The HSBC Flash China Purchasing Managers Index (PMI) for February came in at 50.4, down from a final reading of 52.3 in January and a four-month low. Analysts were expecting a reading of 52.2.

The January reading represented a two-year high, and despite the downturn February marks the fourth consecutive month above 50 for the Flash China PMI.

The value of this particular reading must be discounted, however, because of heavy distortions created by the Chinese New Year. The official holiday period ran from Feb. 9 through Feb. 15, though the private sector could be on slow time until the end of February. The HSBC survey includes a relatively small number, approximately 420 manufacturing companies, and this number has likely been depressed even further by celebration.

“The Chinese economy is still on track for a gradual recovery,” noted Qu Hongbin, Chief Economist, China, and Co-Head of Asian Economic Research for HSBC. “Despite the moderation of February’s Flash PMI, the index recorded the fourth consecutive reading above the ‘50’ critical line. The underlying strength of Chinese growth recovery remains intact, as indicated by the still expanding employment and the recent pick-up of credit growth.”

PMI readings above 50 indicate “expansion,” while readings below 50 indicate “contraction.”

The HSBC report, reputed to be the earliest indicator of China’s economic health, showed demand for Chinese exports weakened in February, as the New Export Orders sub-index inched down to 49.8, just below the critical 50 level. Export growth surged to 21-month highs in January, although lingering uncertainty in the US and in Europe continues to cloud the outlook.

Output continued to flash “increase,” though at a slower rate, as did New Orders, Employment, Output Prices, Input Prices and Quantity of Purchases.

In addition to New Export Orders, Backlogs of Work and Stocks of Purchases came up “decrease” with a “change of direction.” Stocks of Finished Goods was below 50 and slower than January, while Suppliers’ Delivery Times are “shortening,” a “change in direction” from the prior report.

The Output sub-index backed up from a 22-month high, New Orders slowed from a 20-month high, Employment edged down from its highest in 20 months, Input Prices cooled from a 16-month peak and Output Prices fell from a 14-month high.

Consistent with recent trends, the data show that domestic conditions are relatively strong, as export-focused criteria continue to reveal weakness in the US, Europe and developed Asia.

Despite the backtracking, the February HSBC Flash China PMI reading still marked the fourth straight month the index has been above 50. Before November 2012 it had been below 50 for 12 consecutive months.

China will hold its annual full-session parliament meeting on March 5, 2013, when incoming President Xi Jinping officially takes the reins of state power. Outgoing Premier Wen Jiabao will present the government’s 2013 economic targets.

Final HSBC PMI data will be published on Friday, March 1, as will official manufacturing activity data from the Chinese government. The median estimate from 28 observers surveyed by Bloomberg is for an official PMI reading of 50.5.

About the Aussie

The Australian dollar weakened to USD1.0186 early Thursday morning in Sydney, its lowest point since early October. Although the aussie has been above parity versus the US dollar for eight months, its longest run above USD1 since it was freely floated in 1983, it’s depreciated about 5 percent over the past year, from USD1.0809 on March 1, 2012.

The Reserve Bank of Australia (RBA), which has cut its benchmark overnight interest rate by 175 basis points over the past 16 months, has conceded that it’s taking the exchange rate into account when setting monetary policy.

RBA Governor Glenn Stevens said last week the aussie is “somewhat too high” in light of lower prices for the nation’s commodity exports. Mr. Stevens also added that he would need to be confident the currency is “seriously overvalued” before considering intervention to weaken the exchange rate.

There are other factors at work supporting the aussie in addition to the traditional commodity pillars. As revealed through a Freedom of Information Act request made by Bloomberg News, Australia’s currency is held by as many as 34 central banks from Reykjavik to Santiago.

The central banks of Slovakia and Slovenia were recent additions to a list of 16 economies that publicly hold the Australian currency, according to papers prepared in the second half of 2012 by the RBA. Newcomers on a list of 18 possible holders include China, France, India, South Korea, Thailand and South Africa.

Demand from abroad for Australian government bonds helped drive yields to record lows in June 2012. The benchmark 10-year rate touched 2.698 percent June 4, 2012, while foreign holdings of federal securities reached as high as 82.3 percent in the third quarter of 2011. Central banks seeking to limit inflation risk have loaded up on Australian bonds. Australia, with low debt and conventional monetary policy, is perceived to have very low inflation risk.

