/ thematic-hk

11 Hong Kong Stocks that do business with Venezuela

Venezuela had its elections over the weekend. Nicholas Maduro, the existing president won a new 6 year term. Maduro is the leader of the leftist party and successor to Hugo Chavez, after the former leader died of cancer in 2013.

The opposition has denounced the elections, calling them a show to prop up a dictator.

Venezuela has been battling with rampant inflation and an economic crisis. Foreign sanctions have been hurting the economy for a while. Maduro’s re-election has caused many to speculate that tougher sanctions are to follow.

With that, we decided to look at which Hong Kong listed companies have exposure to Venezuela, if at all. The nation’s economy is largely driven by petroleum, which accounts for more than 50% of GDP and 95% of exports. Unsurprisingly most companies we found were in the energy sector.

Methodology

In total we found 18 companies that mentioned Venezuela in their latest annual reports.

Of these, 6 companies had senior staff or board member biographies that contained Venezuela. 1 company mentioned in their ESG report that they hired staff from a variety of countries, including Venezuela, presumably to showcase their equal opportunities hiring policy. These companies were excluded from the results as there were no obvious business ties to Venezuela.

Notably, 3 of these companies were Cheung Kong companies. 1113 CK Asset Holdings, 1038 CK Infrastructure Holdings, and 775 CK Life Science Holdings shared a single independent board member, Colin Stevens Russel, the former Canadian ambassador to Venezuela.

Of the 11 remaining stocks we found that 2 seemed to no longer derive any revenues from Venezuela. Of those that did, most companies had very little exposure to Venezuela by revenues, especially those involved in retail. We’ve therefore split the list into three categories; Business Suspended, Retail, Energy & Construction.

Results

HK Stocks that are Business Suspended with Venezuela
553 PANDA Electronics — The company is involved in the manufacturing of electronic goods. Products range from mobile phones to satellite and mobile communication solutions. One of their product lines is the manufacture of automatic ticket vending machines for metro systems around the world. Most of the sales are in Mainland China but they do export to Taiwan, Hong Kong, India, Thailand, Venezuela and United Arab Emirates. From what we can gather, there have been no new sales to Venezuela in the past year. Even if there were it appears it would be a fraction of their total business so we have placed them in this category. [Latest Annual Report]

0206 TSC Group Holdings — the company is involved in the oilfield industry with 34% of revenues coming from Capital Equipment (like drills), 59% from Oilfield Expendables, and the 6% from Engineering. The Oilfield Expendables business had dealings with PDVSA, Venezuela’s state owned oil company but they decided to suspend further business due to;

political instability and uncertainties in Venezuela.
This caused revenue for the segment to drop 26% year-on-year.

Digging into old news reports (in Russian) we found that TSC had signed 6 contracts in Venezuela worth $60 million in 2015. Presumably these are the contracts that got suspended. [Latest Annual Report]

HK Stocks that sell Retail products to Venezuela
0393 Glorious Sun Enterprises — Fashion retailer in the casual wear segment. They operate using franchise models in certain overseas markets. The annual report mentions that franchises in the Philippines and Venezuela did not perform well, the latter being of no surprise. It’s unclear how much of the company’s revenues are generated from overseas franchise operations, let alone Venezuela. [Latest Annual Report]

0592 Bossini — Hong Kong fashion retailer. Out of 940 stores worldwide, 656 are franchised, and 6 of those franchises are in Venezuela. It’s safe to assume that performance would have been poor, but at 0.6% of the retail footprint, and probably less by volume, it’s likely immaterial to the top line. [Latest Interim Report]

1338 Bawang International — Bawang are a Chinese Shampoo brand. They also sell body wash, toothpaste, and a variety of hair products. While most of the sales are in Mainland China, they do export to Hong Kong, Singapore, Thailand, Malaysia, and Venezuela. Venezuela accounts for RMB668,000 of sales vs. RMB264,000,000 total, or 0.25% of sales volumes. [Latest Annual Report]

HK Stocks that sell Petroleum or Construction related services to Venezuela
0857 PetroChina — One of the largest Oil & Gas companies in the world. Of their RMB2 trillion in total revenues, RMB721 billion is from ‘Other’ geographies. Of the RMB1.9 trillion in Non-current assets, RMB219 billion are from ‘Other’ geographies too.

Digging into the notes to the financial statements reveals that ‘Other’ geographies consist of Kazakhstan, Venezuela, and Indonesia. It’s unclear what the exact breakdown between these economies is but it’s reasonable to assume that the impact is at least a few percentage points. [Latest Annual Report]

3996 China Energy Engineering Co — The Company is a comprehensive service provider for the energy industry. They are engaged in construction, equipment manufacturing and investment operations, and is one of the largest integrated solution providers in the industry both in China and abroad.

