Freedom Of The Hong Kong Press

 After the clipping of Mario Draghi's wings, and the European Central Bank is gaining support after losing it last week.

Writing for investorsintelligence.com, C. Dochio sums it up:

“The ECB's surprise rate cut and other stimulus measures initially resulted in weakness for the Euro. However, that slide was turned around in a dramatic fashion. Against the US Dollar, for instance, firm intraday support was encountered at $1.0822; close to the lows of the December/early-February trading band, with the rate jumping back up towards last month's high at $1.1376.

“However, volatility is continuing into Friday, with the single European currency trading at $1.1109 a short time ago. We would stand aside until the dust settles; also noting the lack of activity following the last upward dynamic by the Euro on 3 December. “ (We trade ideas with investorsintelligence, a British daily financial blog.)

Boosting stocks last week was the latest somewhat ambiguous word form the International Energy Authority in Paris. The IEA noted that oil prices have “recovered remarkably” and said there are “signs that crude prices have bottomed out” like “possible action by oil producers to control output; supply outages in Iran, Nigeria, and the Emirates, and US$ weakness.” But it doesn't expect a new supply-demand balance before the end of this year.

Perhaps more importantly, Goldman Sachs put out a bullish report on oil prices giving a target price per barrel for Q2 of $25-45. Last week, the London price was $38.85/barrel. Also boosting oil price is the mano-a-mano against the US Administration's methane emissions rules on existing oil and gas wells by the American Petroleum Institute. Cleaning up the gas would discourage the shale revolution which has lowered energy costs and increased US energy independence, the API charges. This is separate from the lawsuit against the Bureau of Land Management regs on fracking. The oil industry is fighting against measures to reduce environmental damage from fracking, but they will ultimately increase the price of oil and natural gas.

The Chinese crackdown in Hong Kong took down social media on the websites of South China Morning Post and Caixin. Both were suffering blockages and deletions of negative articles about Chinese policy as the Chinese Communist Party holds its national congress.

Rumor has it that other global websites, of The Financial Times, Bloomberg, and Reuters were also taken off-line in Hong Kong.

When I last was in China, in 2008, I used Deutsche Welle and NZZ (in German) to keep up with news from the real world. After we returned to Hong Kong the normal internet was available. Now China is changing course and Hong Kong's free-wheeling press and netizens are a target.

Beijings Cyberspace Administration says internet service providers are responsible for “removing accounts which break the law or are harmful”. Both blocked sites have reported on the disappearance of 5 Hong Kong bookstore owners who sold books critical of Beijing. SCMP was long a champion of Chinese dissidents starting with the 1989 Tienanmin Square uprising which it commemorates on every anniversary.

However Alibaba (BABA) is now in the process of buying control of the SCMP, whose shareholders will vote on the issue next week. BABA controls Weibo, one of the Chinese sites where blockages are occurring. Its stock is listed in the US.

Under the rules for its takeover of Hong Kong with Margaret Thatcher, China agreed not to interfere with Hong Kong politics. But the present regime is not respecting international accords as it clings to power in a declining economy.

The other internet blockages are on WeChat which belongs to Tencent, HK-700, which we recommend. TCTZF in turn is 34% owned by South Africa's Naspers, NPSNY, which we also tip. They were up strongly last week, on the assumption that the Chinese regime will have to pay handsomely to get control. Tencent also has huge global bond debts which can suffer from Chinese pressures to self-censor. 

*Nokia's (NOK) future is not exclusively tied to the spread of 4G and 5G to Chinese and Japanese cellphone users whose markets are hard to win. However, other countries where telephone exchange markets are growing range from India to Nigeria, from The Philippines to Thailand.

Moreover, thanks to its buyout of Nokia Siemens network and its more recent merger with Alcatel-Lucent (successor to Bell Labs), the Finnish firm has a good chance of picking up US business too. Among others building out their American cell network is comeback-kid Blackberry (BBRY). Maria, the most sophisticated smartphone user I know has just gone back to crackberry because of concerns about security vulnerabilities with more popular rivals. It is not going to use operating systems from existing cellphone carriers but is working with NOK to update its old one.

Finance

*Old Mutual plc. (ODMTY), listed in London and Johannesburg, reported last week and the numbers were good. Its pretax operating profit rose 11% in constant currency to £1.7 bn, or 4% in constant currencies. It also announced a 2^nd interim dividend at 6.25 pence flat from last year bringing the total payout to 8.9 pence for the year, up 2%.

Old Mutual's key fund management arm boosted its assets under management by 8% in constant currencies or 6% in reported ones, to £303.8 bn. Net client cashflow last year rose 40% (in part because of acquisitions) to £3.5 bn. Inflows in the UK rose 35% to £2.7 bn. Profit in its British OM Wealth operations grew 74% to £33 mn helped by new laws allowing retirees to buy their own pension plans.

