Daily Posts

White Horse Stampede, Big Mama Warns Shorts, Tax Cuts, TAL Earnings, Mainland Earnings Season, Share Repurchases

Hope you had a great weekend!

Hang Seng gained +0.38% on below average volumes with 29 advancers and 16 decliners. HSBC’s strong earnings led to +5.04% increase worth 127 of the indice’s 94 point gain. Within the MSCI China All Shares Indice’s HK stocks, consumer discretionary, healthcare and staples were lower -2.18%, -1.85% and -1.79%. Utilities was the only positive sector in fairly lackluster trading. Southbound Connect volumes were moderate with buyers outpacing sellers 2 to 1. Tencent was Connect volume leader by 2X with buyers leading sellers to 2 to 1. One broker noted that Tencent’s immensely popular Honour of Kings game now includes a time limit for youth. The overhang of new game approval has been an immense impediment for Tencent. To see mainland investors buy in size is a potential clue that this overhang might be dissipating.

Shanghai & Shenzhen lost -2.18% and -2.02% as Kweichow Moutai’s disappointing earnings weighed heavily on the markets. Q3 revenue grew a tepid 4% to $2.84 billion for the index heavyweight. Q3 2017 was an abnormally strong quarter for the company last year which made the year over year comparison a difficult one. For the year Kweichow’s revenue is still expected to grow nearly 100%. Investors didn’t agree with my line of thinking as the stock fell limit down 10%. The company’s fall accounted for -61 index points versus the index fall of -56 index points. Breadth was poor as volume declined 9% day over day and well below the 52 week average. The opening sentence from a mainland broker’s daily review included tragic, tumbled, shrinking, and collapse.  Within the MSCI China All Shares’ mainland stocks, Kweichow’s fall brought down food and beverage stocks as staples fell -8.42% followed by discretionary -4.88% as home appliances well in unison. Healthcare was off -2.59% though not on any news. Tech and Communications were relatively stable as small caps outperformed large in a rarely seen event as mega caps and large caps saw outflows while mid-caps and especially small caps saw inflows. Northbound Connect volumes surged as sellers outpaced buyers by a slim margin. Several MSCI index inclusion heavyweights saw selling (Ping An and Kweichow).

The mainland market showed signs of a bottoming last week. Could today’s market action be the low? Maybe though time will tell. Policy makers continue to give vocal support to stabilizing the market. Tax cuts are center stage as corporate VAT, personal income tax deductions and most recently car purchase taxes have all been proposed. While these will take time to make their way through the economy, their implementation could be a much needed catalyst.

Online education firm TAL Education (TAL) released earnings just as a finishing up Friday’s China Overnight. TAL’s stock had lost 52% from its mid-June high despite it benefitting from China’s rigorous school entrance exams beginning in kindergarten and leading to the brutal Gao Kao college entrance exam. Highlights include:

  • Revenues +53.5% year over year (YoY) to $699mm from $455mm
  • Net income +29.5% YoY to $77mm from $59.5mm
  • Company has $1.6B in cash
  • Total enrollment +120% YoY to 4.9mm from 2.2mm

TAL gained +14.5% on volume of 14.9mm versus an ADV 5.8mm. The company had 25mm shares short which means yesterday’s gain might continue as shorts scramble to cover. I also believe that potential catalyst for Chinese equities listed in the US, which has been under the cloud of trade war, is earnings season. If the companies follow with strong earnings like TAL, I believe investors will return to the space. On deck is Baidu next tomorrow.

PBOC Deputy Governor Pan Shenggong gave a warning to renminbi short sellers in a not so subtle reminder. Back in 2015/2016 several hedge funds’ went public with their renminbi short. The PBOC, affectionately called Big Mama, responded by buying CNH in HK which decreased the amount of CNH available to short. This raised the cost of the short which has to be rolled. Recently a HF portfolio manager was on TV articulating their CNH short thesis. Clearly the PBOC noticed!

Combined Q3 profits for 1,347 mainland listed stocks reached $105B/CNY 731B which is a rise of 13% year over year. 70% of reporting companies reported YoY profit growth. Leading sectors were coal, steel, petrochemical, advanced manufacturing and new energy according to a Xinhua article. Over the weekend Industrial Profits were released for the month of September which grew a tepid 4.1% versus August’s 9.2% increase.

The Shanghai Stock Exchange submitted a draft for improving stock buybacks.

Swiss robot maker ABB will invest $150mm to build a robot making factory in Shanghai.

  • CNY 6.95
  • Another big rally in fixed income
  • Yield on 1 Day Chinese Gov’t Bond 1.52%
  • Yield on 10 Year Chinese Gov’t Bond 3.52%
  • Yield on 10 Year China Development Bank Bond 4.17%

Commodities were weaker on both Shanghai & Dalian