Bloomberg – It’s going to take more than the biggest stock slump in world history to convince analysts that PetroChina Co. has finally hit bottom.
Ten years after PetroChina peaked on its first day of trading in Shanghai, the state-owned energy producer has lost about $800 billion of market value — a sum large enough to buy every listed company in Italy, or circle the Earth 31 times with $100 bills.
In current dollar terms, it’s the world’s biggest-ever wipeout of shareholder wealth. And it may only get worse. If the average analyst estimate compiled by Bloomberg proves right, PetroChina’s Shanghai shares will sink 16 percent to an all-time low in the next 12 months.
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Of course, many of the factors behind PetroChina’s slump have been outside the company’s control. When it listed in Shanghai in 2007, bubbles in both oil and the Chinese equity market were primed to burst, while the global financial crisis was just around the corner. Measured against the 73 percent drop in China’s CSI 300 Energy Index over the past decade, PetroChina’s 82 percent retreat doesn’t look quite so bad.
And as Citigroup Inc. analyst Nelson Wang points out, most of PetroChina’s shares are owned by the Chinese government, so the hit to minority investors hasn’t been as big as the loss in total market value might suggest.
On Hong Kong’s exchange, where PetroChina first listed in April 2000, stockholders have enjoyed strong long-term gains. The company’s so-called H shares have returned about 735 percent since their debut, outpacing the city’s benchmark Hang Seng Index by more than 500 percentage points. (Dual listings are common among Chinese companies, which often sell stock to international investors in Hong Kong.)
The H shares, which account for less than 12 percent of PetroChina’s total shares outstanding and trade at a discount to their Shanghai counterparts, may rise 31 percent over the next year, according to the latest price target from Laban Yu, a Hong Kong-based analyst at Jefferies Group LLC. PetroChina could return a “huge” amount of cash to shareholders if it decides to start spinning off pipeline assets, Yu said in an interview last week.
A spokesman for Beijing-based PetroChina, which is scheduled to report third-quarter results on Monday, declined to comment.
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When it comes to PetroChina’s Shanghai-traded shares, analysts are unusually pessimistic. The energy producer is one of just a handful of large-cap Chinese companies with more sell ratings than buys, and the stock’s projected loss of 16 percent compares with an average estimated gain of about 10 percent for shares in China’s large-cap CSI 300 Index. PetroChina slipped 0.1 percent at 10:05 a.m. in Shanghai.
Valuation is one reason for the bearish outlook. Even after its slump, PetroChina’s forward price-to-earnings ratio in Shanghai is 80 percent higher than its historical average. And while the shares were more richly valued in 2007, it seems improbable that China’s government would allow such heady market conditions to return anytime soon. Authorities have intervened to prevent excessive swings in Chinese stocks over the past year, seeking to avoid a repeat of the boom-bust cycles that whipsawed investors in 2007 and 2015.
Even if the government does loosen its grip, today’s market darlings are more likely to be found in the technology and consumer industries than in “old economy” sectors like oil. President Xi, who cemented his status China’s strongest leader in decades at last week’s Communist Party congress, has emphasized the need for more environmentally-friendly growth. His government is rolling out one of the world’s biggest electric car programs and has pledged to cap China’s carbon emissions by 2030.
For Andrew Clarke, director of trading at Mirabaud Asia Ltd. in Hong Kong, it adds up to an uncertain outlook for China’s national oil champion. Asked whether PetroChina will ever climb back to its 2007 high, Clarke, who is 50, had this to say: “Maybe one day, but it depends how long your time frame is. I’m pretty sure I will be dead before that happens again.”
Of course, many of the factors behind PetroChina’s slump have been outside the company’s control. When it listed in Shanghai in 2007, bubbles in both oil and the Chinese equity market were primed to burst, while the global financial crisis was just around the corner. Measured against the 73 percent drop in China’s CSI 300 Energy Index over the past decade, PetroChina’s 82 percent retreat doesn’t look quite so bad.