Although the strong aussie is clearly creating problems for domestic manufacturers, RBA documents uncovered by Bloomberg reveal that the central bank is not yet in panic mode.

“There is not strong evidence that the Australian dollar is posing an imminent threat of deflation or is highly contractionary for the domestic economy,” the RBA concluded.

The RBA, during its first meeting of 2013 on Feb. 5, held its benchmark at 3 percent, down from 4.75 percent after 175 basis points of cuts in five separate moves from November 2011 through December 2012.

The RBA’s stance is decidedly dovish, as in his concluding paragraph in his statement on the monetary policy decision Governor Glenn Stevens noted, “The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand.”

Over the long term the Australian dollar, due to the fundamental strength of the underlying economy and the sound fiscal position of the federal government, will look good versus its global counterparts. In the short term Mr. Stevens is providing support to struggling sectors of the domestic economy.

It’s important to note that at 3 percent the RBA’s overnight target remains among the highest such benchmarks for developed-world central banks.

The RBA will meet again on March 5.

The Roundup

Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) reported a cash profit for the first quarter of fiscal 2013–or the three months ended Dec. 31, 2012–of AUD1.53 billion, a 6.2 percent increase from AUD1.44 billion for the three months ended Dec. 31, 2011. Statutory net profit after tax was AUD1.36 billion.

In its commentary accompanying the quarterly “trading update,” management noted strong revenue growth from its Asia operations, though volume growth in that key market was offset by margin pressure in Australia and New Zealand.

Income for ANZ’s Global Markets segment, which includes Asia, grew 26 percent to AUD544 million. Overall customer sales income increased by 4 percent over the quarterly average for 2012, with the Australian business performing “well” and the Asian business posting its “strongest-ever” customer sales result.

Credit-quality metrics were in line with expectations, as management booked a AUD311 million impairment charge for the quarter. Management maintained the full-year impairment forecast provided with its fiscal 2012 full-year results announcement.

Management also noted that market share in Australia increased in key sectors, including traditional and affluent banking as well as household mortgages and deposits. Retail margins improved slightly. Commercial lending and deposits showed “good momentum.”

Management described credit quality across retail and commercial lending as “sound and within expectations,” although the provision charge was slightly higher compared to the prior corresponding period. The Australian division posted a “strong” profit, excluding provisions, as ANZ remains focused on controlling costs in its domestic operation.

The strong Global Markets result was offset by weaker numbers for Global Loans and Transaction Banking in Australia. Margin pressure continued albeit at a lesser rate than in the second half of fiscal 2012.

Notably, the Asia-Pacific, Europe and America business continues to deliver strong revenue growth to the division, and expenses are “well controlled.”

Management described the revenue situation with its New Zealand division as “subdued,” though it did note cost savings resulting from productivity improvements and brand integration.

As management forecast during its October 2012 presentation of fiscal 2012 results, margins for the division have declined from their 2012 peak. Credit quality trends remain “benign.”

ANZ’s Global Wealth & Private Banking division continues to win business from the existing client base. Although management noted that in-force premiums and funds under management grew and that investment markets have improved, business conditions remain “challenging.” Here, too, cost management is a key and ongoing focus.

ANZ’s Basel III common equity Tier 1 ratio as of Dec. 31, 2012, was 7.7 percent, equal to 9.7 percent on a “fully harmonized” basis and unchanged from Sept. 30, 2012, the end of the bank’s fiscal 2012.

ANZ had completed approximately 50 percent of its fiscal 2013 term wholesale funding requirement as of Dec. 31, 2012.

Management will report results for the first half of fiscal 2013 (ending April 30, 2013) on May 30, 2013, at which time it will announce the amount of its interim dividend.

ANZ paid AUD0.66 per share for its fiscal 2012 interim dividend, up from AUD0.64 in fiscal 2011. The fiscal 2011 interim dividend rate was 23.1 percent higher than the fiscal 2010 rate.

However, based on management’s generally circumspect stance on the state of its major domestic operations–and despite robust results from its key growth initiatives in Asia–it’s likely that the dividend increase for fiscal 2013 will more closely resemble the 3.1 percent boost announced in April 2012.