Of course the drooping South African rand hurt results for 2015, and things will get even worse this year as Zuma's government defects grow. Old Mutual was founded in 1845 as an insurance company in Cape Town but moved its HQ to London.

The big news, leaked all over the British press in the last week, is that ODMTY plans to split itself into 4: OM Emerging Markets (OMEM, insurance in Africa); OM Wealth (OMW, UK weath management); Nedbank (South African bank); and OM Asset Mgm (OMAM, already partly spun off, operating funds in mostly the US, but also Asia, and Europe.) The CEO of OMW, Paul Feeney claimed the results showed it had a “successful business strategy” and “a very exciting future.” Its wealth management arm beat forecasts :despite being faced with some of the most difficult global stock markets [Feeney had] ever seen.”

CEO Bruce Hemphill, who joined OML in Nov., said the existing company has “a costly structure with insufficient synergies to justify these costs.”

The confirmation of this program leaves many questions unanswered:

• How the shareholding reduction will be done;

• How the separation of Nedbank which ODMTY does not want to buy from other existing shareholders will work short-term and longer. Eventually, ODMTY wants to be a minority shareholder in the bank but it now owns a majority. But we don't want to own Nedbank if it is listed only in Johannesburg;

• How it will link to OMEM;

• What fee revenues can be collected from the AUM side to support the dividend and generate the cash and liquidity we are used to;

• Will it sell OMW for which a US-offshore bid has been reported at around £3.5 bn?

• How will the non-emerging markets businesses provide the target 2.5-3.5x dividend cover;

• Who gets the Solvency 2 rule capital ratio surplus. This is a low £1.6 bn after excluding the £800 mn surplus at OMEM and Nedbank. It is currently at 135% under the new European rules and it is hard to figure out where more surplus can come from at the parent level.

The breakup is supposed to be done by the end of 2018. This year, it said “will be challenging.” Having listed issues with the breakup, I count on the conference call or Martin Ferera to get answers.

Last week, Martin warned that Nigeria and South Africa have been unable to resolve a trade dispute between the two largest African countries, which let Nigeria to impose a $3.9 bn fine against South African firms and block their access to foreign currency. The targets: MTN (cellphones); grocery chain Woolworth; food and dairy producers Tiger, and Clover; fashion retailer Truworth; real estate and other South African investors.

A visit by Zuma with Nigerian Pres. Muhammadu Buhari Tuesday failed to resolve the dispute. Martin writes: Nigeria is trying blackmail or greenmail and Zuma is ill-equipped to deal with it. Old Mutual has a growing albeit small Nigeria presence but is likely to hit the pause button now.

OMT is one of the firms under UK investigation for how it treated closed-book customers. This refers to policies sold in the 20^th century which are closed to new customers post-millennium. ODMTY said the fact that there is an investigation doesn't mean rules were broker.

OML also plans to spend a whopping £450 mn upgrading its investing platform to International Financial Data Services, and the move will not be completed as planned this year, but will now be delayed until H2 2018. It has already spent £177 mn on the platform upgrade. Mr Feeney defended the spending by claiming half the other managers are “kicking the can down the road” and will be sorry they haven't tackled it. (Mr Feeney like Justin Trudeau needs to get a better shave.)

The first to call OML a buy was Shore Capital with a target price of GBX185. The 10:1 ADR TP is $26.20 vs a current price of $20.21, down 0.5% on the confirmation that its new CEO wants to split the company 4 ways.

While we are planning to exit, we want to wait until we are in the green with this share. It fell 1.78% last week in London.

Drug Stocks

*Also reporting last week was Bavarian Nordic (BVNRY) which has gained from partnerships with majors like Johnson & Johnson (JNJ) and Bristol Myers Squib (BMY). We reported earlier on the summary version of its results which showed a 4^th year of more than DKK 1 bn in revenues and a break-even profit result plus some odd numbers under Danish rules called cash preparedness.

What is new is being introduced to new executive suite managers, and getting a firmer handle on 2016. The Danish firm has a production process turning out 28 mn doses of smallpox jabs backing its research into other inoculation.

By the end of this year, BVNRY expects to have more than 20 drug trials going on for its vaccines, an all-time high. These will include combination therapy using its prostvac prostate cancer jab to start phase III this year.

It works in other cancers like bladder and solid tumors, smallpox jabs for immune-suppressed people and babies, and plagues like Ebola and Marburg (MVA-BN, licensed to a JNJ sub, Jensen for these diseases and as a jab against human papilloma virus given to pre-teens ), and Zika. It also uses its expertise in other pox viruses beside MVA-BN, like vaccinia (non-reproducible smallpox) and fowlpox to develop jabs.

It is also investing in immunization against respiratory syncytial virus which infects 30 mn people annually, causing as many hospitalizations and deaths as flu—but for which there is no vaccine. This one it is financing solo so far.

