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China: Apple and Baidu Report Great News, but Chinese Banks Disappoint

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Moody's reaffirms China rating, while Bo Guagua speaks out for the first time.

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MINYANVILLE EXCLUSIVE A slew of major companies reported first quarter earnings this week, while Bo Guagua, son of Bo Xilai, made headlines as he spoke out publicly for the first time since this political controversy erupted. First, some business news:
  • Apple (AAPL): It was all about Apple this week, even in China. The tech behemoth released its blockbuster first quarter earnings results this week, and robust growth from China emerged as the main highlight.
The Middle Kingdom accounted for $7.9 billion, or 26%, of Apple's first quarter $39.2 billion haul. Apple's sales in China for the first six months of the current fiscal year were $12.4 billion, which is not far away from the $13.3 billion it racked up for the entirety of the previous year. Before the iPhone was introduced in 2009, the company's annual sales in China did not even hit $1 billion.

This quarter's outstanding China performance can be credited to the introduction of the iPhone 4S in January and the addition of China Telecom (CHA) as a carrier. China Unicom (CHU) also carries the flagship Apple phone, but China Mobile (CHL), which has the most number of subscribers in the world, still does not.

China's importance to Apple does not look like it will be fading anytime soon. A 2011 Credit Suisse report estimates that China could contribute up to $30 billion in sales for the Cupertino-based company by 2015.
  • Telecommunications Companies: In more earnings news, even with the addition of the iPhone to its list of offerings, China Telecom's first quarter profit fell 6.5% to $677.2 million from $725 million a year earlier. The company said it was raising network lease and handset sales costs associated with its March launch of the iPhone 4S, which caused the drop in net profit. Operating revenue did go up, however, rising 15.7% to $10.8 billion from $9.32 billion a year ago.
China Unicom, the country's second-largest mobile operator, had better news to report, as its first-quarter net profit was up nearly seven times compared to a year ago. For the first three months of the year, the company's net profit was $160.5 million, up from $23 million for the same period a year earlier. Revenue, meanwhile, rose 25% to $9.7 billion from $7.8 billion

Industry leader China Mobile reported last Friday that its first quarter net profit rose 3.5% to $4.41 billion. Its revenue also increased by 7.8% to $20.2 billion from $18.8 billion.
  • Tech Sector: China's leading search engine company, Baidu (BIDU), saw its first quarter net profit soar 75% from a year ago to $299 million, with growing Internet use boosting advertising sales. The company, led by billionaire entrepreneur Robin Li, also saw revenue grow 75% to $677 million. Earnings for the second quarter may be disappointing, though; Baidu, perhaps trying to manage expectations, said second quarter revenue is likely to come in around $847 million to $867 million, below the $869.6 million analysts expect. Baidu currently has 78.5% of China's search market, with Google (GOOG) a distant second with 16.6%.
E-commerce platform Alibaba.com reported a 25% fall in first quarter profit to $53.8 million, with the company saying that China's slowing economic growth and a change in its business model has slowed revenue growth. Revenue did go up 3.7% to $252 million from $243 million. Alibaba.com is the listed unit of Alibaba Group, in which Yahoo (YHOO) has a 39% stake.

Huawei Technologies, the world's second-largest telecommunications equipment maker, reported that net full-year profit fell over 50% in 2011 to $1.8 billion due to stiff competition in the handset business and foreign exchange losses. Revenue increased 11.7% to $32.3 billion.
Banking Sector: China's Big Four banks all missed analysts' expectations for first quarter results. The Industrial and Commercial Bank of China, the world's largest bank by market value, said net profit rose by a lower-than-predicted 14%, as the bank was slowed by weak fee and commission income.

No. 2 was China Construction Bank , No. 3 was Bank of China, and No. 4 was the Agricultural Bank of China; these saw net profit gains of 9.2%, 10%, and 28% respectively.

Growth for Chinese banks may slow dramatically for the rest of the year, as the sector is bracing itself for a halt in fee income growth after regulators announced in February that bank subsidiaries could no longer set their own fees, such as the "consulting fee" companies had to pay to keep a lending relationship with a bank. Instead, all service fees have to be set at the head office.

In Chinese economic news, Moody's affirmed its positive China ratings outlook, keeping the country's AAA rating for foreign and local currency bond ratings in a new report.

"Rapid economic growth, coupled with low deficits and debt of the central government, have provided ample fiscal headroom to manage contingent risks in local government finances, or in the banking system," said Moody's in a statement.

The ratings agency expects a 7.5-8.5% range for China's real economic growth rate in 2012 and 2013, far lower than the brisk 10.3% average of the last 10 years.

Meanwhile, this week in the Bo Xilai saga, "princeling" Bo Guagua, son of the deposed Communist Party leader, made his first public statements since the scandal occurred. Bo, a student at Harvard's Kennedy School of Government, used the Harvard Crimson as a platform to address criticisms that he has a privileged and extravagant lifestyle.

Bo noted that his tuition at Harrow, Oxford, and Harvard was funded "exclusively by two sources - scholarships earned independently, and my mother's generosity from the savings she earned from her years as a successful lawyer and writer."

He also said that he has never driven a Ferrari, contrary to reports where fellow students at Harvard said they had spotted him in one. The Wall Street Journal does note, however, that three traffic tickets Bo incurred in 2010 and 2011 indicated that he was driving a black Porsche, which was registered to someone else at his address.

As the Chinese continue to watch the Bo Xilai saga unfold, they are also apparently heading out to catch James Cameron's 3D theatrical re-release of Titanic. While the Fox (NWS) and Paramount Pictures (VIA) production has performed modestly in the US during its second round in cinemas, it hit full speed in China. In its opening weekend, Titanic 3D chalked up $67 million in box office, making it China's largest opening weekend ever.

Why is Titanic so popular in the mainland? A People's Daily commentary explained that the Chinese prefer a reverse-Cinderella story, where a poor man and a rich woman fall in love against all odds. Titanic, thus, did well because it mirrored successful domestic productions that "cater directly or indirectly [to] Chinese audiences' psychology of a normal male hungering for the touch from a 'fairy.'"

Twitter: @sterlingwong
No positions in stocks mentioned.
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