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China has been a naval power longer than some countries have existed - the Song Dynasty, dating back to the 12th century, had a permanent standing navy, with squadrons and fighting vessels. For China, aggression via sea is an old tactic, and its growing maritime presence around India in recent years has raised eyebrows.

China's naval strategy around India involves an expanding network of ports across the Indian Ocean, essentially encircling India and forming what experts have called the "String of Pearls". 

This not only positions China as a key regional player in the Indian Ocean but has also made any potential response from India more complicated.

The strategic significance of these Chinese or China-funded ports cannot be overstated, as they serve as crucial hubs for international trade, connectivity, and regional influence. It's important to note that the civilian ports China has invested in, must provide logistical support to the Chinese navy if required. The Chinese investments thus come with military commitments to China. 

This edition of Chart of the Week explores the key Chinese-operated ports in the Indian Ocean region, examining their growth, investments, and the broader implications for India and its neighbours. 

China encircles India, by investing in eight ports in the Indian Ocean

India’s neighbours are, Pakistan, Sri Lanka and Bangladesh. All three countries have received port investments from China. 

Under the China-Pakistan Economic Corridor (CPEC), China has invested in two Pakistani ports: the Gwadar port ($248 million investment) and the Karachi deep-water terminal ($550 million investment). 

China's engagement with the Gwadar Port has unfolded in two phases. The first phase took place from 2002 to 2006, involving a financial infusion of $248 million through foreign aid grants from the Chinese government and loans from the Export-Import (Exim) Bank of China. The second phase, initiated in 2013, remains undisclosed in terms of the invested amount. Under this agreement, China will be providing financial investment in exchange for a concession agreement to conduct operations at the port. 

The second port, the Karachi Deep Water Container Terminal, commenced its operations at Karachi Port in December 2016. The port was established through a public-private collaboration between Karachi Port Trust (KPT) and Hong Kong's Hutchison Ports. Its significance lies in providing optimal access to ships entering Karachi, which is strategically positioned in the CPEC under China's Belt and Road Initiative (BRI).

In addition, there is a direct investment pledge of $3.5 billion from the Chinese government in the Karachi Coastal Comprehensive Development Zone (KCCDZ) from 2021, according to reports. Unlike a conventional loan, this investment aims to transform the underutilised land of the Karachi Port Trust into a multi-purpose residential, commercial, and seaport infrastructure. 

Debt-ridden Sri Lanka has, thanks to its highly strategic location, two ports under Chinese influence: Hambantota Port and CICT Terminal Colombo. China has invested around $1.3 billion in the former and $500 million in the latter. State-owned China Merchants Port Holding (CMPH) is the contractor for both these ports. Hambantota Port received funding from China’s Exim Bank in two phases: an initial $508 million from 2007 to 2014, and a subsequent $808 million from 2014 onwards. Under the agreement, CMPH will get a 99-year concession agreement of $1.12 billion and 85% ownership of the port.  

Bangladesh also has two ports with major Chinese investments. The Chittagong Port and the Payra Port have investments of $400 million and $600 million respectively. Mongla Port is contracted out to China National Complete Engineering, another state-owned entity. It is one of the main seaports of Bangladesh, handling about 80% of the nation's export-import trade. 

As for the Payra Port, the construction and development of its core infrastructure started in 2016. The project was executed by two Chinese companies, China Harbour Engineering Company (CHEC) and China State Construction Engineering Corporation (CSCEC). CHEC was responsible for building the core infrastructure, which amounted to $150 million, while CSCEC undertook tasks such as fortifying riparian areas, reducing flood risks, and establishing housing, education, and health facilities, involving an investment of $60 million. 

Much like Pakistan, Myanmar is also involved in China's BRI through the China-Myanmar Economic Corridor (CMEC). China earmarked an investment  of $1.3 billion for the Kyaukphyu Port, starting from 2020. The total project cost was $7 billion. However, Myanmar’s National League of Democracy (NLD) regime reduced the project's scope in 2020,  due to fears of falling into a debt trap. The China International Trust and Investment Corporation Group (CITIC) leads the project, which also involves creating an industrial zone. Situated on the western coast of Rakhine state, , the Kyaukphyu Port occupies a strategic location on the Bay of Bengal. This geographical positioning follows the trajectory of the 21st-century Maritime Silk Road, a modern-day maritime route that interlinks Asia, Europe, and Africa.

