Daily Posts

Huawei CFO Arrested, Drug Procurement Price Plunge, Former PBOC Gov’s Comments, MOMO reports Q3 Earnings, Mainland Investors Close Brokerage Accounts

Apologies as we had our MSCI Consultation on the inclusion of Chinese A Shares. I believe there will be good news once the consultation is released by the end of February.

There were two key developments overnight.

Private telecommunications giant Huawei confirmed the arrest of their CFO and founder’s daughter in Canada at the request of the US. The speculation is the US believes Huawei sold equipment to Iran violating US imposed sanctions. The US has been gunning for Huawei for some time as the company is seen as technology rival. The US has concerns that their equipment could allow for spying leading to a campaign to keep allies in the UK and Australia from buying their equipment (BT recently said they would stop buying Huawei equipment.). The US government is a big entity so in theory the action could have been done without the White House’s knowledge. The action is similar to what we saw with ZTE which led to hefty fines and US installed guidelines. The similarities end there as ZTE had agreed not to sell equipment to Iran and then did so regardless. The second round of US fines almost put the company out of business. Huawei is different as it is highly regarded company within China and loved for its sophisticated yet inexpensive cell phones. S&P 500 futures initially plunged up to 1.9% on the news. Considering the positive developments coming out of the dinner the timing of the arrest markets are concerned the arrest is a step backwards leading to derailment of talks. While China will push back on the move, I don’t believe one company will derail trade talks. The US and China are apt to deescalate a trade war though the US campaign to limit China’s technological growth may continue.

11 Chinese cities participated in a pilot drug procurement bidding process. Pharmaceutical companies had to submit offers for where they would sell drugs. The offering prices where well below expectations leading to sharp sell off in healthcare stocks. Analysts are just beginning to weigh in the earnings effect as one early report was dismissive due to the winning bidder receives the lionshare of drug purchases which could offset the price decrease. As we receive more analyst color I’ll report back. While the drug procurement process could weigh on pharma names in the short run, the long opportunity in healthcare’s growth will continue.

Hang Seng dropped -2.47% increased 22% day over day though below the 52 week average with only 3 advancers and 46 decliners. The Huawei news weighed very heavily on the markets. Tencent lost -5.32% on no news worth 132 of the indice’s 663 point drop though it was a fairly broad drop. The chatter around online gaming regulation has been improving though Tencent is widely held. Apple suppliers AAC and Sunny were off -5% on news fellow supplier Lagran issued a revenue warning. Within the MSCI China All Shares’ HK stocks, healthcare dropped -8.87% with communications and tech off -3.95% and -3.83%. Staples and discretionary were off -3.22% and -2.96%. Southbound Connect volumes were higher with buyers outpacing sellers though Tencent was sold 3 to 2. Ping An was bought heavily.

Shanghai & Shenzhen were off -1.68% and -2.17% on light volumes and poor breadth. Healthcare lost -4.62% while tech dropped -3.52% and staples -3.07% within the MSCI China All Shares’ mainland stocks. Northbound volumes were higher with sellers outpacing buyers as foreign investors sold mainland stocks for the first time. The sales were not especially high though worth noting.

Former PBOC Governor Zhou was interviewed on his thoughts on the G-20 dinner on Bloomberg TV (small insight into my evening activity). He articulated positive thoughts on the dinner and feasibility for a deal to get done.

Social networking platform Momo reported Q3 earnings inline with analyst expectations as revenues were quite strong though net income came in light. Despite this the stock is down pre-market though everything is!

  • Q3 revenues increased 51% to $536 million versus analyst expectations of $533 million.
  • Adjusted EPS $0.53 versus analyst estimates $0.53 and Q3 2017 of $0.45
  • Monthly active users was 110 million versus Q3 2017’s 94mm

In a sign of investor sentiment, the number brokerage accounts for Chinese B-Shares actually declined from September to October by a small amount. Closing a brokerage account actually takes some effort as opposed to just defunding it. B-Shares are US $ denominated stocks in the mainland which are very small in number and getting smaller. We don’t have November’s number but once it is out I’ll report back. Regardless I would take it as an example of how poor sentiment as evidenced by investors literally walking away from the stock market. I’m holding it out as evidence of investor capitulation.

CNY 6.88; backed up 35bps

  • Yield on 1 Day Chinese Gov’t Bond 1.70%
  • Yield on 10 Year Chinese Gov’t Bond 3.29%
  • Yield on 10 Year China Development Bank Bond 3.81%

Metals were off on the Shanghai while softs were firmer on the Dalian