Managing the Dragon’s 2015 Predictions: How Did We Do?

2015To begin with, my prediction that: “The year of the goat may go down as the year of the capital markets in China” was certainly on target. Extreme volatility in the country’s stock market during the year rocked Chinese investors and rattled financial markets throughout the world.

Meanwhile, a little-known stock exchange based in Beijing — “the biggest stock market you’ve never heard of” — became a magnet for smaller companies to raise capital in 2015 and now has more listings than Shanghai and Shenzhen combined.

Apart from the capital markets, the five specific predictions which I made for 2015 covered the economy, mergers and acquisitions, and the auto business. As in prior years, I will now score each on a scale of zero to 20, with zero being a complete whiff, and 20 being a knockout punch.

Prediction #1: China’s Gross domestic product (“GDP”) will come in at 7 percent or higher for the year.
The perennial question in recent years has been whether China’s economy would have a “hard landing.” The predictions weren’t as dire this time last year, but there were differences of opinion. Bears like UBS and Nomura predicted that GDP growth would slow to 6.8 percent, while others like Stephen Roach, a Yale University professor, predicted that China would be able to comfortably achieve its 7 percent growth objective. My prediction was for growth of 7 percent or higher.

For the first six months, China seemed to be on track as GDP grew by 7 percent in each of the first two quarters. Growth slipped to 6.9 percent in the third quarter, though, and the People’s Bank of China recently estimated that growth would finish at 6.9 percent for the full year. While the official figures will not be released until January 19, it now seems clear that China will fall short of its 7 percent target.

While my point estimate for GDP was wrong, it was well within the margin of error and worth 15 points in my opinion.

Prediction #2: The SSE Composite Index will pierce the 4,000 level in 2015.
After essentially remaining flat from 2000 to 2014 — a period of time when China’s economy grew tenfold — a stagnant property market, interest rate cuts, the establishment of Shanghai-Hong Kong Stock Connect and the introduction of bank deposit insurance for smaller accounts combined to fuel a sharp stock market rally in 2014. As a result, the Shanghai Stock Exchange (“SSE”) Index was one of the best performing bourses in 2014 and opened 2015 at 3234, a stunning 61 percent higher than its low point the year before.

As China attempted to moderate the rally by clamping down on margin loans at the beginning of 2015, investors found new ways to leverage their share purchases and the SSE index pierced the 4,000 level on April 10, soaring to 5166 by June 12. Unfortunately, leverage cuts both ways and share prices began unraveling, falling precipitously by 76 percent to 2927 on August 26. By the end of the year, the SSE index had stabilized at the 3500 level, up 9 percent for the year.

Despite the run up in share prices in 2014, I believed that China’s bull market had a long way to go and predicted that the SSE Composite Index would break through 4000 in 2015. Because the SSE Composite Index did just that, I could claim the entire 20 points. However, the market did end the year below 4000, so I’ll accept a five-point haircut and settle for 15 points on this one.

Prediction #3: Over 100 IPO’s Will Be Completed on the Shanghai and Shenzhen Stock Exchanges in 2015.
In order to stem the freefall in share prices that began in June, China suspended all Initial Public Offerings (“IPOs”) in July. Despite the IPO window being closed for much of the year, my prediction of at least 100 IPOs in 2015 was on the money. According to a study by Ernst & Young, the Shanghai stock market led the world in initial public offerings during the first six months of 2015 with 78 companies issuing shares and raising $16.6 billion. During the same period, another 112 companies raised $7 billion through IPOs in Shenzhen. When China reopened the IPO market in mid-December, 10 Chinese companies promptly went to market.

In addition, hundreds of companies raised another $8.1 billion in the third quarter alone through IPO’s on the Chinese National Equities Exchange and Quotations (“NEEQ”) in Beijing, otherwise known as the “Third Board.” Established in 2006, the Third Board came to life in 2015 and took up the slack when the government closed the IPO window. There are now 3,721 companies listed on NEEQ, more than Shanghai and Shenzhen combined, compared to only 356 in 2013.

I’ll take the entire 20 points for this prediction.

Prediction # 4: Prediction #4: Outbound Chinese M&A Activity Will Reach New Levels in 2015.
With a robust stock market providing funds for acquisitions; a drive to acquire technology; and a search for new markets as China slows, I predicted that overseas acquisitions by Chinese companies would set a new record in 2015. Full year figures are not yet available, but early reports suggest that 2015 will be a banner year for overseas acquisitions.

According to one, Chinese acquisitions of companies worldwide jumped 83 percent to $516 billion in 2015. Included among the year’s most notable deals was the $7.7 billion acquisition of Pirelli by ChemChina, parent of the China National Tire & Rubber Corporation. Investments in Korean companies alone soared 119 percent to $1.9 billion, led by deals in the insurance, technology, health-care and cosmetics. Attracted by their reputation for innovation, Chinese companies are buying their South Korean counterparts at a record pace

All of the returns are not yet in, but I feel comfortable taking all 20 points for this prediction.

Prediction #5: Car Sharing Will Become A Growing Trend In China’s Auto Industry, Spurring Demand For Electric Vehicles (“EVs”).
With an increasing number of Chinese cities restricting new car registrations to ease congestion and address growing air pollution, car sharing reduces the number of cars on city streets and electric vehicles are often exempted from license plate restrictions. Both trends saw further development in 2015.

Didi Chuxing is the largest car hailing service in China with approximately 3.6 million active users; Uber follows with approximately 650,000; and UCAR has an additional 470,000. Meanwhile, other car hailing platforms received significant funding during the year. Attracted by the potential $60 billion car hailing market, Beijing-based Leshi Information Technology Co (“Letv”) announced in October that it would acquire a 70 percent stake in Yidao Yongche for approximately $700 million.

Another interesting trend to watch in China is the development of the country’s electric vehicle industry. Similar to the experience in other countries, conventional EVs and hybrids have yet to gain traction in China due to their high price points. Nonetheless, 78,500 conventional EVs and hybrids were sold in the first half of 2015, almost as many as the 83,900 that were sold in the entire year of 2014.

However, sales of so-called Low Speed (Micro) EVs, with top speeds of less than 80 kilometers per hour, are already a larger market than their conventional counterparts due to their greater affordability. With average prices of between $3,000 and $8,000, 365 thousand Low Speed EVs were sold in the first six months, compared to 400 thousand for all of 2014. Low Speed EVs are popular in Tier 2 and Tier 3 cities where customers want affordable transportation and don’t need speed or long range. Shandong, Jiangsu, Zhejiang, Guangdong and Henan provinces are taking the lead in using local regulations to encourage the use of low-speed EV’s.

While both car sharing and electric vehicles showed significant development in 2015, the connection between the two trends is not yet altogether clear. For this reason, I will take 15 of a possible 20 points for this prediction.

Summing up: With 20 points for each of Predictions #3 and #4, and 15 points for Predictions #1, #2 and #5, my total score is 85. I was delighted to receive a grade of 85 at Yale — a good mark before grade inflation set in — and I am happy with an 85 for my 2015 predictions.

On to 2016!

One Response to “Managing the Dragon’s 2015 Predictions: How Did We Do?”

  1. Precisely!
    Uber has been the most exciting name in car sharing business. As a foreign IT company it is leading a great example of localization in China. I think global companies can learn a lot from it when they develop business in China.