China looks to expand far east with ports in Cambodia and Malacca

China has increased its presence in Cambodia through a $1.5 billion investment in the Ream Naval base. This initiative, led by state-owned Shanghai Construction Company and China Bridge and Road Company, is set to be operational by 2025. The initial project phase has a $200 million investment to establish container operation zones, commencing with a yearly capacity of 300,000 TEU (twenty-foot equivalent unit). Plans include highway connections, including one to the nearby capital, Phnom Penh. Recent reports indicate swift progress, with the pier development underway in the first half of 2023.

Adjacent to the Cambodian naval base is Malaysia's Malacca Port, a crucial link between the Indian Ocean and the South China Sea. The project was awarded in 2016 to Malaysian developer KAJ Development. Collaborating with Chinese companies like PowerChina International Group, a subsidiary of China's State Power Investment, along with Shenzhen Yantian Port Group and Rizhao Port Group, KAJ envisioned a 246-hectare project featuring economic zones, upscale housing, hotels, and diverse tourist attractions. However, the project was left incomplete after the Malacca government cancelled the agreement with KAJ Development owing to three years of inactivity in November 2020.In December 2022,  the countries made new plans for the redevelopment of the port into a new deep sea port with an investment of $7.2 billion from China. The redevelopment deal also includes a commitment of imports of $2 trillion from Malaysia over the next five years.

China continues to make new investments in African nations

We now shift our focus to the African continent, where China stands as one of the top four investors with investments reaching $3.4 billion in 2022 and another $1.3 billion by April 2023. 

Among African countries, Sudan represents one of China's earliest engagements with the continent. Sudan’s Haidob port received a Chinese investment of $141 million, and was inaugurated in December 2020. This facility is dedicated to the transportation of livestock such as cattle, camels and sheep to Asian markets. In the vicinity,  Eritrea and Djibouti have two ports with major Chinese investment - the Massawa Port and the Doraleh Multipurpose Port, respectively. Massawa Port’s project was contracted to state-owned China Harbor Engineering Company for $400 million. Doraleh, on the other hand, was financed for $405 million by China’s Exim Bank and was contracted to state-owned China Civil Engineering Construction Corp and Channel Engineering Bureau Group.

Coming to the Southern part of Africa, we  encounter Tanzania, home to the Dar Es Salaam and Bagamoyo ports. For the Dar es Salaam Port, a $154 million contract was awarded to China Harbour Engineering Company in 2017. The project involves the expansion of the primary port in the commercial hub, the construction of a roll-on, roll-off terminal, and the enhancement of the depth and resilience of seven berths within the port. On a different note, the Bagamoyo Port is a stalled $10 billion project, which is being renegotiated between the Tanzanian Government and China Merchant Port.

Mirroring Tanzania, Kenya also hosts two ports with Chinese funding - Lamu and Mombasa. The Lamu Port plays a crucial role in the expansive transportation corridor linking Lamu, South Sudan, and Ethiopia. This corridor, known as the Lamu Port South Sudan-Ethiopia Transport (LAPSSET) corridor, is valued at $23 billion. The initial phase of this project, which involves constructing 32 berths, was undertaken by the state-run China Communications Construction Company at $367 million in 2021, focusing on the first three berths. The Mombasa-Nairobi standard gauge railway received a $3.2 billion loan from China’s Exim bank. The initial auditor’s report suggested that the Mombasa port served as collateral, and any default on yearly payment of $705 million could result in a Chinese takeover, akin to the events in Sri Lanka. 

China eyes global trade with two ports in the Suez Canal

From eastern and southern Africa, we move to the ports along the Suez Canal, which is a vital route for India’s trade  with Europe. Among these, Port Said is situated in the northern part of the canal and Ain Sokhna Port occupies the southern part. China’s COSCO Shipping Ports (CSPL) has purchased a 25% stake in a new container terminal at the Ain Sokhna Port for $375 million. The company already had a 20% stake in the non-controlling container terminal at Port Said. 

In Australia, the Darwin Port was leased to China’s Landbridge group for $390 million for a period of 99 years. As Australia’s relations with China deteriorated in recent years, the Australian government decided to build a new port in Darwin for $1.5 billion. 

