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Alibaba HK IPO Pushed, Pinduoduo Delights while Baozun Beats

Hope all is well! 

Key News 

Quiet, lackluster, and boring were some of the terms used by institutional brokers to describe last night’s market action as investors wait for the Fed minutes today and a positive trade war catalyst. The markets overcame some negative trade war commentary from President Trump saying that he is indifferent to trade war’s consequence on the US equity market and the approved sale of F-16s to Taiwan. Markets resiliency could be driven by positive, albeit small steps towards a trade resolution. Increasingly, it appears that putting the trade war to bed would help the US economy, which one would assume an incumbent president would want.

Reuters is reporting that Alibaba is pushing its August Hong Kong (HK) IPO to October due to unrest. Taking a step back, this isn’t surprising as who would want to IPO in August. August? IPO? C’mon. The goal is to raise money! BABA has not filed anything with the HK exchange although an October listing makes sense as a post Labor day roadshow leading up to an October launch makes a world of sense.

The Hang Seng overcame a loss at the open to eke out a gain of 0.15% or 38.5 index point and close at 26,270 on light volume and strong breadth of 29 advancers and 18 decliners. The HK and China Gas Co. lost 5.26% equivalent to a loss of 26.2 index points on disappointing earnings. China Construction Bank (CCB) added 0.7% and 13.2 index points while real estate China Resources Land gained 4.45% and 12.2 index points on earnings that beat analyst expectations. The HK stocks within the MSCI China All Shares Index gained 0.38% led by real estate (+2.48%), healthcare (+1.62%), staples (+1.39%) and consumer discretionary (+0.39%). Communication services, on the other hand, lagged (-0.18%) as Tencent eased (-0.25%/-6.4 index points). Southbound Connect volumes were strong as buyers outpaced sellers. CCB had nearly a ratio of 12 to 1 buyers to sellers; Ping An had a 2 to 1 ratio of buyers to sellers, and Tencent 2 to 1 buyers.

Shanghai & Shenzhen traded sideways all day to close up 0.01% and down 0.09% respectively on light volumes, which was 14% lower from the previous day. Breadth was mixed as 1,632 stocks advanced and 1,731 stocks declined, and large caps underperformed on the day slightly. The mainland stocks within the MSCI China All Shares Index eased by 0.17% as trade-sensitive technology and communication stocks gained 1.08% and 0.58% respectively and contrary to healthcare (-0.77%), materials and staples (-0.57%), utilities (-0.54%) and industrials (-0.21%). Northbound Connect flows were moderate. Shenzhen volumes exceeded Shanghai volumes with buyers outpacing sellers and foreign investors buying a total of $282mm of mainland stocks. Shanghai Connect volume leader Kweichow Moutai had a ratio of 2 to 1 buyers to sellers while Shenzhen Connect volume leader Gree Electric Appliances had a ratio 5 to 1 buyers.

Baozun (BZUN US) helps foreign brands navigate and sell into China’s vast e-commerce market. The company reported Q2 financial results this morning pre-US market open. The results were strong across the board beating expectations though their Q3 forecast was light. The stock is off pre-market but I suspect we’ll see buyers come in as algorithms tend to hit anything with negative news exacerbating price volatility especially during the summer.

  • Revenues +47% to RMB 1.704B ($248mm)
  • Gross Merchandise Value +59.9% to RMB 9.725B
  • EPS RMB 1.16 ($0.17) from RMB 0.65 YoY
  • Q3 Forecast Revenue between RMB 1.5B and 1.55B

E-commerce challenger brand Pinduoduo (PDD US) reported strong Q2 financial results prior to the US market open today that exceeded analyst expectations. PDD differs from larger rivals BABA and as they focus on consumers within smaller cities Tier 3 and 4. The stock is up pre-market.

  • Revenue +169% to RMB 7.29B ($1.06B) from RMB 2.709B versus estimate $867mm
  • Monthly active users +88% 366mm in Q2; active buyers in the last year 383mm +41% YoY
  • Gross Merchandise Value for the last twelve months +171% RMB 709.1B ($103.3B) from RMB 262.1B
  • Cost of Revenues +311% to RMB 1.594B from RMB 387.8mm
  • EPS loss of RMB 0.88 ($0.12); ADJ EPS RMBS 0.36 ($0.04)

Chinese healthcare stocks have faced the headwind of uncertainty around the implementation of centralized drug buying that has hurt pharmaceutical stocks. Earnings from the companies have been quite strong as the market discounted a worst-case scenario. Year to date, the sector is showing signs of life. 

CNY 7.06 versus 7.05

  • Yield on 1 Day Chinese Gov’t Bond 2.16% versus 2.11% 
  • Yield on 10 Year Chinese Gov’t Bond 3.0399% versus 3.04% 
  • Yield on 10 Year China Development Bank Bond 3.54% versus 3.52%

Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.54%.