FT : China’s Huarong issues profit warning on property sector woes

China’s Huarong issues profit warning on property sector woes
Downturn for developers stymies recovery at biggest bad debt bank despite $6.6bn state-led bailout

China Huarong Asset Management, the country’s largest distressed debt investor, has issued a profit warning on surging credit impairments and property market jitters less than a year after a $6.6bn state-led restructuring.

Credit impairment losses “increased significantly” in the first six months of the year, Huarong said in a filing late on Tuesday, as it warned of a net loss of Rmb18.9mn ($2.8mn) for the first half of 2022.

The company attributed the loss to the “impact of volatility in the capital market and downturn in the real estate market”, adding that the recurrence of Covid-19 cases, geopolitical conflicts and pressure on the economy were also to blame.

Huarong, one of China’s “Big Four” asset management companies, needed a government-orchestrated bailout last year after delaying disclosure of a $16bn loss for months.

The company now counts state-owned investment company Citic Group as its largest shareholder and is divesting its non-core business units including banks, brokerage, trust and consumer finance entities as regulators urge big AMCs to streamline their operations to reduce financial risk.

In a separate filing on Tuesday, Huarong said it planned to transfer a 76.8 per cent stake in Huarong Trust to China Trust Protection Fund for about Rmb6.15bn.

Investors are divided over the long-term prospects for Huarong and the Chinese distressed debt industry. The company’s restructuring has been complicated by the 2021 execution of Lai Xiaomin, its former chair, who was found guilty of taking $280m of bribes during his tenure as chair.

The latest profit warning has added to concerns over the exposure of the big asset managers to cash-strapped property developers through their restructuring businesses for distressed companies. More than half of Huarong’s restructuring businesses’ assets were related to the real estate and construction sectors at the end of 2021, according to company filings.

That level is about the same at Cinda Asset Management, a smaller rival, which warned in July that its six-month profit would drop 30-35 per cent, citing “certain financial assets measured at amortised cost held by the company are under greater pressure”.

“Although most of these credit exposures are for projects and are well-collateralised with low loan-to-value ratios, they are vulnerable to a plunge in property sales and a decline in property prices,” analysts from Moody’s Investors Service said.

How Huarong restructures its business after the capital injection can set an example for other AMCs, said Yang Yewei, analyst at Guosun Securities.

Great Wall Asset Management, another asset manager that held off releasing its 2021 annual report in June, is also expected to gain similar support and go through debt restructuring, Yang said. The uncertainty has triggered turbulence in the offshore bonds of Chinese AMCs, sending some of Huarong’s perpetual bonds down nearly 20 per cent in July.

But Huarong remained optimistic about its prospects under Citic’s leadership.

One person close to the company said the past six months had “laid a solid financial foundation for subsequent disposals of its risk assets” despite the loss.

Huarong has lined up distressed assets worth Rmb100bn for resolution, the person added, which could contribute to the company’s future cash returns.

To show its determination to turn back to the core business, Huarong said it would “make every effort” to separate the risks, resolve them and relieve the difficulty for real estate-related projects, according to its filings.

>>> US After Hours Summary: A +6.4% higher on earnings; SAVA +21% higher on two

After Hours Summary: A +6.4% higher on earnings; SAVA +21% higher on two insider purchases; JKHY -4.8% lower on earnings

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: A +6.4%

Companies trading higher in after hours in reaction to news: SAVA +21% (discloses two insider purchases), CCRN +6.2% (authorizes new $100 mln share repurchase program), QTRX +4.8% (discloses insider purchases), ICPT +2.9% (ICPT settles patent litigation with RDY), FNF +0.6% (acquires AllFirst Title Insurance Agency), HYZN +0.4% (to delay 10-Q filing), WBA +0.3% (OPCH announces 11 mln share offering by WBA), PAA +0.2% (exploring expansion of its Fort Saskatchewan facility), SHEL +0.1% (to shut Gulf of Mexico crude pipelines, Odyssey and Delta, for two weeks, according to Reuters)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: JKHY -4.8%