In conclusion, China's "String of Pearls" strategy involves strategic investments in maritime ports along the Indian Ocean, thereby reshaping regional geopolitics. Ports like Gwadar, Hambantota, and Chittagong enhance China's influence through initiatives like BRI and CPEC. The situation in Hambantota, Sri Lanka, is a warning about the risks of falling into debt traps. The impact extends to trade routes like the Suez Canal, reflecting China's global maritime ambitions. These nations are striving to strike a balance between reaping economic benefits and addressing security concerns, thereby reshaping policies in response to China's ever-expanding maritime network.

  1. Mazagon Dock Shipbuilders: 

Thisshipbuilding firm is making headlines due to the government’s plans to tender six Air Independent Propulsion (AIP)-capable diesel submarines worth around Rs 43,000 crore. It's the only Indian firm capable of building destroyers and conventional submarines. According toTrendlyne Technicals, the stock has risen by 8.8% in the past month. The firm’s order book at the end of June 2023 was pegged at Rs 39,117 crore, which is executable till FY27. However, the peak revenue recognition is expected in FY25 if no new major orders are bagged.

Mazagon Dock Shipbuilders’ Q1FY24 revenue increased marginally by 1.6% YoY, but net profits surged by 39.5% YoY. The bottom-line growth was driven by the faster commissioning of the P15-B destroyer ship. The management has given a revenue guidance of 10-12% for FY24, with margins at FY23 levels. Mazagon Dock has planned a capex of Rs 500 crore towards a floating dry dock.

The firm has tied up with ThyssenKrupp Marine System (TKMS) to participate in the bidding for P75I submarines (6 numbers), with an expected order value of around Rs 43,000 crore. Mazagon Dock Shipbuilders and L&T (along with Spain-based firm Navantha) have been shortlisted for the bidding process. The firm is also expecting an extension of the P75 submarine (3 numbers) valued at around Rs 22,000 crore. Apart from this, periodic refit and life certification projects are in the pipeline.

ICICI Securities says that despite Mazagon Dock’s strong execution capability, uncertainties around ordering timelines for P75I and P75 and its depleting order book pose a risk to revenue growth. The brokerage maintains its ‘Sell’ rating.

2. Kalyan Jewellers India: 

This gems and jewellery retailer has risen by 18.2% in the past week, reaching a 52-week high of Rs 228.4 on Thursday. The increase comes after the company announced a 33.3% YoY improvement in its Q1FY24 net profit to Rs 143.9 crore, beating Trendlyne Forecaster’s estimate by 16.9%. Its revenue also grew by 31.3% YoY to Rs 4,387.4 crore, beating the estimate by 3.7%. This revenue surge was driven by robust store expansion and high momentum in footfall.

For FY24, Kalyan Jewellers has plans to open 52 new stores in India under the FOCO model (franchise owned while the company operates). This approach will reduce capex costs and contribute to margin expansion. The management also aims to convert its digital platform Candere into an omnichannel model by launching 25 new stores in FY24. This rapid expansion may lead to further top-line growth. In Q1FY24, Kalyan Jewellers’ operating profit margin stood at 7.8%, while its peer Titan’s was 11.2%.

But the jewellery maker needs to absorb and train employees much before the store openings, leading to increased employee cost expenses. It already added nearly 600 employees in Q1. The company also features in a screener for stocks with growing YoY costs for long-term projects. 

Along with the expansion push, Kalyan Jewellers may also benefit from the rising share of organised jewellery retailers. These organised retailers are expected to claim over 40% of the market share by FY25 from 32% in 2020.

ICICI Securities maintains a ‘Buy’ call on Kalyan Jewellers and foresees  revenue and profit CAGR of 21% and 28% respectively by FY25. It retains its stance based on the company’s execution performance capabilities, which it expects to sustain in the future. According to Trendlyne Forecaster, the company has a consensus recommendation of ‘Strong Buy’ from 6 analysts.

3. Jindal Steel & Power: 

This metals & mining stock has been on the decline since Monday following its announcement of a 15% decrease in net profit to Rs 1,691.8 crore in Q1FY24 on August 11 post-market hours. Its revenue also fell by 3.3% YoY to Rs 12,588.3 crore due to a fall in pellet production and delays in the commissioning of key steel manufacturing facilities. These caused the company to appear in a screener of stocks with declining quarterly revenue and net profit (YoY). While its revenue was in line with Trendlyne’s Forecaster estimates, net profit beat estimates by 111.1%.

