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China Watch: Nokia's Lumia Supply Crunch Could Hurt Sales This Chinese New Year


Yum Brands and Baidu also make the news.

Heading into the Chinese New Year weekend, China received further confirmation that its economy is on the rise again. The country's exports and imports both grew in January, with exports climbing 25% year-on-year, while imports jumped 28.8%, which indicated that domestic and overseas demand were both on the way to recovery.

"Overall this says there is no need to worry about the strength of China's recovery," said Sun Junwei, China economist at HSBC in Beijing, according to Reuters.

Here is this week's China business headlines:
Yum Brands (NYSE:YUM): The parent company of KFC, Pizza Hut, and Taco Bell had a disastrous fourth quarter, thanks largely to the fallout over a food safety scare in China. KFC's January sales in China dropped a stunning 41% thanks to "adverse publicity" regarding the inappropriate antibiotics use of some of KFC's chicken suppliers. Overall, Yum's year-to-year fourth quarter same-store sales in China dipped 6%

Yum also warned that it projects a "mid-single digit" decline in 2013 earnings per share, when it had previously forecast 2013 earnings per share growth of at least 10%. If the company's current projection turns out to be accurate, it would be the first time in 12 years that Yum failed to provide double-digit earnings per share growth.

"The past seven weeks of media attention have been intense and negative toward the KFC brand image. Even though this is a very disappointing setback, we are more committed than ever to continue to strengthen our efforts, restore the confidence of our customers, and win back their brand loyalty," said Yum in its earnings release. The company also plans to launch a new ad campaign in China around the Lunar New Year to restore the reputation of KFC as a chain of high food quality.

Following Yum's earnings release, the stock was downgraded to Neutral from Outperform by Baird and to Neutral from Buy at Goldman Sachs.

Nokia (NYSE:NOK): A lack of supply for Nokia smartphones? It's hard to envision such a situation considering the woes the Finnish company has had with iOS (NASDAQ:AAPL) and Android (NASDAQ:GOOG) devices having eaten away at Nokia's smartphone market share. But this is the case currently in China.

Pushing the Nokia Lumia 920T for the Lunar New Year, a strong period for retail sales comparable to the Christmas season in the US, China Mobile (NYSE:CHL) had ordered 90,000 of the device through January 30, but Nokia only shipped 30,000, said Li Yan, a China Mobile spokeswoman.

"Nokia's production is still very low and supply isn't meeting demand at this point," Li told Bloomberg. "Many of our stores don't have any units."

Nokia declined to explain the Lumia shipping shortfall to China Mobile, but Chief Financial Officer Timo Ihamuotila acknowledged in a January conference call that his company was undergoing supply constraint issues.

"We are now building more capacity as we speak to match the demand, and we would expect that at some point in not too distant future, we would be in a situation where we are no longer constrained," said Ihamuotila.

Baidu (NASDAQ:BIDU): China's leading Internet search company reported a 36% increase in fourth-quarter net profit to $1.28 per share on a 42% jump in revenue, but analysts were unimpressed as this was Baidu's slowest rate of profit growth in nearly four years.

"The short-term prospects for Baidu are pessimistic," Eric Qiu, an analyst at Guosen Securities Co. in Hong Kong, said in a note, according to Bloomberg. "Years of rising ad prices are coming to an end."

Analysts have been questioning Baidu's ability to monetize mobile traffic, as users are increasingly accessing the Internet using smartphones, and the company acknowledged the importance of the market.

"Our key strategic focus in 2013 is mobile," said Baidu Chief Financial Officer Jennifer Li in an earnings call. Still, Baidu's CFO warned that the company's mobile monetization efforts could take a couple of years before they took off.

"There's a lot of work we need to do to make [mobile] a better channel for our advertisers," said Li on the call. So far, Baidu said that its mobile channel has not provided any "meaningful" revenue contribution.

Japanese automakers: Chinese customers are getting over the Sino-Japan territorial dispute, it appears from January auto sales. The major Japanese car makers reported double-digit gains last month, the first time they have notched year-on-year growth in five months.

Nissan (PINK:NSANY) reported a 22% China sales jump to 115,700 vehicles in January, while Honda (NYSE:HMC) also saw a 22% climb to 47,248 vehicles.

But before the companies can start popping champagne, analysts cautioned that the rise can partly be attributed to a calendar shift. This year, the Chinese New Year, a typically slow sales week, falls in February when it occurred in January last year.

"Japanese car makers have been winning back Chinese consumers thanks to their efforts and given that quarrels between the two countries have subsided ahead of the Lunar New Year holiday, but it is too early to be optimistic about their China sales this year," Zhang Xin, an analyst at Guotai Junan Securities, told the Wall Street Journal.

Zhang also warned that the ill effects from Japan and China's territorial dispute over the Senkaku (or Diaoyu in Chinese) islands in the East China Sea would not dissipate so easily, saying, "The disputes over the Diaoyu islands will be a long-term overhang to Japanese car makers."

Twitter: @sterlingwong
No positions in stocks mentioned.
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