Daily Posts

MSCI Inclusion Preview, Meituan Dianping Earnings Surprise to the Upside

Key News Overnight

  • Asian equity markets posted moderate gains with South Korea as a declining outlier.
  • China’s retaliation with increased tariffs aimed at US autos, oil and soybeans is dominating US headlines. There were several hints something was coming as this morning HK/Beijing time. The Commerce Ministry mentioned that the recent US tariff announcement broke an agreement between Trump and Xi reached at the Japan G-20 meeting.
  • Earnings were a significant driver of sector dispersion overnight as healthcare was powered higher from continued strong earnings while tech was weak as Apple supplier AAC declined -5.84% on weak earnings.
  • Next Tuesday’s MSCI quarterly rebalance, which includes the second of three China A inclusions, is already moving markets. One of our brokers noted that today’s Shanghai outperformance versus Shenzhen was driven by pre-MSCI rebalance positioning. A media source noted that FTSE Russell will announce its pro forma for their September rebalance Saturday.
  • Overnight Bond Connect announced it would allow T+3 settlement. Mainland stocks settle T+0 versus the global standard of T+2 (an investor/broker needs to delivery shares/cash based on trade date plus two days). T+0 is problematic because I need to raise cash two days before I buy Chinese stocks. Operationally T+0 is an issue because you can’t “fail” a trade ie not have the exact amount of cash available. If equity Connect were to adopt T+2 it would eliminate one of the last remaining hurdles for full China A inclusion.

H-Share Update

The Hang Seng grinded higher to close +0.5%/+130.6 index points at 26,179 on light volumes accompanied with mixed breadth of 25 advancers and 22 decliners. For the week the index gained 1.73%. Index heavyweights AIA gained 1.97%/55.2 index points, Tencent +0.97%/+26 index points and Ping An +1.44%/+22.3 index points. CSPC Pharma was the best performer +3.43% /+7.6 index points while AAC lost 3.78%/3.07 index points. The Hong Kong stocks within the MSCI China All Shares gained 0.29% as healthcare gained 3.18%, utilities +2.7% and communications +0.89%. AAC pulled tech down by 0.7%, real estate -0.66% and discretionary 0.55%. Southbound Connect volumes were moderate though buyers outpaced sellers 3 to 2. Volume leader CCB had massive buying activity (again) while Tencent and Ping An had 3 to 1 buying (again).

A-Share Update

The Shanghai & Shenzhen chopped around to close +0.49% and -0.01%, respectively, on volumes above the 1 year average accompanied by weak breadth of 1,172 advancers and 2,371 decliners. For the week, Shanghai & Shenzhen gained 2.61% and 3.49%, respectively. Mega/large caps outperformed mid and small caps by ~1%. Remember that MSCI’s current definition of China is mega/large caps, but mid-caps will be added in November. The mainland stocks within the MSCI China All Shares gained 0.64% led by healthcare’s +2.55%, financials +0.96% and staples +0.87% while communications -0.9% and real estate -0.11%. Northbound Connect flows were moderate as Shanghai Connect volumes exceeded Shenzhen Connect though buying was more pronounced on SZ versus SH. Volume leader and inclusion name Kweichow Moutai had 3 to 1 sellers though in aggregate buyers outpaced sellers as $162mm was bought overnight.

Meiuan Dianping Earnings

Meituan Dianping (3690 HK) released earnings after the close in HK today which seems like a very odd time for a release. Friday evening releases are usually bad news, but this release looks very strong. There are two key takeaways. First, we often call Meituan the Grubhub/Uber Eats of China though financial results show that food delivery, which is based on transaction volume, increased 36.5%/gross margin 22.3%, is only one leg of the Meituan stool. Alternative services, which include hotel and travel services, and new initiatives, which include bike sharing and car hailing, were very strong as gross transaction volume increased 20.7% and 14.1% YoY while gross margins for the two business lines were 88.1% and 9.1%. The second point is the company turned a profit! The market increasingly values profits versus revenue growth. Data in RMB and Year over Year.

  • Revenue +50% RMB 22.703B from 15.072B and versus estimate of 21.91B
  • Total profit +179.5% to RMB 7.9B from RMB 2.8B
  • Gross transaction value +28.7% to RMB 159.2B
  • Users +18.4% to 422.6mm from 356.9mm
  • Selling & Marketing Expenses declined to 18.3% from 25.7%
  • Profit RMB 875mm

Last Night’s Stats

  • CNY 7.08 versus 7.08
  • Yield on 1 Day Chinese Gov’t Bond 2.11% versus 2.11%
  • Yield on 10 Year Chinese Gov’t Bond 3.06% versus 3.0599%
  • Yield on 10 Year China Development Bank Bond 3.54% versus 3.55%
  • Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper -0.19%.
  • CNY 7.08 versus 7.08
  • HKD 7.84 versus 7.84