Bloomberg News

Airlines Stoke ETF Slump as Crude Surge to Erode Profit: China Overnight

February 27, 2012

Chinese stocks traded in the U.S. fell for the third time in five days and the iShares FTSE China 25 Index Fund plunged the most in two weeks, led by airlines on concern rallying oil prices will eat into profit.

China Southern Airlines Co. (ZNH) and China Eastern Airlines Co. (CEA), the nation’s second- and third-biggest carriers by market value, tumbled in U.S. trading, pushing the Bloomberg China-US 55 Index of Chinese stocks traded in New York down 0.7 percent to 106.75 yesterday. Hong Kong-listed stock of Air China Ltd. (601111), the largest international carrier, dragged the iShares FTSE China 25, the biggest ETF in the U.S., down by the most since Feb. 10.

Crude soared 6.3 percent last week to the highest price since May, as escalating tension with Iran threatened supplies. The rally spurred a 2.9 percent increase in jet fuel in the week, with prices at a nine-month high in Singapore yesterday. World Bank President Robert Zoellick also added to pressure on Chinese equities, saying yesterday in Beijing that the Chinese economy will probably have a “soft landing.”

“Margins get hit at transportation stocks including airlines as jet fuel prices rose and they can’t raise prices by the same amount,” Dave Lutz, head of ETF trading and strategy at Baltimore-based Stifel Nicolaus & Co. said by phone yesterday. China will probably need to continue to “loosen monetary policy,” to sustain its level of economic growth, Lutz said.

The People’s Bank of China cut lenders’ reserve-requirement ratios for the second time in three months on Feb. 24 to help ease credit conditions in the world’s second-largest economy. Policy makers have kept benchmark lending and deposit rates unchanged since July.

Not Sustainable

Zoellick said China’s current economic-growth model isn’t sustainable in a speech based on a report by the IMF and Chinese state researchers. The nation needs to redefine the government’s role, alter the structure of state enterprises and gradually allow market-set interest rates, according to the executive summary.

Guangzhou, China-based China Southern released data on Feb. 16 that showed its load factor, a measure of occupancy, declined 3.7 percent in January from a year earlier, driven by a drop in cargo loads.

American depositary receipts of China Southern sank 4.3 percent to $24.22 in New York, the lowest level since Nov. 25. Each ADR represents 50 common shares in the company. The ADRs traded 1.3 percent higher than the company’s Hong Kong stock, which slumped 4.6 percent to HK$3.71, or 48 U.S. cents a share. Shanghai-traded stock of China Southern climbed for the fifth day in a row, adding 2.2 percent to 5.48 yuan, or 87 U.S. cents a share.

Oil Advance Bets

Oil for April delivery retreated 1.1 percent to $108.56 a barrel yesterday on the New York Mercantile Exchange, after reaching a nine-month high on Feb. 24. Prices have increased 9.8 percent this year.

Hedge funds and other large speculators raised wagers on rising oil prices by 11 percent in the week ended Feb. 21, according to the Commodity Futures Trading Commission’s Commitments of Traders report. Bets increased 26 percent over two weeks, the biggest gain since March.

ADRs of Shanghai-based China Eastern, each representing 50 common shares, dropped for a third day, losing 2.1 percent to $18.42, the lowest level since Feb. 1. The ADRs are trading 0.8 percent lower than Hong Kong-traded stock, which slid 0.7 percent to HK$2.88, the equivalent of 37 U.S. cents. China Eastern’s Shanghai-traded shares gained 1.9 percent to 4.39 yuan, or 70 cents per share, yesterday.

Elong Sinks

Air China (735) slumped 5.9 percent to HK$5.59 yesterday, the biggest drop since Oct. 18. It was the largest decliner on the iShares FTSE China 25 ETF, which dropped 1.1 percent to $39.71, the lowest level since Feb. 14. The slump trimmed the fund’s gain this year to 14 percent.

Elong Inc. (LONG), a Chinese online travel agency whose biggest shareholder is U.S. online travel agency Expedia Inc., sank 4.7 percent to a one-week low of $17 in New York. Beijing-based Elong said on Feb. 23 that sales will grow between 15 percent to 25 percent in the first quarter, after rising 27 percent in the last quarter of 2011 from a year ago to 158.2 million yuan ($25.1 million).

Elong’s bigger competitor Ctrip.com Inc. (CTRP) gained 6.3 percent to a $26.81, the highest level in a month.

Carson Block is the the short seller and analyst who sparked a 74 percent drop in Sino-Forest Corp. shares listed in Canada when he said the company misstated its business.

Spreadtrum Rebounding

His latest opinions aren’t getting the same reaction as they were in June when he told investors that Sino-Forest overstated its timber holdings. Focus Media Holding Ltd. (FMCN), which sank 39 percent when Block’s Muddy Waters LLC said on Nov. 21 that the Shanghai-based digital advertiser exaggerated its network, has since rebounded 52 percent.

Spreadtrum Communications Inc. (SPRD), a chipmaker in Shanghai, has increased 25 percent to $15.67, from $12.49 on June 28, when Block questioned its revenue. Focus Media and Spreadtrum say the firm’s assertions lack merit. Spreadtrum retreated 3.9 percent yesterday to $15.67.

SouFun Holdings Ltd. (SFUN), owner of China’s largest real-estate website, dropped 5.9 percent to $16.67, the lowest level since Feb. 15.

Some Chinese developers are allowing first-time homebuyers to delay down payments on homes in order to boost sales, China Business News reported yesterday, citing unidentified agents and sales people. Developers in cities including Nanjing, Shenzhen, Guangzhou and Wuhan sold some projects with a 10 percent down payment, the newspaper reported.

Sina Earnings

Chinese home prices recorded their worst performance in at least a year in January, as none of the 70 cities monitored by the government posting gains, according to data released by the National Statistics Bureau on Feb. 18.

China will release its official manufacturing index for February on March 1. The measure probably rose to 50.9 from 50.5 in January, according to the median estimate of 22 economists surveyed by Bloomberg.

Shares of Sina Corp. (SINA), which provides a Twitter-like service in China, snapped a five trading-day drop to gain 2.5 percent to $62.95 in New York yesterday.

In a statement issued after U.S. markets closed, Shanghai- based Sina said net income was $9.3 million in the fourth quarter, compared with the $10.4 million average forecast of 10 analysts surveyed by Bloomberg. The company expects sales in the first quarter to be between $78 million and $80 million. That compares with the average analyst estimate of $113.7 million.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net


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