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How the Chinese are taking over Nigeria’s economy 

The investments of Chinese companies in Nigeria worth over $20 billion because the country is a competitive destination for the establishment of industries.

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How the Chinese are taking over Nigeria’s economy 

With an estimated approximated 203.42 million population and growing at over 2% per annum, Nigeria ranks the seventh-largest country in the world. The nation represents over 70% of the effective West African market, as Nigeria remains the most competitive destination for the establishment of medium and large manufacturing industries.

No wonder, China has since positioned itself to take advantage of this expansive market by unleashing its horde of investors and businessmen on the manufacturing sector. From textile to garment; household appliances, furniture, automobile; consumables and iron and steel as well as Financial Technology (FinTech) products, China has taken over, churning out tons of products for various segments of the market.

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Today, the investments of Chinese companies worth over $20 billion and still counting. In a recent interview, the President, China Chambers of Commerce in Nigeria, Ye Shuijin, said, “The 160 Chinese firms operating in the country had also employed over 200,000 Nigerians. I believe the Chinese investment in Nigeria now is about $20billion and we have employed over 200,000 Nigerians. Our workforce is 95% Nigerians.”

How the Chinese are taking over Nigeria’s economy 

Details: Fintech

Fintech industry has been thriving for a few years, a development that attracted some Chinese firm to Nigeria. Some of them are OPay and PalmPay, just to mention a few.

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For instance, when the Country Manager, Opay, Iniabasi Akpan, reeled out the statistics of the company and its subsidiaries at the KPMG’s Digital Summit on November 26, 2019, a lot of the participants were shocked that in less than five years, the company have achieved so much.

[READ MORE: A look at the secret behind Chinese companies’ success in Nigeria]

He said, “We make $10million/day in transactions through our agents; N5billion+/day in transactions via Opay; 66% market volume of bank transfers, 10,000 riders with Oride, over 100,000 agents, and 125 million Monthly Active Users among others.” 

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That is not all. A few weeks ago, another Chinese firm, PalmPay launched its product in Lagos. The app is expected not only to reward its users for making payments but will give Nigeria’s excluded population access to secure and easy to use financial services.

At the event, General Manager, TECNO Mobile, Stephen Ha, told Nairametrics that the fintech company is backed by TECNO mobile, which was the lead investor in its $40 million seed round.

He said, “Tecno has helped expand access to smartphones among the Nigerian population. We are now looking to leverage this infrastructure to further improve people’s lives. We see a huge growth opportunity in mobile payments and financial services in the country and are looking forward to working together with the PalmPay team to help shape the future of payments in the nation.”

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Manufacturing 

Several Chinese companies are presently competing with their Nigerian counterparts in the real sector. For instance, Chinese-owned Western Metal Products Company Limited (WEMPCO), a multi-billion naira integrated steel mill, situated at Magboro, on Lagos-Ibadan Expressway, Ogun State, is the first of its kind in Africa. The sprawling steel-manufacturing plant boasts of a production capacity of 700,000 metric tonnes and production machinery of five-stand Tandem Mill.

The factory, according to its Group Managing Director, Mr. Lewis Tung, will produce cold roll steel sheet of up to 0.15mm in thickness and coils of the same dimension and above. Other facilities in the plant include a 52-megawatt generator for power supply; a water treatment and recycling plant; a Ceramic tiles plant; an acid-generating plant; an air purifier and an annealing line.

How the Chinese are taking over Nigeria’s economy 

[READ ALSO: Chinese companies’ investments in Nigeria hit $20 billion – CCCN]

Transportation

The Chinese have been visible in the transport sector, especially in rail transport. The $1.49 billion Lagos-Ibadan railway contract has been awarded to China Civil Engineering Construction Corporation (CCECC) and the Olokola Deepwater Port project awarded to the China Ocean Shipping Group. The CCECC is also handling the 27.5-kilometre Marina-Iddo-Okokomaiko, Lagos Light Rail project.

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Since 1995, the company has won many of the contracts linked with Nigerian projects, edging out interested companies from the United States and European nations.