And as Citigroup Inc. analyst Nelson Wang points out, most of PetroChina’s shares are owned by the Chinese government, so the hit to minority investors hasn’t been as big as the loss in total market value might suggest.
On Hong Kong’s exchange, where PetroChina first listed in April 2000, stockholders have enjoyed strong long-term gains. The company’s so-called H shares have returned about 735 percent since their debut, outpacing the city’s benchmark Hang Seng Index by more than 500 percentage points. (Dual listings are common among Chinese companies, which often sell stock to international investors in Hong Kong.)
The H shares, which account for less than 12 percent of PetroChina’s total shares outstanding and trade at a discount to their Shanghai counterparts, may rise 31 percent over the next year, according to the latest price target from Laban Yu, a Hong Kong-based analyst at Jefferies Group LLC. PetroChina could return a “huge” amount of cash to shareholders if it decides to start spinning off pipeline assets, Yu said in an interview last week.
A spokesman for Beijing-based PetroChina, which is scheduled to report third-quarter results on Monday, declined to comment.
When it comes to PetroChina’s Shanghai-traded shares, analysts are unusually pessimistic. The energy producer is one of just a handful of large-cap Chinese companies with more sell ratings than buys, and the stock’s projected loss of 16 percent compares with an average estimated gain of about 10 percent for shares in China’s large-cap CSI 300 Index. PetroChina slipped 0.1 percent at 10:05 a.m. in Shanghai.
Valuation is one reason for the bearish outlook. Even after its slump, PetroChina’s forward price-to-earnings ratio in Shanghai is 80 percent higher than its historical average. And while the shares were more richly valued in 2007, it seems improbable that China’s government would allow such heady market conditions to return anytime soon. Authorities have intervened to prevent excessive swings in Chinese stocks over the past year, seeking to avoid a repeat of the boom-bust cycles that whipsawed investors in 2007 and 2015.
Even if the government does loosen its grip, today’s market darlings are more likely to be found in the technology and consumer industries than in “old economy” sectors like oil. President Xi, who cemented his status China’s strongest leader in decades at last week’s Communist Party congress, has emphasized the need for more environmentally-friendly growth. His government is rolling out one of the world’s biggest electric car programs and has pledged to cap China’s carbon emissions by 2030.
For Andrew Clarke, director of trading at Mirabaud Asia Ltd. in Hong Kong, it adds up to an uncertain outlook for China’s national oil champion. Asked whether PetroChina will ever climb back to its 2007 high, Clarke, who is 50, had this to say: “Maybe one day, but it depends how long your time frame is. I’m pretty sure I will be dead before that happens again.”
Founder and Managing Director of Lakpa Shoes, Chandra Kannangara loads their first container for export in 1990 together with his son Malitha Kannangara, now a Director at the company as well as a Doctor of Medicine.
The provincial shares as a percentage of the national GDP are given in Chart 1. Accordingly, the major contribution of 10 per cent or more were reported from Western, North Western, Central and Southern provinces.
Continuing the trend observed in recent years, the GDP share of the Western province declined in 2016 contributing to reduce disparities among provinces. However, the Western province remained the frontrunner in the economy providing the highest contribution of 39.7 per cent to GDP. The North Western province accounted for the second highest contribution of 10.7 per cent in 2016, compared to 10.6 per cent in 2015. The third highest contribution of 10.5 per cent was observed from the Central province in 2016, which was a marginal decline from 10.6 per cent recorded in 2015. Contributions from the Uva and the Northern provinces increased marginally to 5.8 per cent and 4.2 per cent in 2016 compared to 5.6 per cent and 4.1 per cent in 2015, respectively. Except for the North Central province, the contributions to GDP from the other three provinces, namely Southern, Sabaragamuwa and Eastern, remained unchanged at 10.1 per cent, 7.5 per cent and 5.7 per cent respectively, in 2016. The share of the North Central province to overall GDP was 5.8 per cent in 2016 from 5.9 per cent in 2015 mainly due to subdued performance in agriculture activities.