Companies trading lower in after hours in reaction to news: ASLE -8.4% (selling shareholders to offer 4.25 mln shares in secondary offering), OPCH -5.1% (OPCH announces 11 mln share offering by WBA), OSH -3.8% (files for stock offering by selling shareholders), IMAB -2.1% (IMAB amends license and collaboration agreement with ABBV), EVBN -0.3% (increases dividend), DDOG -0.1% (announces expanded monitoring for Microsoft SQL Server and Microsoft Azure database platforms), TSLA -0.1% (First Model Y deliveries in Australia and New Zealand, according to tweet), VSH -0.1% (approves repurchase of an additional 6 mln shares)

Reuters - Dan Loeb can help Disney get with the program

Dan Loeb can help Disney get with the program

NEW YORK, Aug 15 (Reuters Breakingviews) - There’s a new character at Walt Disney (DIS.N) that can help it generate more money. Dan Loeb, the decidedly unbashful hedge fund manager who runs Third Point, has taken a nearly $1 billion position in the entertainment empire, after liquidating its former stake earlier this year. His ideas for the company are far from goofy.

The pushy investor sent a letter read more to Disney Chief Executive Bob Chapek on Monday that started by congratulating him. Chapek managed to knock streaming subscribers out of the park last week by disclosing the $222 billion company had as many customers as Netflix (NFLX.O) does, with Disney+, Hulu and ESPN+ totaling 221 million.

Meanwhile, incumbent broadcasters are trying to make the transition from fading television assets – Disney also owns U.S. network ABC – and streaming. To cope with the challenges, Loeb suggests spinning off ESPN to whittle down Disney’s $46 billion in debt. Morgan Stanley estimates the sports network will generate some $4 billion in EBITDA this year. On a multiple of 10 times – higher than rival Fox (FOXA.O) and lower than Ultimate Fighting Championship owner Endeavor (EDR.N) – suggests ESPN is worth about $40 billion.

Loeb is also advocating that Disney consider buying the rest of Hulu’s 33% stake it does not own from Comcast (CMCSA.O). The two companies have an agreement in place to sort out a deal by January 2024 for a minimum total equity value of $27.5 billion. Having full ownership would give Disney leeway to experiment with the more adult-oriented programming, for instance “Only Murders in the Building,” and complement Disney+ offerings from the Marvel and Star Wars franchises.

Streaming bellwether Netflix has been clobbered after losing more than 1 million subscribers during the first half of this year and causing a ripple of schadenfreude across Hollywood. In theory, having a sputtering but cash-generating asset would help offset losses from streaming. Indeed, Disney’s direct-to-consumer division lost $1 billion in the quarter ending July 2, more than three times what it lost a year earlier. But Disney also has a strong theme parks division, which accounted for more than 60% of Disney’s operating income last quarter. That gives Chapek enough slack to cut the cord and make shareholders happy.

>>> US Close Dow +0,71% S&P +0,19% Nasdaq -0,19% Russell -0,04%

Closing Stock Market Summary

The stock market opened on a soft note before a midmorning rally recouped early losses. The bounce had limited staying power, as the major indices fell sharply with about an hour left in the session before moving sideways into the close. The late afternoon selling efforts coincided with the S&P 500 testing its 200-day moving average (4,326.11) at its intraday high (4,325.26), where it found resistance and sold off after that.

The midmorning rally was fueled by retailers trading up in solidarity with Dow components Home Depot (HD 327.38, +12.77, +4.1%) and Walmart (WMT 139.37, +6.77, +5.1%) after the companies reported better-than-expected results for Q2. The SPDR S&P Retail ETF (XRT) closed up 4.0% on the day. 

The S&P 500 consumer discretionary (+1.1%) and consumer staples (+1.2%) sectors closed at the top of the leaderboard thanks to gains in their aforementioned components. 

Also, highly shorted stocks like GameStop (GME 42.19, +2.51, +6.3%), Blue Apron (APRN 5.38, +0.75, +16.2%) and Bed Bath and Beyond (BBBY 20.65, +4.65, +29.1%) made big upside moves today. The size of the moves points to a significant short-covering element in this session's rally. 

Weakness today was due to lagging mega caps with the Vanguard Mega Cap Growth ETF (MGK) closing down 0.1% versus a 0.3% gain in the Invesco S&P 500 Equal Weight ETF (RSP) and a 0.2% gain in the S&P 500.

Semiconductor related stocks were another specific area of weakness with the PHLX Semiconductor Index (SOX) closing down 1.0%. These stocks also brought down the performance of the information technology sector (-0.3%), one of the top laggards today. 