The CCECC is involved in multiple projects across the country in about 22 major infrastructural projects over $47 million, comprising the construction of airport terminals, roads and rails including inner-city light rails in Abuja and Lagos, all financed with concessional loans from the Exim Bank of China.

The state-owned Export-Import Bank of China (EXIM Bank) is also providing a $500 million concessionary loan for the 186-kilometre modernisation of the Abuja-Kaduna rail line, which includes the building of 36 bridges and nine fully-developed stations.

In the railway sub-sector, the CCECC was handed a $528 million contract in 1995 to rejuvenate the nation’s stretch of old rail track, supply 50 locomotives, wagons and coaches, install signal system and train Nigerian workers.

Power projects worth $10 billion underway

Chinese firms are involved in three key projects in Nigeria’s power sector estimated at $10 billion. One of the projects, the Mambilla hydroelectric power plant, is for the delivery of a 3,050Megawatt power plant in Taraba State.

The $5.8 billion contract was signed by the FG and the China Gezhouba Group Corporation, Sinohydro Corporation Limited and the CGCOC Group Company Limited in November 2017, about 40 years after the idea was conceived.

The China Exim Bank and other Chinese lenders will provide 85 per cent of the contract sum, while Nigeria pay the 15% balance.

Zungeru hydropower project is a 700MW hydroelectric facility also being developed with the Chinese assistance on the upper and middle reaches of Kaduna River in Niger State. Another power project with funding support from China is the $1 billion Gurara hydropower plant located in Kaduna. It has the capacity to generate 360MW electricity.

How the Chinese are taking over Nigeria’s economy 

$600 million for four international airport terminals

In aviation, the Federal Government entered into a partnership with the Chinese government through the CCECC in 2013 to execute four international airport terminal projects.

The projects were the rehabilitation and construction of airport terminals in Nnamdi Azikiwe International Airport, Abuja, Port Harcourt International Airport, Mallam Aminu Kano International Airport, Kano and the Murtala Muhammed International Airport in Lagos.

The four projects are being funded with a $500 million loan from the Export-Import Bank of China and $100 million counterpart funding from the Federal Government, obtained as a loan from the Debt Management Office at an interest rate of 5.37%.

[READ FURTHER: Chinese automobile maker, GAC Motors to set up assembly plant in Lagos]

General Merchandise 

Scores of Chinese businesses dominate the retail segment of the market in various parts of the country. Brands such as Viju Milk, Big Treat, Infinix, Guangzhou Automobile Group Company (GAC), Huawei, ZTE, Alcatel and others are household names Chinese restaurants, such Golden imperial Chinese Cuisine, Golden Gate, Lagos; Oasis Bakery all in Lagos and several other retail outlets businesses dot the landscape and they are enjoying tremendous patronage.

Despite penetrating several industries and recording countless achievements in Nigeria, the Chinese seem to be unrelenting as they are craving for more investments. There is no stopping the Chinese.

Patricia

Abiola has spent about 14 years in journalism. His career has covered some top local print media like TELL Magazine, Broad Street Journal, The Point Newspaper. The Bloomberg MEI alumni has interviewed some of the most influential figures of the IMF, G-20 Summit, Pre-G20 Central Bank Governors and Finance Ministers, Critical Communication World Conference. The multiple award winner is variously trained in business and markets journalism at Lagos Business School, and Pan-Atlantic University. You may contact him via email - [email protected]

1 Comment

1 Comment

  1. Kingsley Michael

    November 28, 2019 at 8:51 pm

    Very insightful!

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Blurb

Why Insurance firms are selling off their PFAs

It has not been uncommon over the years to have insurance companies with pension subsidiaries.

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Why Insurance firms are selling off their PFAs

The idea of mitigating risks and curtailing losses at the bare minimum begins from the insurance industry and only crosses into the pension space with the need for retirement planning. For this reason, it has not been uncommon over the years to have insurance companies with pension subsidiaries. However, controlling the wealth of people is no easy feat – and crossover companies are beginning to think it might not be worth it competing with the big guns; that is, the pension fund administrators (PFAs) that already cater to the majority of Nigerians.

