Daily Posts

October PMIs, Baidu, IQ, and Yum China Earnings, National Team Buys Healthcare, FI Sell Off

Good morning! Carved pumpkins last night without losing a finger which is a win in my book.

October Official PMIs from the National Bureau of Statistics (NBS) – (NBS reports PMIs for large companies while Caixin reports PMIs for smaller companies)

Manufacturing PMI                        50.2 versus estimate 50.6 and Sept’s 50.8
Non-Manufacturing PMI               53.9 versus estimate 54.6 and Sept’s 54.9

Takeaway: I’m already seeing the lower PMIs related articles as evidence of trade war. WRONG! China has one less work week in October due to the week long National holiday. Month over month comparisons should be taken with a grain of salt. Another factor is lower commodity prices which decreases input and output prices. CNY weakness decreases the value of exports. Yes there was a fairly across the board decline but hardly a surprise. With that said business activity expectations were stable. One economic team noted the increase in construction activity. Infrastructure development in rural China has previously been voiced by policy makers. We are potentially seeing the first “green shoots” of this policy showing up in the PMI. Investors should note Chinese infra stocks have actually underperformed thee broader China market.

Hang Seng gains +1.6% on volumes 6.7% higher day over day with 39 advancers and 11 decliners as Asia followed the US higher Tuesday. FB’s after the close earnings had an effect on tech in Asia as Tencent ripped +5.87% which accounted for 130 of the indice’s 394 point gain. Large cap banks had a solid day which account for 48% of the HSI which is one reason I prefer the MSCI China All Shares Index. The HK stocks with the China All Shares were led by Communications +4.76%, tech +4.58%, and discretionary +4.45%. Financials in the All Shares were only up +0.84%. Southbound Connect volumes were moderate with sellers slightly outpacing buyers. HSBC saw outsized buying while Tencent experienced 2 to 1 selling.

Shanghai & Shenzhen gained +1.35% and +1.39% on slightly higher volumes and very strong breadth. Yesterday’s comments from the CSRC (the SEC of China) on allowing more stock buyback and M&A helped today. The market had been dealing with an AUM decline from a number mutual funds that considered part of China’s “National Team”. As Q3 holdings have been released (similar to 13Fs here) vehicles used by the National Team have changed which explains why some funds saw declines in assets. More importantly is the focus on large/mega cap healthcare and food/beverage/liquor stocks. As this data was released last night guess what the two leading sectors were within the China All Shares’ mainland stocks: you guessed it staples +3.69% and healthcare +3%. Not surprising that mega cap and large cap stocks saw inflows while small and mid caps saw outflows. Who else picked up on this? Foreign institutional investors. Northbound Connect volumes were high and dominated by buying with our old friend Kweichow Moutai experiencing nearly 4 to 1 buying. Infrastructure related materials and industrials had a strong day both +2%.

Mainland investors sold fixed income heavily yesterday especially the front of the curve. What could be happening? Investors are selling money market funds to buy stocks. One great day doesn’t make a trend but let’s see if this persists. (fingers crossed!)

Baidu reported Q3 earnings after the close Tuesday. Baidu is off -35.9% from its May 16th high. After hitting a 52 week low Tuesday, the stock rallied into the close to end +0.89% with a P/E 24 and forward P/E of 18. By the numbers:

  • Revenue $4.11B versus estimate $4B
  • Revenue increased 27% year over year (YoY)
  • Net Income increased 56% YoY to $1.8B
  • Non GAAP diluted EPS $2.77 versus estimate $2.41
  • Non GAAP diluted EPS +46% YoY
  • Q4 Revenue Forecast $3.71B to $3.89B versus estimate $4B

 


Of 163 global companies with a market cap of +$64 billion the average revenue growth is 10%. Pretty good right! Guess what a leading headline was? “Baidu Sales Forecast Misses Estimates as China Economy Slows”. Am I missing something? The nattering nabobs of negativity take an outstanding quarter and point out the one negative. Yes Baidu’s forecast missed but didn’t every other metric beat?

IQ, the Netflix of China, reported Q3 after the close on Tuesday.

  • Revenue $1B (CNY 6.9B) versus estimate CNY 6.98B
  • Revenue increased 48% YoY
  • Operating loss $377mm double a year earlier
  • EPS loss CNY 4.34 versus estimate CNY 2.81
  • Paying subscriber 80.7mm +89% YoY from 42.7mm
  • Q4 Revenue Forecast range CNY 6.48B to 6.75B versus estimate 6.73B

 

As a high growth company net income/EPS is less of a concern for investors versus subscriber growth. With that said the increase loss is disconcerting despite the great growth prospects of the company.



Yum China
reported Q3 earnings after the close Tuesday. By the numbers!:

  • Revenue $2.2B versus estimate $2.24B
  • Adjusted EPS $0.51 versus estimate $0.45
  • Dividend increase 20% to $0.12 from $0.10
  • 64% of sales done by mobile payment
  • KFC loyalty program 145mm


Analysts really missed on this one. They clearly are watching too much financial TV!

  • CNY eases 6.97


Front of the curve spikes as risk on leads to FI selling and equity buying

  • Yield on 1 Day Chinese Gov’t Bond 1.88%
  • Yield on 10 Year Chinese Gov’t Bond 3.53%
  • Yield on 10 Year China Development Bank Bond 4.17%

 


Commodities were off on both exchanges.