The agriculture sector accounted for 2.1 per cent of the GDP in the Western province in 2016, whereas its contribution to provincial GDP ranged from 7.6 to 13.5 per cent in the other provinces. In comparison to 2015, the contribution of the agriculture activities to the GDP marginally increased in the Northern province, while declines were recorded in all other provinces in 2016.
Except for the Central, the North Western and the Western provinces, contribution from industry activities to PGDP increased in all other provinces. In 2016, the largest contribution to PGDP from industry activities was recorded from the Western province while the lowest share was reported from the Southern province.
The Services activities play a major role in all provinces with contributions between 51.1 per cent and 61.6 per cent of the PGDP in 2016. However, when compared to 2015, the contribution from the Services activities increased in the North Central, the North Western and the Western provinces, but declined in all other provinces during 2016.
The per capita income increased in all provinces while only that of the Western province exceeded the national value in both years. The ratio between provincial per capita income and the national per capita income is also given in Table 4 and as it reflects the ratios remained unchanged both in 2015 and 2016.
Industry overview
The annual income generated by the domestic tobacco industry (2016) is estimated at LKR 144 billion (USD 960,000,000). Of this amount, the CTC is said to account for LKR 131 billion (USD 873,000,000) and the other industry segments (beedi, cigars and chewing tobacco) account for the remaining USD 83 million.
Where employment and livelihoods are concerned, there are large discrepancies between different agencies on the contribution of this industry.Given available data, we have estimated the tobacco industry in Sri Lanka as employng around 70,000 workers.An Estiamted 45,000 of the employees are engaged in the cigerette sector where the Ceylon Tobacco Company (CTC), owned by British American Tobacco (BAT), has a monoply as the only licenced player in the market.Of these, the CTC has 320 direct employees working from Colmobo and Kandy. The remaining 25,000 workers are employed by the Beedi industry (20,000), cigar industry (9,000) and chewing tobacco (4,400). There are also an estaimted 20,000 farmers engaged in the industry.
In the Beedi industry, the supply chain starts with the purchase of tobacco leaves, which includes the purchase of refuse leaves that are rejected by the CTC. This tobacco is then wrapped in a Tendu leaf that is imported from the state of Orissa in India. The wrapping process is almost exclusively a cottage industry that employs a considerable number of village level house-holds on a casual basis.
There are 600-700registered / licensed Beedi producers in Sri Lanka along with many more small players that operate “below the radar” at the cottage industry levels. The cost of acquiring a Beedi license is said to be very low. Of those who are registered, around 50 are well established and pay ETF and EPF to their workers according to industry sources.
The contribution of the Beedi industry to government revenue was LKR 2.8 billion in 2016. According to the Tobacco Tax Act No. 8 of 1999, all the manufacturers and importers of Beedi only had to register under the Commissioner General of Excise and did not actually have to pay any taxes. This industry only started paying taxes in 2010 (Gazette Number 1625/1 October 26 2009, brought in to affect from March 1st 2010).
Efficacy of Recent Tax Hikes
By most accounts, Sri Lanka has made great progress in meeting the challenge of reducing the health harm of smoking. As per the WHO report, Sri Lanka has a high compliance of smoke-free policies and record adult daily smoking prevalence at 10 percent parallel to India, whilst Indonesia recorded 34 percent. The international agencies, including the World Bank have suggested that a 10 per cent rise in taxes will result in an 8 per cent fall in smoking in low and middle-income countries.However, in Sri Lanka’s case, we can note that the availability of much cheaper alternatives including the locally produced Beedi, along with a growing choice of illicit cigarettes that are priced competitively lower in the market servesto illustrate that a ‘cut and paste’ approach to tobacco policy across international markets cannot work. In essence, taxation driven price hikes alone have proved that they are insufficient policy measures for delivering the reductions in smoking prevalence despite the claims made by international agencies.