A few months ago, AXA Mansard Insurance Plc announced that its shareholders have approved the company’s plan to sell its pension management subsidiary, AXA Mansard Pensions Ltd, as well as a few undisclosed real estate investments. It did not provide any reason for the divestment. More recently, AIICO Insurance Plc also let go of majority ownership in its pension arm, AIICO Pension Managers Ltd. FCMB Pensions Ltd announced its plans to acquire 70% stakes in the pension company, while also acquiring an additional 26% stake held by other shareholders, ultimately bringing the proposed acquisition to a 96% stake in AIICO Pension. The reason for the sell-off by AIICO does not also appear to be attributed to poor performance as the group’s profit in 2019 had soared by 88% driven by growth across all lines of business within the group.

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 So why are they selling them off? 

Pension Fund Administration is, no doubt, a competitive landscape. Asides the wealth of the over N10 trillion industry, there is also the overarching advantage that pension contributors do not change PFAs regularly. Therefore, making it hard to compete against the big names and industry leaders that have been in the game for decades – the kinds of Stanbic IBTC, ARM, Premium Pension, Sigma, and FCMB. Of course, the fact that PFAs also make their money through fees means the bigger the size, the more money you make. With pressure to capitalize mounting, insurance firms will most likely spin off as they just don’t have the right focus, skills, and talents to compete.

The recent occurrence of PENCOM giving contributors the opportunity to switch from one PFA to another might have seemed like the perfect opportunity for the smaller pension companies to increase their market shares by offering better returns. More so, with the introduction of more aggrieved portfolios in the multi-fund structure comprising of RSA funds 1, 2, & 3, PFAs can invest in riskier securities and enhance their returns. However, the reality of things is that the smaller PFAs don’t have what it takes to effectively market to that effect. With the gains being made from the sector not particularly extraordinary, it is easier for them to employ their available resources into expanding their core business. There is also the fact that their focus now rests on meeting the new capital requirements laced by NAICOM. Like Monopoly, the next smart move is to sell underperforming assets just to keep their head above water.

READ MORE: AIICO seeks NSE’s approval for conducting Rights Issue

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Olasiji Omotayo, Head of Risk in a leading pension fund administrator, explained that “Most insurance businesses selling their pension subsidiaries may be doing so to raise funds. Recapitalization is a major challenge now for the insurance sector and the Nigerian Capital Market may not welcome any public offer at the moment. Consequently, selling their pension business may be their lifeline at the moment. Also, some may be selling for strategic reasons as it’s a business of scale. You have a lot of fixed costs due to regulatory requirements and you need a good size to be profitable. If you can’t scale up, you can also sell if you get a good offer.”

What the future holds

With the smaller PFAs spinning off, the Pension industry is about to witness the birth of an oligopoly like the Tier 1 players in the Banking sector. Interestingly, the same will also happen with Insurance. The only real issue is that we will now have limited choices. In truth, we don’t necessarily need many of them as long all firms remain competitive. But there is the risk that the companies just get comfortable with their population growth-induced expansion while simply focusing on low-yielding investments. The existence of the pandemic as well as the really low rates in the fixed-income market is, however, expected to propel companies to seek out creative ways to at least keep up with the constantly rising rate of inflation.

 

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Patricia
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Nigerian Banks expected to write off 12% of its loans in 2020 

The Nigerian banking system has been through two major asset quality crisis.

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Nigerian Banks expected to write off 12% of its loans in 2020 

The Nigerian Banking Sector has witnessed a number of asset management challenges owing largely to macroeconomic shocks and, sometimes, its operational inefficiencies in how loans are disbursedRising default rates over time have led to periodic spikes in the non-performing loans (NPLs) of these institutions and it is in an attempt to curtail these challenges that changes have been made in the acceptable Loan to Deposit (LDR) ratios, amongst others, by the apex regulatory body, CBN. 

Projections by EFG Hermes in a recent research report reveal that as a result of the current economic challenges as well as what it calls “CBN’s erratic and unorthodox policies over the past five years,” banks are expected to write off around 12.3% of their loan books in constant currency terms between 2020 and 2022the highest of all the previous NPL crisis faced by financial institutions within the nation.  

