Hope all is well! 

Key News Overnight

• Another quiet night overnight as Asia traded mixed as investors took Mnuchin’s comments on a trade call this week going well leading to a meeting with a grain of salt. The potentially positive catalyst may have been offset by the yesterday’s Tweet calling out China’s GDP print. Earnings are likely to play an increasing role in the short term. I should have mentioned yesterday that foreign favorite Han’s Laster Technology (002008 CH) fell 10% yesterday and another -2% overnight after pre-announcing a significant profit drop of 65% YoY on Monday. Index investors were spared the pain as MSCI removed the stock after it hit foreign ownership limits earlier this year. The foreign favorite is apt to see numerous sell side downgrades. Kweichow Moutai will report earnings tomorrow though other foreign favorites such as liquor and home appliances were weak overnight as the mainland enters earnings season.
• Alibaba shareholders approved a 8 from 1 share split at Monday’s shareholder meeting that will make the company’s HK dual listing more appealing to retail investors. While a listing date has not been announced, it would allow mainland investors to access stock for the first time via the Southbound Connect program. The HK listing would allow arbitrage with the US listing if the HK listing is bid up which one would assume will happen. The US listing should benefit from the listing and also from estimates Altaba (AABA) will commence its selling by mid-August. The question is what valuation will HK/Chinese investors place on the HK listing? The listing will create another issue as MSCI’s methodology includes dual listings. MSCI China currently has 14.8% in Tencent and 13.7% in Alibaba’s US listing. US ETFs and index funds need to adhere to the Registered Investment Company (RIC) Rules within the Investment Company Act of 1940 which states all holdings over 5% can not add to more than 50%. We don’t know the exact size of the HK listing but if it represents more than 5% of the index, US listed ETFs and index funds benchmarked to MSCI China could have a RIC issue. This is pure speculation on my part but the diversification issue is why I prefer the MSCI China All Shares (US, HK and mainland stocks) versus MSCI China.

The Hang Seng had a quiet day managing a +0.23%/+64.7 index points to close at 28,619 as volumes fell 8% day over day and well below the 1 year average. One broker noted the HSI has been holdings its 100 day moving average. Breadth was positive with 32 advancers and 16 decliners led by index heavyweight Tencent +0.5%/+14.6 index points though AIA eased -0.41%/-12.5 ip and Galaxy Entertainment +2.87%/+10.8 as casino names were strong overnight. The HK stocks within the MSCI China All Shares gained +0.43% led by discretionary +1.38% as autos rallied. Auto sales rebounded 17% in June which was a major factor in the strong retail sales release yesterday. The sell side is mixed on the outlook as some view June as an auto inventory clearance. Industrials had a strong day +0.94%, tech +0.93% on Huawei potentially getting a reprieve from the US while healthcare saw follow through from yesterday +0.92%. Staples lagged off -0.6%. Southbound Connect volumes were light as buyers slightly outpaced sellers. 

The Shanghai & Shenzhen traded flat off -0.16% and -0.03% on light volume off -16% day over day and below the 1 year average. Breadth was mixed with 1,805 advancers and 1,624 decliners. Small and mid caps slightly outperformed slightly driven by sector dispersion tech + and foreign favorites in staples and discretionary off on profit taking pre-earnings. The mainland stocks within the MSCI China All Shares were off -0.37% as staples and discretionary were off -1.18% and -1.05%. Healthcare saw short term profit taking -0.71% while financials slipped -0.43%. Northbound Connect volumes were light though buyers outpaced sellers as foreign investors invested $146mm into mainland stocks. 

A media source is reporting Netease (NTES US) will spin off its online education unit Youdao in a Q3 US listing though I’ve not heard of this verified elsewhere. NTES also announced a stake in Canadian video gaming company Behavior Interactive. 

A mainland media source is reporting Goldman Sachs has established Goldman Sachs China Capital in Shanghai. The unit will be comprised of four private equity and real estate investment units consolidated into one. 

China Daily is reporting central SOE 1H 2019 profits increased 8.6% YoY to $102B (RMB 703B) according to the State-owned Assets Supervision and Administration Commission (SASAC) .

Brilliance China Automotive Holdings (1114 HK) had a strong after announcing a board meeting regarding a special dividend. The dividend is rumored to be 

While China is a small market for Pepisco (PEP US) making up just 1.5% of revenue, their China sales did grow at a double digit rate in the latest quarter as the company wants to raise Gatorade’s presence. Sweden’s Atlas Copco (ATCOA SS), the world’s largest manufacturer of air compressors, reported Asia sales fell 1% YoY on trade tensions.

• CNY 6.87 versus 6.86
• Yield on 1 Day Chinese Gov’t Bond 2.29% versus 2.24%
• Yield on 10 Year Chinese Gov’t Bond 3.19% versus 3.19%
• Yield on 10 Year China Development Bank Bond 3.68% versus 3.69%
• Commodities were firmer on the Shanghai & Dalian Exchanges with Dr. Copper +0.36%