We will wait for confirmation of a dividend increase before boosting our buy target on the stock, which has surged to AUD28.28 on the Australian Securities Exchange (ASX), or about USD28.94 based on the prevailing exchange rate as of this writing.

Australia & New Zealand Banking Group remains a buy under USD24 (about AUD25.56 on the ASX).

SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF), which suffered a steep share-price decline in late 2012 after revising downward its fiscal 2013 first-half earnings forecast, maintained its interim dividend at AUD0.135 per share as it announced better-than-anticipated numbers for the first six months of the year and guided to a better second half.

SMS has rallied from AUD4.53 on Dec. 17 to AUD5.32 as of the close of trading on the ASX on Wednesday, Feb. 27, 2013.

The stock reached a 2012 peak of AUD6.71 on the ASX on Sept 12 but plunged from AUD6.46 on Oct. 22 to AUD4.74 on Oct. 24 after management announced it would reduce capacity, restrict recruiting and review and cut overhead costs in light of the reduced demand it was experiencing in the first quarter of fiscal 2013.

SMS reported net profit after tax of AUD12.9 million for six months ended Dec. 31, 2012, down 15.2 percent from the prior corresponding period due to lower revenue from the information and communications technologies (ICT) and transport sectors as well as a single Asia-based client.

CEO Tom Stianos noted that “sales to all other sectors combined have been resilient, with revenue holding up relatively well despite the challenging trading conditions.”

Revenue of AUD144.8 million was down 14.6 percent. ICT was off by AUD11.5 million and transport was AUD7.8 million lower, the two combining to account for 78 percent of the overall decline from AUD169.5 million for the first half of fiscal 2012. Government demand was also softer. These impacts were mitigated somewhat by solid growth in health and improve financial services and utilities revenue.

Earnings per share were AUD0.184, down from AUD0.215 a year ago. The payout ratio based on the interim dividend rate of AUD0.135 and EPS of AUD0.184 was 73.4 percent, up from 62.8 percent. Net operating cash flow, meanwhile, covered the dividend by a 1.11-to-1 ratio.

SMS signed AUD159 million worth of new contracts during the period. But management noted that the six-month period had been characterized by clients’ focus shifting from expansion to cost control, capital project deferrals and slow decision-making on new initiatives. Although there are projects in companies’ pipelines, the uncertain economic environment has made managers reluctant to push ahead.

Management, which has cut overhead costs and adjusted capacity to match demand, noted that although “trading conditions have been subdued, new projects currently under negotiation (including in Asia) and a stronger sales pipeline point to a return to growth in fiscal 2014.”

SMS expects ICT, financial services, state government, transport and utilities customers to proceed with projects that will boost results next year. There is also ample balance-sheet capacity to fund acquisitions that would add to earnings.

SMS has zero debt and more than AUD29.3 million in cash as of Dec. 31, 2012. Cash, in fact, is up 97.3 percent since Dec. 31, 2011, providing ample support for the dividend. The positive outlook for fiscal 2014 suggests as well that SMS will return to dividend growth in the very near future.

SMS Management & Technology, which is yielding 5.7 percent at current levels, is a buy under USD6.50 (about AUD6.65 on the ASX).

Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY) posted net profit after tax (NPAT) of AUD1.285 billion for the first half of fiscal 2013, a 9.3 percent increase over the prior corresponding period, as strong Retail results from Coles, Bunnings and Kmart as well as a reversal of the company’s Insurance division’s fortunes more than offset weakness at Target and the Resources segment.

Management declared an interim dividend of AUD0.77 per share, payable March 28, 2013, to shareholders of record on Feb. 25. That’s a 10 percent increase over the fiscal 2012 interim dividend of AUD0.70 per share.

Supermarket unit Coles delivered earnings growth of 15.1 percent to AUD755 million, while Bunnings’ net was up 6.8 percent to AUD518 million. Kmart earnings surged by 24.9 percent to AUD246 million.

Target’s profit slid 20.4 percent to AUD148 million, though management reported “early progress” on a transformation plan and improved sales momentum toward the latter part of the half-year. The cost of implementing the transformation plan continued to weigh on the bottom line, however.

Officeworks posted 11.8 percent earnings growth to AUD38 million, as improved cost controls and strong online sales offset declining technology-related activity and a tough environment for small to medium-sized businesses.

