Daily Posts

Asia Resilient in Wake of US Sell Off, Alibaba Smashes Analyst Expectations, Thoughts on Tencent

Key News

Asian markets were mixed following the pounding of US equities yesterday as Japan was off 1% though China, HK, South Korea, and Taiwan managed to end in the green. HK and China all opened lower but moved higher, overcoming the 10 AM release of mainland new home prices that were tepid at +0.59% month over month, while sales fell 1.3% YoY. While I noticed several headlines spinning the month over month sales increase into a negative story, they fail to look at Year over Year numbers as reported by one mainland broker: Tier 1 cities +4.3%, Tier 2 cities +10.7% and Tier 3 cities +10.2%. I wish my home had appreciated 10% over the last year! Best performing sector in HK: real estate, but brokers felt that short covering likely played a role. One broker note of chatter from the HK government implying support for real estate companies due to continued demonstrations. With that said, preventing a housing bubble and containing the national real estate obsession has been a key policy. Policies to cap rampant housing speculation are here to stay.

Tencent was off -2.82% in HK today following yesterday’s financial results versus the US unsponsored ADR TCEHY losing -4.34%. While the US ADR traded 2X normal, I believe slow summer trading and algorithmic trading likely played a role in the steep decline of H-shares. The supercomputers are programmed to sell stock when they “read” the filing and catch words like “miss”. I believe portfolio managers will be active in buying this dip once they return from their summer vacations. Mainland investors were 4 to 1 buyers of Tencent overnight in a very strong day of Southbound Connect buy trading. Interesting that rival Netease gained +0.49% during the US market sell-off on the strength of Tencent’s gaming business. NTES reported strong earnings back on August 7th that have powered a nice rally over the last week.

Alibaba Earnings

Alibaba reported strong financial results before the US open this morning. How did they do it? According to Vice Chairman Joe Tsai on the management conference call, they did it by servicing China’s 300mm urban middle class. He also mentioned China’s continued urbanization and growth of smaller cities as future revenue growth for the e-commerce company. Tale of the tape:

  • Revenue +42% RMB 114.92B ($16.741B) versus estimate RMB 111.59B
  • Core Retail E-Commerce +40% YoY (66% of Total Revenue)
  • Total E-commerce +44% YoY (87% of Total Revenue)
  • Cloud computing +66% YoY though only 7% of Revenue
  • Adjusted EBITA RMB 39.24b versus estimate RMB 34.31B
  • 755 mobile users +34mm versus estimate 721mm; 674mm active customers
  • Gross margin 34% estimate 44.2%
  • Adjusted EPS RMB 12.55 versus estimate 10.28
  • Q2 Forecast EPS estimate RMB 9.99 – not released as of time of writing
  • Q2 Forecast estimate Revenue 113.61B – not released  as of time of writing

H-Share Update

The Hang Seng opened down -1.41% but ground higher on light volume to close +0.76%/+193.1 index points at 25,495. Breadth was strong with 40 advancers, and 10 decliners as the market overcame Tencent’s -2.82%/-75.2 index points led by China Mobile +5.42%/+66.7 index points on 5G chatter and AIA +2.05%/+55.2 index points. China Unicom HK had a big day on the 5G chatter +10.9%/+15.8 index points. HSBC was off -2.07%/-49.4 index points after hitting its 52-week low intraday. The HK stocks within the MSCI China All Shares lost -0.04% as real estate gained +1.95% followed by staples +0.6% and financials +0.55% though Tencent pulled communications off -1.01%. Southbound Connect volumes were moderate, but once again mainland investors were active buyers of HK stocks. Today was a big day with buy trades outpacing sell trades 5 to 2 while the number of buy trades was 77k versus 35k sells. Volume leader CCB had 10 to 1 buyers to sellers with Sunny Optical and Tencent having 4 to 1 buyers to sellers.

A-Share Update

Shanghai & Shenzhen opened -1.66% and -2.08% but reversed course and closed +0.25% and +0.53% though on light volume and moderate breadth of 1,253 advancers and 2,356 decliners. The PBOC was active in injecting liquidity into the market, which helped sentiment overnight. Small and mid-caps outperformed large caps on the day. The mainland stocks in the MSCI China All Shares gained +0.09% as CNY’s slight depreciation took a small bite out of returns overnight. Communications sector was up +1.95% as Huawei related stocks performed well on potentially easing trade tensions, which helped tech +1.73% while real estate and healthcare gained +0.73% and +0.3%. Energy, staples, and industrials gave back -0.5%, -0.44% and -0.41% respectively. Northbound Connect volumes were moderate though Shenzhen Connect volume and buying outpaced Shanghai Connect volume. Foreign investors added $19mm to mainland stocks as volume leader Kweichow Moutai finally received some foreign TLC with 3 to 2 buying though the big story must be foreign investors buying Shenzhen stocks. Very interesting!

ADR Update

We had several smaller US-listed Chinese companies report mixed results after the close on Tuesday: video streamer YY and group discount retailer VIPS. Both stocks were off yesterday though YY hung in there despite several analysts lowering their price target. VIPS had a disappointing forecast that likely weighed on the stock.

Hong Kong Airport Reopens

After the weekend closure of the airport, flights are taking off from Hong Kong once again. The airport reopened on Tuesday following the departure of the majority of demonstrators. Cathay Pacific stock was up by 5.7% last night.

FX and Bond Update

RMB 7.02 versus 7.01; several brokers noted that China has restricted some 300-500 tons of gold purchases in a move to bolster the RMB.

Yield on 3 Month Chinese Gov’t Bond 2.38% versus 2.38% 

Yield on 10 Year Chinese Gov’t Bond 3.02% versus 3.05% 

Yield on 10 Year China Development Bank Bond 3.52% versus 3.51%

Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.71%.