Separately, analysts at UBS AG initiated coverage on shares of DryShips (NASDAQ:DRYS) in a research note to investors on Thursday, August 22nd. They set an “outperform” rating on the stock. They noted that the move was a valuation call. Finally, analysts at Imperial Capital initiated coverage on shares of DryShips (NASDAQ:DRYS) in a research note to investors on Thursday, August 22nd. They set an “outperform” rating and a $2.75 price target on the stock.

Five equities research analysts have rated the stock with a hold rating and three have assigned a buy rating to the stock. The stock presently has a consensus rating of “Hold” and a consensus target price of $2.40.

DryShips (NASDAQ:DRYS) traded up 4.16% on Friday, hitting $2.88. 23,919,192 shares of the company’s stock traded hands. DryShips has a 1-year low of $1.46 and a 1-year high of $2.78. The stock’s 50-day moving average is $2.12 and its 200-day moving average is $1.95. The company’s market cap is $1.163 billion.

DryShips (NASDAQ:DRYS) last posted its quarterly earnings results on Wednesday, August 7th. The company reported ($0.05) EPS for the quarter, beating the Thomson Reuters consensus estimate of ($0.07) by $0.02. The company had revenue of $336.10 million for the quarter, compared to the consensus estimate of $329.57 million. During the same quarter in the prior year, the company posted ($0.05) earnings per share. The company’s quarterly revenue was up .0% on a year-over-year basis. On average, analysts predict that DryShips will post $-0.25 earnings per share for the current fiscal year.


Nokia Sale To Microsoft

Image representing Nokia as depicted in CrunchBase
Image via CrunchBase

NOK : NYSE : US$3.90 HOLD 
Target: US$5.50 

Nokia Corporation designs, manufactures, and sells a full range of mobile devices as well as network infrastructure along with services and software on a global basis. The company offers mobile phones and devices based on common mobile phone standards and offers devices that range from entry level to high-end, multifunction smartphones.
All amounts in US$ unless otherwise noted

Technology — Communications Technology — Wireless Equipment
Investment recommendation: With our global surveys indicating gradually improving Windows Phone 8 smartphone sales due to strong sales of the Lumia 520 and other mid/low-tier Lumia smartphones, we believe the timing makes sense for Microsoft to purchase Nokia’s Devices & Services business in order to fund stronger long-term growth trends. We maintain our HOLD rating but increase our price target to $5.50 ahead of Nokia’s 8 AM EDT conference call.
Investment highlights
 Microsoft will pay €3.79 billion to purchase Nokia’s Devices & Services business and €1.65 billion to license Nokia’s patents for a total transaction price of €5.44 billion in cash. We believe the transaction should close in the first quarter of 2014.
 Our recent survey work indicated steadily improving sales of the Lumia 520 and other low/mid-tier Lumia smartphones. In fact, our surveys indicated solid Lumia 520 sales not only in emerging markets such as Russia and key APAC region countries, but also in developed markets such as the U.K. and the U.S.
 We believe Microsoft with its strong balance sheet and increased focus on hardware devices can help accelerate the growing WP8 smartphone momentum. We estimate Lumia sales now constitute over 85% of WP8 smartphone sales. We believe Microsoft has recently worked more in concert with Nokia to drive sales, as evidenced by Microsoft’s advertising campaign featuring Lumia features and by Nokia 1020’s ranking as a top 3 selling smartphone at AT&T.
Stephen Elop is stepping down as CEO, as Nokia focuses on its three businesses of NSN, HERE, and Advanced Technologies.
 Due to improving Lumia sales trends and prior to the acquisition closing , we slightly raise our 2H/C2013 and C2014 D&S handset sales estimates, resulting in our 2013 non-IFRS EPS estimate increasing from $0.04 to $0.06 and our 2014 estimate increasing from $0.07 to
Valuation: Our $5.50 price target (was $33.30) is based on our sum-of-parts analysis.


Avago Technologies Limited

AVGO : NASDAQ : US$36.56
Target: US$45.00

Avago Technologies Limited is a designer, developer and global supplier of analog semiconductor devices. Avago offers products in three primary target markets: wireless communications, wired infrastructure, and industrial and automotive electronics. Applications for Avago products include smartphones, connected tablets, consumer appliances, data networking and telecom equipment, and enterprise storage and servers.

Technology — Communications Technology — Semiconductors
Investment recommendation:

Avago reported strong Q3/F13 results above our estimates with strong Wired and Industrial division sales offsetting weaker-than-expected Wireless demand. Further, Avago guided to strong sequential sales growth in Q4/F13 driven by strong
trends in the company’s Wireless and Wired divisions. We believe Avago’s proprietary technologies, strong IP portfolio, and diverse customer base in several growth markets position the company for strong long-term growth trends with industry-leading margins.

We reiterate our BUY rating and increase our price target to $45.
Investment highlights
 Q3/F13 sales of $644M and pro forma EPS of $0.74 were above our $623M/$0.68 estimates driven by 18% Q/Q sales growth in the higher-margin Industrial and Wired Infrastructure (excluding CyOptic sales) divisions versus our mid-single digit growth estimates for each division. CyOptics contributed $21M in sales during the quarter and should contribute $55M in Q4.
 Wireless sales increased only 3% sequentially or below management’s high-single digit sequential growth guidance, but
this is consistent with our analyses indicating softer high-tier smartphone sales trends during Q3/F13.
 Avago management guided to a 12-15% Q/Q sales increase for Q4/F13 driven by solid Q/Q growth in the Wireless and Wired Infrastructure divisions. Management anticipates mid-teens percent Q/Q growth in the Wireless division due to sales ramping into new smartphone programs at both Apple and Samsung, as Avago is benefitting from increased content share in high-end LTE smartphones.
 Given the strong results and our expectations for sustained growth trends, we have increased our F2013 pro forma EPS from $2.76 to $2.82 and F2014 from $3.29 to $3.30.
Valuation: Our $45 price target is based on shares trading at roughly 13x – 14x our F2014 pro forma EPS estimate.

Credit Suisse Shipping Sector Review / Rate Forecast

Credit Suisse published an interesting piece of research on Dry Bulk Shipping commenting that Dry bulk rates suffered in 2012 (one of the worst years in history), with average spot rates for Capes and Panamaxes at breakeven levels.

While 2013 is off to a sluggish start, Credit Suisse believes that 2012 was the trough in the current dry bulk cycle. While they expect rates to bounce along the bottom this year – they expect 2013 to be better than 2012 – with the rate recovery taking hold in 2014.

The analyst expects average Cape spot rates of $17,000 ($7,000 YTD) and Panamaxes at $12,000 ($6,000 YTD) in 2014. A key point in the research note is the aging global bulk carrier fleet. The worldwide dry bulk stands at ~10,000 ships comprised predominately by Capes (41%) Panamaxes (26%) and Handymaxes (20%). The average age of the world dry bulk fleet is 9.5 years old but only 8.0 years old on a capacity weighted average as the Cape fleet (largest vessel) is usually the youngest as iron ore (primary cargo) is the most strenuous cargo on a ship’s hull.

Given the types of cargos Handy vessels trade (primarily grains and minor bulks), it is not uncommon for Handys to trade well beyond their average useful life. The analyst noted that 67% of the fleet is 0-10 years old and 11% is in the scrapping zone of 20+ years old.

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