Successfully won a bid for output lines of heavy oil power plant in Barinas, Venezuela. This deal is part of their equipment manufacturing business that accounts for RMB12 billion in sales vs. RMB234 billion total. In other words, this deal represents an unknown portion of a business line that generates 5% of the company’s revenues. [Latest Annual Report]

0267 CITIC — A diversified conglomerate. Their annual report mentions a few accolades in connection with Venezuela under their CITIC Construction segment;

The Company’s Air Force and Navy Command Headquarters Building Project in Venezuela was named the Structural Great Wall Cup: Golden Quality Award Project in 2017–2018 by the Beijing Quality Construction Evaluation Committee.
Tiuna Social Housing Project, Venezuela. Maduro was at the opening ceremony and expressed his appreciation of CITIC Construction its contributions to the country’s Gran Mision Vivienda Venezuela (GMVV) housing programme.
They regional revenues from Latin America to be 24% of the HKD9.5 billion in total revenues. However, it’s unclear how much of this is from Venezuela.

Total revenues for the conglomerate were $450 billion. This implies that even if LatAm sales were 100% from Venezuela, the impact is at most 0.5% of total revenues.

[Latest Annual Report]

1938 Chu Kong Petroleum and Natural Gas Steel Pipe Holdings — As the name implies, the company manufactures steel pipes. They are the largest manufacturer and exporter of longitudinal welded steel pipes. Their annual report lists 1 Water Irrigation Project in Venezuela. However, the capacity is relatively low and it’s one of many global projects listed. It’s fair to assume that Venezuelan sales are not material to their business. [Latest Annual Report]

1829 China Machinery Engineering Corporation (CMEC) — a construction and engineering company. Operates through a subsidiary in Venezuela ‘CMEC Engineering, C.A.’, incorporated March 11, 2011. In their annual report they mention ‘Venezuelan Central Power Plant. №6 600MW steam turbine generator block project of the central power plant in Venezuela’. South America accounts for 14.7% of the company’s RMB23 billion in total revenues. Of this, Venezuela revenues are RMB705 million, or 2.9%. It’s worth noting that sales from Venezuela decreased -7.9% from RMB892 million the previous year. [Latest Annual Report]

2236 Wison Engineering Services — in the Engineering, Procurement, and Construction Management (EPC) field with a specialisation in petrochemical and refining industries. Total revenues for the company were RMB4.1 billion. Of this 765 million were from Venezuela, representing 18.6% of revenues. They mention completing 10 million safe man-hours, a unit of production, presumably with PDVSA.

we have established good cooperative relations with PDVSA of Venezuela and handled the project progress and various issues accordingly

11% of the company’s cash reserves are in the Venezuelan Bolivar. In the notes to the financial statement they point out that in 2016 a 5% move in RMBVEF impacts EBIT by RMB13,000. They didn’t publish the 2017 sensitivities, however given that VEF cash holdings have increased by a factor of 6.25, we can extrapolate that a 5% move in RMBVEF should impact EBIT by RMB81,250. Given that EBIT was RMB 229 million in 2017 this shouldn’t be a problem.

[Latest Annual Report]

Summary

While there were 11 stocks that came up, the majority don’t seem to have too much exposure to Venezuela. Only 2236 Wison and 0857 PetroChina seem to have meaningful revenue exposure to Venezuela.

HK Stocks that are Business Suspended with Venezuela
0553 PANDA Electronics — No new sales
0206 TSC Group Holdings — Suspension caused a 26% drop in revenues

HK Stocks that sell Retail products to Venezuela
0393 Glorious Sun Enterprises — Unclear exposure. They mention Venezuelan franchises performed poorly
0592 Bossini — 0.6% of revenues from Venezuela
1338 Bawang International —0.25% of revenues from Venezuela

HK Stocks that sell Petroleum or Construction related services to Venezuela
0857 PetroChina —36% from Kazakhstan, Venezuela, and Indonesia.
3996 China Energy Engineering Co — An unknown fraction of 5% of revenues from Venezuela
0267 CITIC — Max 0.5% of revenues from Venezuela
1938 Chu Kong Petroleum and Natural Gas Steel Pipe Holdings — Only one pipe in Venezuela, out of many globally
1829 China Machinery Engineering Corporation — 2.9% of revenues from Venezuela
2236 Wison Engineering Services — 18.6% of revenues from Venezuela

11 Hong Kong Stocks that do business with Venezuela
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