Resources reported a 62.8 percent decline in net income to AUD93 million, as lower coal prices, the strong Australian dollar and the lagged effect of a large rebate to major customer hit the top and bottom lines for the unit. Insurance earnings were up AUD87 million to AUD104 million, mainly through better underwriting performance that was driven by higher premiums and fewer claims, including catastrophe costs.

Chemicals, Energy and Fertilizers reported earnings of AUD104 million, up 5.1 percent over the prior corresponding period due to good plant performance and improved pricing. Industrial and Safety earnings declined 9.3 percent to AUD88 million on lower sales and increased margin pressure, mainly due to pressures on the Australian resources sector.

Operating cash flow was AUD2.207 billion, though free cash flow for the half decreased 13.9 percent to AUD1.007 billion and underlying free cash was down by 30.4 percent.

Operating cash flow per share was AUD1.91, while earnings per share came in at AUD1.11. Both figures well cover the AUD0.77 per share dividend. Management reported an interest-cover ratio of 11.8 times, though net debt ticked up during the period by 14.3 percent.

Management is “cautiously optimistic” about the second half of the fiscal year, despite continuing economic and market uncertainty. These latter factors will continue to hamper the Resources and Industrial and Safety divisions. Management expects its Retail businesses to continue to grow, however, on the strength of new offers for customers and cost controls.

In the aftermath of its 10 percent dividend increase Wesfarmers is now a buy up to USD40 (approximately AUD41 on the ASX).

BHP Billiton Ltd (ASX: BHP, NYSE: BHP) posted a net profit after tax of USD4.238 billion, a decline of 57.8 percent from the prior corresponding period, as revenue sagged 14.1 percent to USD32.204 billion.

The result was heavily weighed down by USD1.4 billion in one-time costs related to the sale of assets, though net profit excluding items fell 43.4 percent to USD5.683 billion. Underlying earnings before interest and tax (EBIT) for the half sank 38.3 percent to USD9.782 billion.

Net operating cash flow was off by 48 percent to USD6.4 billion. Management had previously announced a USD0.57 per share interim dividend, which compares to USD0.55 paid a year ago.

Management ascribed the profit decline to lower prices for iron ore and other commodities in 2012. It also noted at the outset of its results presentation the realization of USD1.9 billion in controllable cash cost savings on an annualized basis during the period.

Of perhaps greater note, and probably related to the significant decline in profit, Marius Kloppers announced he would give up his duties as CEO effective May 10, 2013, and leave BHP entirely in October.

BHP said the result was built on the foundations of a strong operating performance, its continued focus on costs and the benefits of its differentiated strategy.

Management, however, presented an upbeat forecast, noting the strong operating performance of its various commodity segments. “In summary,” BHP’s presentation noted, “the global economy is expected to strengthen over the next 12 months, providing support for commodities demand and pricing.” Management also pointed to a “robust” longer-term outlook.

BHP’s low-cost, upstream strategy and broad diversification positions it well for a turnaround in the near-term fortunes of the global economy and for a longer-term return to trend rates of growth.

Management remains optimistic about new Chinese leadership and its commitment to policies that support stable growth and also noted that the US was benefiting from relatively low energy costs as it continues to crawl out from under the mess of 2007-09. Also of note is the fact that euro zone markets had stabilized following the European Central Bank’s commitment to provide additional support for troubled peripheral nations.

BHP did, however, caution that despite current high iron ore prices the addition of low-cost supply in many markets and a maturity in China’s infrastructure-led growth would eventually dampen pricing for iron ore and metallurgical coal.

BHP remains a buy under USD40, or about AUD41, on the Australian Securities Exchange (ASX).

BHP also trades as an American Depositary Receipt (ADR) on the New York Stock Exchange (NYSE). BHP’s ADR, which is worth two ordinary, ASX-listed shares, is a buy under USD80.

Mineral Resources Ltd (ASX: MIN, OTC: MALRF) reported earnings before interest, taxation, depreciation and amortization (EBITDA) of AUD145.1 million for the six months ended Dec. 31, 2012, up 1.4 percent versus the prior corresponding period. Statutory net profit after tax was AUD63 million, down 22 percent year over year.

Revenue for the period was AUD500.2 million, up 22 percent versus the first half of fiscal 2012.