A 20-pack John Player Gold Leaf, which is the most commonly sold brand of legal cigarettes in the country cost LKR 280 in 2007 and by 2016 was priced at LKR 1,000. Yet the smoking prevalence in Sri Lanka only moved from 10.2 per cent to 9.7 per cent over the same period.Clearly, the evidence shows that price alone is not a decisive factor in the overall smoking prevalence in Sri Lanka.
Regional Disparities SpurSmuggling
Whilst the debate on the efficacy of tax increases as one of the tools for reducing smoking prevalence continues, the link between cigarette prices and the recent alarming rise in smuggling is much more evident. By regional comparisons, Sri Lanka has the highest rates of Excise taxation and as a result is the most expensive country in which to purchase cigarettes. This situation has in fact triggered a rapid rise in smuggling in Sri Lanka this year, which seems to be gathering momentum with more and more international smugglers targeting the island.
According to the authorities and other sources met during the RIU research, a40-foot container of smuggled cigarettes can generate a profit of between LKR 250-400 million.Customs officials say that most of the brands of illicit cigarettes detected have been smuggled from Dubai, China, Vietnam and Turkey.However, in Sri Lanka the fine for smuggling in a big container load of illicit cigarettes can be as low as just one million rupees. Consequently, smugglers exploit a system that is soft on punishment and lucrative in terms of financial returns. According the law enforcement officers that RIU spoke with, large amounts of illicit cigarettes reach the hands of youth and under-aged smokers as it is a completely unregulated environment.
Unfortunately, the Customs authorities are successful in detecting only one in ten sticks smuggled into the country according to multiple sources. A very senior official at the Finance Ministry claimed that 40 million illicit cigarettes have so far been detected which would translate to 360 million illicit sticks in the market this year.In terms of loss of government revenue, this would give us a figure of LKR 18 billion in losses so far in 2017.Meanwhile, a senior Officer in Charge of the Anti-Organised Crimes Unit of the STF told RIU that that his unit had detected around 270 million illicit cigarettes so far in 2017.An alternative estimate given by CTC places the total number of illicit cigarettes at 400million sticks so far this year.
In addition to smuggling cigarettes, there is also a worry connecting to a rise in trafficking of more dangerous drugs.The Department of Prisons’ statistics show that in 2015, nearly half, or 46.4 percent;of prisoners convicted were drug offenders. This means that, of the 24,086 who were sentenced, a massive 11,171 went to jail for narcotics crimes. The previous year, the percentage of total convicts that were drug offenders was 43.5 per cent.In 2013 it was 34 percent. The data shows an upward trend in the number of those getting sentenced for trafficking and taking narcotics.
According to the Dangerous Drugs Control Board,Cannabis and Heroin are the narcotics of choice, in that order. The Western Province is the most afflicted followed by the South.Thetotal number of drug related arrests was 82,482 in 2015, up 23 percent from the previous year. Of this total, 32 percent was for heroin and 63 percent was for cannabis.
Cross-country analysis and lessons to learn
The illegal cigarette trade is not just a local phenomenon but a serious global issue, which occurs on every continent and is prevalent in both high and low-income countries. According to multiple sources, an estimated 11.6 percent of the global cigarette market is illicit, equivalent to 657 billion cigarettes a year and USD 40.5 billion in lost revenue for governments. If the global illicit trade were eliminated, governments would gain at least USD 31 billion dollars.
The phenomenon that Sri Lanka is currently experiencing post the Budget 2016 cigarette tax hike is nothing new in the international context.For example, in 2015 the Malaysian government increased taxes by 40 percent which represented a 110 percent hike over five years.However, this policy has failed to deliver on both the health and government finance levels.According to Malaysia’s Health Ministry, the actual number of smokers in the country had increased from 4.3 million in 2011 to 4.4 by 2015.However, the reverse was seen in the industry’s volume where the number of legal cigarettes purchased in 2015 had reduced to 10.5 billion sticks versus 13.2 billion sticks in 2011. This translates to about 8.8 billion (or 40 percent) of illicit cigarettes in 2011 and 13.8 billion sticks (or 56.7 percent) in 2015.