*Easy come; easy go. Both shares and warrants of Benitec Biopharma at first continued their rise last week. With the main market in Australia now off limits until late Monday our time, this amounts to a buying panic here but on low volumes and still with high spreads on the warrants which closed at $1.45. After this note was written the warrants dropped 15.62% to $1.18 as somebody realized they would incur a huge weekend risk buying last week.

*Reckitt Benckiser (RBGLY) was upgraded to buy by Deutsche Bank with a target price of GBX 7000. Its 5:1 ADRs would only gain $1 as they are already at $19.

*MorphoSys's new antibody for sporadic inclusion body myositis, cachexia in cancer, and sarcopenia, and muscle atrophy is licensed to Novartis (NVS). The Swiss drug maker is likely to get good sales for Bimigrumab, and with these diseases of progressive muscle weakness, according to analysts examining MPSYF's phase 3 trial results.

*The ultimate insider, CEO Sir Andrew Witty of GlaxoSmithKline (GSK) bought more shares. Alas, he didn't buy very many of them, $12,600 worth. He may have been reacting to GSK ditching its mesothelioma trial by giving 180 days notice to Five Prime Therapeutics, which licensed the cancer drug FP-1039 to GSK. Another FPRX cancer drug is still in trials with Bristol Myers and it is still in a deal over respiratory drugs with GSK. The linkage came when it bought Human Genome Sciences in 2012, before Witty got the top job.

*Irish Alkermes will be webcasting its presentation at the Barclays Healthcare conference in Miami next Weds at 8:30 am EST. The stock was up 4.7% last week but still way under water for us.

*Mylan options begin trading in Israel and the Irish firm now listed on the TASE may be able to pick up businesses TEVA has to divest. It tried to buy up Teva unsuccessfully last year.

Hot Latinas

*Cemex CXs selling its Thai and Bangadeshi cement companies for $53 mn to cut its debts. Buyer is Siam City Cement plc, the leading cement firm in southeast Asia. It may also sell its Malaysia cement sub. Sales in the area account for less than 1% of turnover and have been falling. The capacity of its plants in Thailand and Bangladesh is 1.2 mn and 520,000 metric tonnes respectively.

According to what CX told Eduardo Garcia in Mexico City, the operations are not very important to the company, which is the largest cement-maker in the Americas. (Eduardo edits sentidocomun.co.mx with which we exchange articles.)

*Latin America is back in the plus column with VALE hitting $4 again. VALE expects to restart its JV with BHP Billiton, Samarco (where the tailings dam flooded in Nov.) by Q4 this year with output of 19 mn metric tonnes, a third lower than before the disaster. It must win clearance from the Minas Gerais regulators to reopen.

*Santander, a heavily Latin Spanish bank, is up nearly 3%.

*Bank of Nova Scotia (BNS), another heavily Latin Bank, if Canadian, is up 1.8%. We wrote about why to buy it.

*SoQuiMich (SQM), the Chilean fertilizer and lithium firm, is over $20. We bought SQM at under $16.50.

Oil

*BP plc (BP) gained after a US district court rules that it cannot be sued by energy and oil field services firms over actions by a third party, the US govt, after the Deepwater Horizon oil spill. The UK firm is only responsible for oil spill losses it caused and now what happened afterwards.

*Ecopetrol is up 2.9% on oil price euphoria in London. It is up 3.5% here.

Cars

*Abhimanyu Sisodia reports good numbers from India on Tata Motors (TTM) confirming what we got from Trefis analysts. He writes: TTM February global sales rose 17% to 99,842 vehicles primarily thanks to Jaguar-Landrover sales up 31% to 52,313.

*Autoliv (ALV) insider Robert Alspaugh, on its board, sold $72.6 thousand shares. He is on the board. ALV was up 2.23% last week.

Funds

*What will happen at Valeant (VRX) appears to depend on Bill Ackman's moves. The activist manager of our Pershing Square Holdings (PSH) fund got a board seat for an M&A specialist lawyer this week and has called for VRX to spin off or sell its Bausch & Lomb vision business. Mike Pearson, now back in the hot seat as VRX CEO has said he will not sell the eye line to cut debt.

Canadian reader Maurice calls the likely battle between the two men “a test” of Ackman's claims that he can reform companies, and hopes he will not simply sell. VRX reports Mar. 15. A fund manager at Orange Peel Investments on Seekingalpha.com argues it will agree to divest stuff. PSH picked up some gains last week, but it is still deeply in the red for us.

*Analysts at Evercore ISI are telling investors to sell stocks and buy gold. “The cross-asset tehnicals dictates that we abandon our tactical view (S&P at 2030) in favor of a more defensive posture. Our structural bear market call with downside to 1670 remains intact. Sell global equities and commodity currencies and buy gold.” That means the SPDR Gold ETF, GLD.

*GlobalX MSCI Argentina ETF is now around $19, well into the black for us. ARGT was a macro pick by me. It doesn't suffer weekend panic like our Orocobre from Australia, ORL-Toronto. Its ORE ADR has stopped trading and you have to go Canadian now.