Management declared an interim dividend of AUD0.16 per share, payable April 11, 2013, to shareholders of record as of March 21. The interim dividend rate is in line with the fiscal 2012 interim dividend of AUD0.16.

Commodity export volumes for the half year were 14 percent higher compared to the second half of fiscal 2012 and up 56 percent versus the first half of fiscal 2012.

Mineral Resources’ mining services business was awarded four BOO contracts totaling 17 million metric ton of annual crushing volume. Three of the four contracts were in operation late in the half and the fourth will be in operation during the fiscal third quarter. The company won a fifth contract in January, which will be in operation by May 2013.

These contracts also provide for a number of add-on services, such as haulage, providing an additional avenue for resource utilization on each site.

Although the steep decline in iron ore prices from mid- to late-2012 had a significant negative impact on the Australian mining industry, Mineral Resources’ Crushing Services International unit actually stands to benefit from the more lasting uncertainty afflicting decision-makers.

These managers are now much more concerned with improving efficiencies and reducing capital expenditures, efforts CSI will help further.

The company completed construction of the Christmas Creek 2 project on behalf of Fortescue Metals Group Ltd (ASX: FMG, OTC: FSUMF, ADR: FSUGY) on time and within budget.

The PIHA unit has also established a solid base in the provision of dewatering services to the mining industry in addition to its traditional jobbing work of pipeline installations, pipe lining and fittings manufacture. This change in focus will improve margins and also provide increased certainty of workflow for the group.

The commodity business produced first iron ore from the Phil’s Creek mine, while production gains from Carina and high-quality output continue to please management and to impress customers. Mineral Resources started up development activity at the Poondano iron ore project.

The pace of development and further ramp-up of output will be dictated by iron ore prices, which rebounded strongly from the August-to-October 2012 worldwide slump that continues to color miners’ outlooks.

Mineral Resources’ ability to pursue expansion opportunities is considerably bolstered by the negotiation during the period of a AUD608 million syndicated debt and guarantee facility. The debt-to-equity ratio as of Dec. 31, 2012, was 35 percent.

Management is “very positive” about Mineral Resources’ medium- to long-term prospects for both contracting and mining activities. Work won or coming into production in the contracting business will, along with some normalization of commodity markets, improve the company’s earning capacity in the second half and also in the long term. Management expects second-half results to be “strongly up” from the first half.

Mineral Resources remains a buy under USD13 (about AUD13.30 on the ASX).

Here are dates for the next round of reporting season, which for most companies will be for the first half of fiscal 2013. We’ve noted where the reporting period differs.

We’ve also linked to discussion of earnings for those companies that have already reported numbers. We’ll have another set of updates in next week’s Down Under Digest.

Conservative Holdings

• Aberdeen Asia-Pacific Income Fund (NYSE: FAX)–N/A (fund, reports holdings on a quarterly basis)
• AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Feb. 27, 2013 (confirmed)
• APA Group (ASX: APA, OTC: APAJF)–Feb. 21 Down Under Digest
• Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Feb. 7 Down Under Digest
• Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–Feb. 27 Down Under Digest
• Cardno Ltd (ASX: CDD, OTC: COLDF)–Feb. 21 Down Under Digest
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Feb. 21 Down Under Digest
• Envestra Ltd (ASX: ENV, OTC: EVSRF)–Feb. 21, 2013 (confirmed)
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Feb. 25, 2013 (confirmed)
• Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–Feb. 24, 2013 (confirmed)
• SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF)-–Feb. 27 Down Under Digest
• Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Feb. 7 Down Under Digest
• Transurban Group (ASX: TCL, OTC: TRAUF)–Feb. 7 Down Under Digest
• Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY)–Feb. 27 Down Under Digest

Aggressive Holdings

• Amalgamated Holdings Ltd (ASX: AHD, OTC: None)–Feb. 21, 2013 (confirmed)
• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Feb. 27 Down Under Digest
• GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–May 16, 2013 (confirmed)
• Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Feb. 27 Down Under Digest
• Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Feb. 21 Down Under Digest
• New Hope Corp Ltd (ASX: NHC, OTC: NHPEF)–Mar. 26, 2013 (estimate)
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Feb. 26, 2013 (full year 2012, confirmed)
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Feb. 21, 2013 (confirmed)
• Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Feb. 24, 2012 (full year 2012, confirmed)
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–February Sector Spotlight