Similarly, the German government in the early part of the new millennium attempted to achieve a significant revenue boost with sharp ad-hoc tax hikes on cigarettes and found that it back-fired in terms of achieving the desired health and budgetary outcomes.Within a short time, Germany emerged as a major retail market for contraband cigarettes within the EU. On the black market, cigarettes from tax-free or low-tax sources were supplied at a price below legal retail prices, providing significant savings on the consumer side and lucrative profits for suppliers. The illicit cigarette trade has received increasing political attention in the light of substantial losses of revenue and growing concerns that the cigarette black market is linked to “organized crime”.Germany was faced with a similar situation to that faced by Sri Lanka at the present time whereby its immediate neighbours along Eastern Europe were all retailing cigarettes at much lower prices.
Since 2006 the German Government has changed its approach to tobacco excise with the emphasis firmly placed on tackling the illicit trade and preventing further market erosion. From early 2006 until May 2011, tobacco excise rates were adjusted moderately. During this period pricing stability reduced the growth of cross-border and illicit consumption – the share of such products in total cigarette consumption remained flat at 21 percent over the whole period of 5 years.
Key recommendations of study: A holistic approach
According to the high-level RIU industry stakeholder study, tax increase alone will not deliver the required outcomes at the national level. Moreover, the findings indicate that tax increases are in fact the least significant of the policy tools that are at the disposal of law makers.
According to the RIU study that included one-on-one meetings with former Finance Ministers, Ministers currently serving in the government, senior heads of Customs, Excise, Ceylon Tobacco Company (the monopoly cigarette manufacturer in the country), the Beedi association, WHO, IPS, the Police, the Special Task Force, Sri Lanka Tourism Development Authority (SLTDA) and multifarious think-tanks, NGOs and other government agencies, a much more holistic and multi-faceted approach is needed to address the dual government objectives of reducing the health harm from smoking whilst securing the taxation revenue that is due to the government treasury.
The RIU research findings suggest that the government needs to establish a task force of industry stakeholders and government agencies led by those representing Finance, Customs and Heath. The most important strategy according to the stakeholders is to focus on education and warnings to the youth on the dangers of smoking. This approachneeds to be supported by bans on tobacco promotion and monitoring the overall prevention policy. Offering smokers some support to help quit their habit was also cited as a key component of any future policy framework. Finally, the stakeholders confirmed that raising taxes needs to be included in the overall navigation of the strategy.
However, the findings of research suggest that tax rises need to be part of the long-term plan with stakeholder participation that secures a level-playing field for the legal industry. In fact, some players in the Beedi industry even went as far as to say that they would be ready to work with the government on a total ban on Beedi so long as it was part of a long-term plan made in consultation with all the stakeholders, giving them time to adjust and giving those workers in engaged in farming and manufacturing a chance to find an alternative source of livelihood.
De-politicising the issue of tobacco taxes is also critical to ensuring that the legal and regulated industry has a predictable and level-playing-field that generates the forecasted amounts of revenue for the Treasury.Whilst the government will want to balance the Health Ministry perspective with that of the Finance Ministry, it is essential that all stakeholders are included in the discussion.
Unpredictable and ad-hoc tax hikes that are made sans consultation with those who represent various points of view in the industry only seem to spur the illegal business of smuggling which is connected to an overall rise in criminality that includes drug trafficking in Sri Lanka. In such a situation, not only do we lose the objectives of preserving the nation’s health and well-being along with the nation’s financial health, but we have also witnessed the rise of criminality, which has its own financial (loss of revenue from taxation) and social costs which are potentially far worse.
Team Chinese dragon cafe