The energy sector (-0.3%) was another top laggard amid falling oil prices. WTI fell 3.4% to $86.28/bbl. Unleaded gasoline futures fell 2.1% to $2.89/gal.

Separately, Treasury yields made upside moves today. The 2-yr note yield rose six basis points this session to 3.24% while the 10-yr note yield rose three basis points to 2.82%.

Ahead of tomorrow's open, Lowe's (LOW), Target (TGT), and TJX (TJX) are all set to report earnings.

Looking ahead to Wednesday, market participants will receive the following economic data:

  • 7:00 ET: Weekly MBA Mortgage Index (prior 0.2%)
  • 8:30 ET: July Retail Sales (consensus 0.2%; prior 1.0%) and Retail Sales ex-auto (consensus 0.1%; prior 1.0%)
  • 10:00 ET: June Business Inventories (consensus 1.5%; prior 1.4%)
  • 10:30 ET: Weekly crude oil inventories (prior +5.45 mln)
  • 14:00 ET: July FOMC Minutes

Reviewing today's data:

  • Housing starts in July decreased 9.6% month-over-month to a seasonally adjusted annual rate of 1.446 million (consensus 1.543 million) from June's upwardly revised rate of 1.696 million (from 1.559 million) while building permits -- a leading indicator -- were down 1.3% month-over-month to a seasonally adjusted annual rate of 1.674 million ( consensus 1.647 million) from June's upwardly revised rate of 1.696 million (from 1.685 million).
    • For the second month in a row, the headline miss has been softened by upward revisions to last month's figures. This is masking the fact that housing starts are now at their lowest level since early 2021 while building permits are also receding from a high that was seen earlier this year.
  • Total industrial production increased 0.6% month-over-month in July ( consensus 0.3%) after an upwardly revised flat reading in June (from -0.2%). The capacity utilization rate increased to 80.3% (consensus 80.2%) from a downwardly revised 79.9% (from 80.0%) in June.
    • The key takeaway from the report is that total production growth was supported by a solid increase in motor vehicle assemblies, which is fueling hopes that the semiconductor shortage is easing its grip on auto production.

Dow Jones Industrial Average: -6.0% YTD
S&P 400: -7.3% YTD
S&P 500: -9.7% YTD
Russell 2000: -10.0% YTD
Nasdaq Composite: -16.3% YTD

FT : Darktrace/Thoma Bravo: cash bid would chase away the shadows

Darktrace/Thoma Bravo: cash bid would chase away the shadows
The darkest cloud shadow drifting across the landscape is controversy over Mike Lynch

Darktrace promises to identify threats lurking shadily in IT systems, as its name implies. The UK cyber security group has some shadows of its own. The business is something of a black box and shareholder Mike Lynch is fighting extradition to face criminal charges in the US. The volatile shares are twice their float price but have halved since their September peak.

Thoma Bravo may offer investors a way to step back into the light. The US buyout group has made a bid approach. This lifted the stock, valuing the group at £3.4bn.

Broadly, cyber security is a good investment in a dangerous era. The financial metrics of Darktrace are up there with highly rated peers. Yet even after the pop from a potential takeover offer, the shares were valued at just six times 2023 revenues. That was two-thirds lower than CrowdStrike of the US.


The darkest cloud shadow drifting across the landscape is controversy over Lynch. Earlier this year, he lost a case brought by Hewlett-Packard. The legacy IT group bought software business Autonomy from him and others for $11bn in 2011. HP’s successor claims the value was fraudulently inflated.


Lynch has no management role at Darktrace. But he helped create the business, which employs several ex-Autonomy staff, including chief executive Poppy Gustafsson.

Critics have questioned Darktrace’s financial reporting as they did that of Autonomy. Why, for example, is R&D spending — which is equivalent to 13 per cent of sales — only half what CrowdStrike spends? Higher reliance on artificial intelligence and lower UK wages are questionable justifications. Short seller ShadowFall also thinks customer churn rates are higher than officially stated.



Thoma Bravo will know all this. It will also be aware that Darktrace sales still rose by almost half last year.

The buyout group has stumped up large premiums for its growing cyber security portfolio. Public investors should also seek a decent mark-up on the rolling average price of this volatile stock. Lynch’s 4.3 per cent stake is at present worth £146mn. His legal fighting fund, which is already substantial, may be about to get bigger.