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Note that Access Bank, FBN Holdings, Guaranty Trust Bank, Stanbic IBTC, United Bank for Africa and Zenith Bank were used to form the universe of Nigerian banks by EFG Hermes.  

READ MORE: What banks might do to avoid getting crushed by Oil & Gas Loans

Background  

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Over the past twelve years, the Nigerian banking system has been through two major asset quality crisisThe first is the 2009 to 2012 margin loan crisis and the other is the 2014 to 2018 oil price crash crisis 

The 2008-2012 margin loan crisis was born out of the lending institutions giving out cheap and readily-available credit for investments, focusing on probable compensation incentives over prudent credit underwriting strategies and stern risk management systems. The result had been a spike in NPL ratio from 6.3% in 2008 to 27.6% in 2009. The same crash in NPL ratio was witnessed in 2014 as well as a result of the oil price crash of the period which had crashed the Naira and sent investors packing. The oil price crash had resulted in the NPL ratio spiking from 2.3% in 2014 to 14.0% in 2016.  

Using its universe of banks, the NPL ratio spiked from an average of 6.1% in 2008 to 10.8% in 2009 and from 2.6% in 2014 to 9.1% in 2016. During both cycles, EFG Hermes estimated that the banks wrote-off between 10-12% of their loan book in constant currency terms.  

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 READ MORE: Ratings firm explains why bank non-performing loans could be worse than expected

The current situation 

Given the potential macro-economic shock with real GDP expected to contract by 4%, the Naira-Dollar exchange rate expected to devalue to a range of 420-450, oil export revenue expected to drop by as much as 50% in 2020 and the weak balance sheet positions of the regulator and AMCON, the risk of another significant NPL cycle is high. In order to effectively assess the impact of these on financial institutions, EFG Hermes modelled three different asset-quality scenarios for the banks all of which have their different implications for banks’ capital adequacy, growth rates and profitability.  These cases are the base case, lower case, and upper case. 

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Base Case: The company’s base case scenario, which they assigned a 55% probability, the average NPL ratio and cost of risk was projected to increase from an average of 6.4% and 1.0% in 2019 to 7.6% and 5.3% in 2020 and 6.4% and 4.7% in 20201, before declining to 4.9% and 1.0% in 2024, respectively. Based on its assumptions, they expect banks to write-off around 12.3% of their loan books in constant currency terms between 2020 and 2022a rate that is marginally higher than the average of 11.3% written-off during the previous two NPL cycles. Under this scenario, estimated ROE is expected to plunge from an average of 21.8% in 2019 to 7.9% in 2020 and 7.7% in 2021 before recovering to 18.1% in 2024.  

Lower or Pessimistic Case: In its pessimistic scenario which has a 40% chance of occurrencethe company projects that the average NPL ratio will rise from 6.4% in 2019 to 11.8% in 2020 and 10.0% in 2021 before moderating to 4.9% by 2024It also estimates that the average cost of risk for its banks will peak at 10% in 2020 and 2021, fall to 5.0% in 2022, before moderating from 2023 onwards. Under this scenario, banks are expected to write off around as much as 26.6% of their loan books in constant currency terms over the next three years. Average ROE of the banks here is expected to drop to -8.8% in 2020, -21.4% in 2021 and -2.9% in 2022, before increasing to 19.7% in 2024.   

Upper or optimistic case: In a situation where the pandemic ebbs away and macro-economic activity rebounds quicklythe optimistic or upper case will hold. This, however, has just a 5% chance of occurrence. In this scenario, the company assumes that the average NPL ratio of the banks would increase from 6.4% in 2019 to 6.8% in 2020 and moderate to 4.8% by 2024Average cost of risk will also spike to 4.2% in 2020 before easing to 2.4% in 2021 and average 0.9% thereafter through the rest of our forecast period. Finally, average ROE will drop to 11.6% in 2020 before recovering to 14.4% in 2021 and 19.0% in 2024. 

With the highest probabilities ascribed to both the base case and the pessimistic scenario, the company has gone ahead to downgrade the rating of the entire sector to ‘Neutral’ with a probability-weighted average ROE (market cap-weighted) of 13.7% 2020 and 2024. The implication of the reduced earnings and the new losses from written-off loans could impact the short to medium term growth or value of banking stocks. However, in the long term, the sector will revert to the norm as they always do.   

