Tariffs Postponed & US-Listed Earnings Impress
- The US Trade Representative announced that September tariffs will not include cellphones and other devices. However, those products may still be tariffed starting in December. Both sides plan to have a call in two weeks.
- Asia was a sea of red following the US equity market slide and strong move in US Treasuries overnight exacerbated by Argentina’s surprise election results, which hammered the Peso.
- It’s Groundhog day as Hong Kong, once again, languishes due to poor sentiment as demonstrators struck the airport leading to a travel nightmare, but mainland airport stocks surged as HK flights were diverted to them.
- US listed Chinese equity ETFs have seen a weekly outflow of nearly $450mm, HK listed -$540mm and mainland China -$139mm. Such herd mentality coincides with recent skyrocketing borrowing rates in US listed Chinese equity ETFs, high short interest in HK and, as Bloomberg noted, put prices relative to calls in US listed Chinese equity ETFs. The high volume is likely due to the kick off of the earnings season for US-listed Chinese companies.
- We may see slightly weak industrial numbers in September. October 1st is China’s 80th anniversary and factories might be closed that day to provide blue skies for the Beijing festivities.
FX and Bond Update
The RMB continues to show resilience and is likely to benefit from the postponing of US tariffs on key consumer goods. RMB gained as the spot rate rose to 7.04 RMB/USD compared to 7.06 yesterday. PBOC Governor Pan Gongsheng said that the Yuan should not weaken due to external forces such as global trade policies. AUD and JPY declined slightly. China yields persist in bucking the global trend. The yield on the 10-year Chinese sovereign is still at just above 3%, while the US treasury 10-year yield stands at just over 1.7%.
The Hang Seng declined 2.1%/-543 index points on moderate volume below the 1-year average to close at 25,281. Many brokers are noting the 25k as key technical support level. Breadth was awful as only 1 stock advanced and 49 declined as index heavy weights AIA fell -2.97%/-78.7 index points, HSBC -2.29%/-55.5 ip and Tencent -1.76%/-47.5 index points. Sunny Optical (2382 HK) managed to gain +0.47%/+0.87 index points after strong 1H 2019 results. TPV Tech (903 HK) was up 30.4% after announcing plans to go private at $3.06/share. Macau stocks were weak as HK demonstrations weigh on visitors as Galaxy Entertainment (27 HK) reported weak July numbers. The HK stocks within the MSCI China All Shares declined -1.78% led lower by healthcare -2.71%, real estate 2.5%, tech -2.31%, staples -2.07%, industrials -1.87%. Southbound Connect volumes were moderate with buyers out in force as volume leader CCB had 4 to 1 buyers, Tencent 3 to 1 and Ping An 2 to 1.
The Shanghai & Shenzhen declined -0.63% and -0.69% on anemic volumes and weak breadth as only 809 stocks advanced and 2,782 stocks declined. Gold stocks and airport related stocks were the only bright spots as financials weighed on mega caps while tech weighed on small caps. The mainland stocks within the MSCI China All Shares declined -0.74% as financials declined -1.25%, following a similar story for financials in the US. MSCI China tech -1.22%, energy -1.12% and real estate -1.07%. Utilities and materials managed to gain +0.16% and +0.09%. Foreign investors were sellers via Northbound Connect of $344mm of mainland stocks though they added $317mm on Monday following inflows of $197mm Friday and $361mm Thursday. Once again Shenzhen Connect flows were stronger as foreign investors continue to rotate away from mega caps to mid and small caps.
The Baijiu, or Chinese white wine, market is in for a transformation of sorts. CICC expects an increased market appetite for high-end products will drive an industry profit increase of 30% and sales growth of 5x in the next 3 years. Moutai (600519 CH) might stabilize as formerly local-only brands enter the national market.
The auto market saw a decline of 12.6% in wholesale and retail sales growth overall. However, CICC expects the market environment to improve in August as inventory levels rose by 11.8% in July.
JD.com (JD US) just reported Q2 earnings prior to the US market open that beat analyst expectations. This looks like the best quarter in over two years for the company.
- Revenues +22.9% YoY to RMB 150.3B ($21.9B) versus estimate 147.39B and Q2 2018’s 122B
- 1H 2019 Revenues +22% YoY to RMB 271B from 222B
- 1H 2019 Non GAAP gross profit grew 32% YoY to 39.8B from 30.2B
- Active customer accounts 321.3mm
- ADJ earnings per share RMB 2.30 ($0.33) versus estimate 0.46 and Q2 2018’s RMB 0.33
- Q3 Forecast Revenue +20% to 40% RMB 126B to 130B versus estimate 126B
Tencent Music Entertainment (TME US) reported Q2 financial results earnings that were light on revenue but exceeded bottom line analyst expectations after the US close yesterday. Monthly average users across business lines were mixed as bulls will love the 33% increase in paying online music users though mobile online users increased only 1.2% YoY.
- Revenue +31% YoY to RMB 5.9B ($859mm) versus estimate RMB 5.94B and 2018 Q2 RMB 4.5B
- Cost of revenues +46.1% to RMB 3.96B ($576mm) from Q2 2018’s RMB 2.71B
- Gross profit +8.1% to RMB 1.94B ($283mm) from RMB 1.8B YoY
- Operating profit +7% to RMB 1.09B ($158mm)
- Adjusted EPS RMB 0.67 versus estimate 0.61
Tencent reports after the HK close tomorrow while Alibaba reports Thursday before the US open. We also get July Retail Sales, Industrial Production
Last Night’s Stats (Data from Bloomberg as of 8/13/19)
- RMB Spot rate: 7.06 versus 7.04
- HKD Spot rate: 7.84
- Yield on 1 Day Chinese Gov’t Bond 1.99% versus 1.9%
- Yield on 10 Year Chinese Gov’t Bond 3.0025% versus 3.1%
- Yield on 10 Year China Development Bank Bond 3.5% versus 3.55%
- Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper -0.19%.