China: Apple Stumbles in China; CNOOC Encounters Resistance in Purchase of Nexen

By Sterling Wong  JUL 27, 2012 3:10 PM

McDonald's also makes the news.

 


MINYANVILLE ORIGINAL More questions on state censorship of Chinese companies arose this week in the wake of last weekend’s destructive floods in Beijing. Thursday night in China, authorities released the official death toll from the flood; at the same time, some users in Beijing reported that the search function in Sina Corp.’s (SINA) widely-used Weibo microblog was down, according to the Wall Street Journal:

Starting Thursday evening, Weibo users with accounts linked to Beijing reported strange results when they tried to use the site’s search function: Instead of the customary list of related users and posts, searches produced only a list of users. For example, a search for “Beijing” would turn up users who write under a handle that uses the name “Beijing,” but not a single post about the flooding that hit Beijing last weekend.

And that might have been the point. It’s not clear whether the search difficulties were due to a technical problem or the result of government orders, but given the specific geographical limitations – users with no connection to Beijing reported normal search results – and the fact that the shutdown coincided with mounting pressure on the Beijing government over the flooding, the “duck rule” would suggest instructions from the top.

Sina declined to comment on the coincidence. As reported last week, Sina, along with a slew of other Chinese Internet stocks such as Renren (RENN) and Sohu (SOHU), have been hit hard in the past 12 months. Sina’s share price has fallen 60% from a year ago.
 
Here’s more in this week’s business news:
 
Apple (AAPL): The tech giant reported underwhelming second-quarter earnings earlier this week, and a big source of disappointment was results from China. For the three months ended June 30, revenue from China totaled $5.7 billion. The good news? That was a 48% increase from a year earlier. The bad news? That was a steep 28% decline from the previous quarter’s $7.9 billion.
 
Undoubtedly, Apple is still going from strength to strength in China, but perhaps China’s economic slowdown has affected the Cupertino, CA-based company, which counts the mainland as its biggest market outside of the US. As the Wall Street Journal reports, prominent Chinese consumer electronics retailers, including Suning Appliance and GOME Electrical Appliances, announced earlier in the month that their quarterly profits would take a big hit.
 
Some Apple analysts argue that the iPhone might have lost its must-have status in China, after competitors such as Samsung (SSNLF) and HTV successfully launched new products in the last quarter.
 
"The (iPhone 4S) model is a little bit too long in the tooth when compared to other phones with better specs," TZ Wong, a Beijing-based analyst from research firm IDC, told Reuters. "To put it plainly, consumers are getting a little bit tired of the look of the iPhone 4 and the iPhone 4S."

Expect Apple to bounce back in the second half of the year, though. The new iPad was only released earlier this month and so sales did not figure into the latest quarterly earnings report. There’s also the much-anticipated iPhone 5, slated for release around October. It is likely that iPhone sales worldwide have taken a hit because customers are holding out for a chance to purchase the iPhone 5.
 
CNOOC (CEO): On July 23, the state-owned China National Offshore Oil Corporation, or CNOOC, confirmed a deal to buy Canada’s Nexen Inc. (NXY) for $15.1 billion. If approved by regulators, this will become the largest foreign acquisition ever by a Chinese company.
 
Among the assets CNOOC would acquire in this takeover are production platforms in the Gulf of Mexico, the North Sea, and Nigeria, along with tar sands reserves in Long Lake, Alberta. Nexen’s assets would increase CNOOC’s output by 20%, Bloomberg notes.
 
Canadian regulators are likely to approve of the acquisition, according to experts interviewed by the Wall Street Journal, who believe that CNOOC has presented a strong case that the deal will bring economic benefits to Ottawa. Among CNOOC’s pledges are: “Agreeing to make Calgary its North American and Central American headquarters, promising not to fire Nexen workers, and pledging to maintain the company's capital-spending plans.”
 
In the US, New York Senator Charles Schumer raised his objections to the acquisition, drafting a letter to US Treasury Secretary Tim Geithner, who also heads the committee on foreign investment. He said that China has to open up its markets if the deal is to be approved.
 
“I respectfully urge you, in your capacity as chairman of the committee on foreign investment in the United States, to withhold approval of this transaction to ensure US companies reciprocal treatment,” Schumer wrote.
 
Because of Nexen’s Gulf of Mexico assets, the committee on foreign investment has the right to block the takeover of companies with US assets for national security reasons.
 
Having failed in its 2005 attempt to buy Unocoal, which was eventually acquired by Chevron (CVX), CNOOC is prepared this time to win over Washington legislators, having hired lobbyists in recent months to help ensure approval of the deal.
 
McDonald’s (MCD): Fast food chains are feeling the heat in China. Last week, Yum Brands (YUM) reported disappointing second-quarter earnings after profits fell in the mainland. This week, chief rival McDonald’s also unveiled weaker results, falling 4.5% in the second quarter.
 
The fast food giant reports earnings from Asia-Pacific, Middle East, and Africa together. In this division, same-store sales increased by a poor 0.9%, compared to 5.5% in the first quarter.
 
In an earnings call on Monday, new McDonald’s CEO Don Thompson said that same-store sales in China increased 2.2%, which paled in comparison to Yum Brands’ 10% increase. Like Yum, McDonald’s is hurting due to wage inflation and the stalling of the Chinese economy.
 
Nonetheless, with the Chinese fast food market expanding at a rapid 10%-20% pace annually, global giants such as McDonald’s and Yum will continue to tussle for a share of the ever-growing pie. Burger King (BKW), which only has 63 stores in China now, will soon join the fray, having announced plans to open 1,000 restaurants there in the next five to seven years.
 
Twitter: @sterlingwong
No positions in stocks mentioned.

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