Despite the dip in net profit, Jindal Steel & Power's EBITDA margin expanded by 560 bps YoY to 21.6%, owing to a reduction in the cost of raw materials due to lower iron ore and thermal coal prices. It has managed to conclude the mining lease of Utkal C and Gare Palma IV/6, along with the commissioning of a 6 MTPA pellet plant at Angul, despite a delay in the commissioning of steel plants. This will bring down the cost of thermal coal. The delay in the commissioning of the steel plants was due to the hold-up in environmental approvals. Bimlendra Jha, Managing Director of the company, said, “The mining lease for the two thermal coal mines will lead to consistent availability of coal for our thermal coal requirements in DRI Kilns, Coal Gasification and Power Plants at lower costs.”

Following the results, ICICI Securities has maintained its ‘Buy’ rating on the stock with an upgraded target price of Rs 810 per share. This indicates a potential upside of 26.4%. The brokerage believes that the delay in the steel mining activities in Angul will affect revenue growth in the near term. However, it expects the company’s EBITDA margin to improve on the back of the captive coal mining and pellet plants. The brokerage expects its revenue to grow at a CAGR of 3.6% over FY22-25.

4. Tejas Networks:

This telecom services company rose nearly 7% in intraday trade on Wednesday after  winning a contract worth Rs 7,492 crore from TCS. The contract involves supplying radio access network (RAN) equipment for BSNL's 4G/5G network project. As per the deal, the firm will supply RAN equipment across 1 lakh sites and the project is expected to be executed during 2023 and 2024. 

This deal seems to have accelerated the recovery of Tejas Networks' share price. The stock had declined by nearly 10% after the announcement of its Q1FY24 results on July 21. Its net loss widened nearly 4X YoY to Rs 26.3 crore due to sharp increases in raw material costs and employee expenses. The firm's revenue growth of 49.5% YoY was not enough to offset the effects of rising input costs. It shows up in a screener for companies with net profit declining sequentially over the past three quarters. 

However, Tejas Networks has not lost its positive momentum entirely. It achieved robust top-line growth in its domestic and international segments. The company's order book for the wireless business at the end of Q1FY24 stood at Rs 1,909 crore, with 86.5% of the orders coming from the Indian market. Arnob Roy, the Chief Operating Officer of Tejas Networks, said, “Around 50-60% of the company’s total order book will be executed by the end of FY24.” In addition, the recent deal win from TCS adds to the already healthy order book. However, the focus falls on order execution to bring the firm back to profit from loss. 

5. FSN E-Commerce Ventures (Nykaa):

This internet and catalogue retail company plunged over 8% on Monday after reporting a 27.4% fall in its Q1FY24 net profit, missing Forecaster estimates by 83.2%. The net profit decline can be attributed to increased costs of raw materials, finance, and employee benefits. The slowdown in discretionary spending also dragged the net profit down during the quarter. However, its revenue has improved by 23.8% YoY, driven by the beauty & personal care (BPC) and fashion segments. 

During the quarter, Nykaa’s GMV (gross merchandise value) grew by 24% YoY. Specifically, the GMV of the BPC segment (constituting 63.7% of the total GMV) rose by 24%, while the fashion segment’s GMV (24.5% of the total GMV) increased by 12% YoY. Nykaa’s BPC business has remained strong despite a slowdown in discretionary spending, while the fashion segment saw muted growth. Falguni Nayar, the CEO, said, “During the quarter, growth in fashion has been below our long-term expectation. I think it was a particularly tough quarter for fashion and the industry is hoping for a revival." She has also highlighted that the company remains focused on its own brands as it is key to profitability. Own brands now constitute 14% of Nykaa’s overall Fashion GMV, up from the earlier 12%, and they achieved a 30% YoY growth in Q1. 

ICICI Securities highlights that the company’s EBITDA margins have expanded at a slower pace than expected. Nykaa’s EBITDA margin improved 120 bps YoY to 5.2%, largely driven by lower marketing & advertising expenses. However, the management foresees margin expansion through the scaling up of its eB2B business and the optimisation of marketing spends. The brokerage has downgraded its rating to ‘Add’ with an unchanged target price of Rs 165. As a result, Nykaa  makes it to a screener of companies with broker downgrades in price or recommendation in the past month.