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Even with a 939% jump in H1 Profit, Neimeth still needs to build consistency

Neimeth has been one of the better performers in the stock market in the last one year. 

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Even with a 939% jump in H1 profit, Neimeth still needs to build consistency 

Neimeth’s profit after tax for H1 2020 might have jumped by 939% from H1 2019, but there’s still so much the company needs to do to remain in the game. 

For the first time in years, Pharmaceutical companies across the globe are in the spotlight for a good reason.  As the COVID-19 pandemic rages on, the world waits patiently for this industry to produce a vaccine that can once again lead us back to the lives we all missed. Nigeria is also not an exception, it seems. One of Nigeria’s oldest pharmaceutical companies, Neimeth, has been one of the better performers in the stock market in the last one year. However, there is still so much the company needs to do to earn profits consistently. 

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READ MORE: Covid-19: List of pharmaceutical firms that will receive grants from the CBN

Neimeth’s recently released H1 2020 results show a jump of 19.4% in revenue from 976 million earned in H1 2019 to 1.165 billion in H1 2020. While this is impressive, its comparative Q2 results (Jan-March ‘ 20) show a drop in revenue of 25.4% from 748.8 million earned in Q2 2019, to the 568.7 million revenue in Q2 2020. In similar vein, while its profit-after-tax soared by 939% from 5.447 million in H1 2019 to 56.596 million in H1 2020, its quarter-by-quarter results show a drop of 118%. While there is a truth that some months are better performers than others, Neimeth’s extreme profit jump in the half-year results juxtaposed with the more-than-100% drop in the first quarter of this year, reveal wide-gap volatility in its earning potential. Its revenue breakdown attributes the quarter-by-quarter drop in revenue to a comparative drop in its ‘Animal Health’ product line by a whopping 897.42%. The ‘Pharmaceuticals’ line also only experienced a marginal jump of 2.57%. 

Full report here. 

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READ MORE: Nigeria records debt service to revenue ratio of 99% in first quarter of 2020.

Current & Post-Covid-19 Opportunities  

A 2017 PWC report had revealed that by 2020 the pharmaceutical market is expected to “more than double to $1.3 trillion. Mckinsey had also predicted that come 2026, Nigeria’s pharma market could reach $4 billion. The positive outlook of the industry is even more so, following the disclosure by the CBN to support critical sectors of the economy with 1.1 trillion intervention fund.  

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The CBN governor, Godwin Emefiele, had stated that about 1trillion of the fund would be used to support the local manufacturing sector while also boosting import substitution while the balance of 100 billion would be used to support the health authorities towards ensuring that laboratories, researchers and innovators are provided with the resources required to patent and produce vaccines and test kits in Nigeria. 

READ MORE: Airtel to acquire additional spectrum for $70 million 

While manufacturing a vaccine for the Covid-19 pandemic might be nothing short of wishful, the pandemic presents a global challenge that businesses in the healthcare industry could leverage. Through strategic R&D, it could uncover a range of solutions, particularly those that involve the infusion of locally-sourced raw materials.  

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In order for the company to attain sustainable growth, it needs to come up with structures and systems that are dependable, while also tightening loose ends. One of such loose ends is its exposure to credit risk. It’s Q2 2020 reports reveal value for lost trade receivables of N693.6 million carried forward from 2019. To this end, it notes that while its operations expose it to a number of financial risks, it has put in place a risk management programme to protect the company against the potential adverse effects of these financial risks. 

At the company’s last annual general meeting (AGM), the managing director, Matthew Azoji, had also spoken on the company’s efforts to gain a larger market share through its initiation of bold and gradual expansion strategies.  

The total revenue growth and profitability of the half-year period undoubtedly signals a potential in the company. However, we might have to wait for the company’s strategies to crystalize and attain a level of consistency for an extended period before reassessing the long-term lucrativeness of its stock or otherwise. That said, it certainly should be on your watchlist.  

Patricia
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