Key News

• It was a quiet night as volumes were light in advance of Thursday’s ECB and next week’s Fed decisions. Asian markets were mixed with mainland China seeing short term profit taking while Hong Kong was flat. Tencent has been actively buying back shares since August 28^th in lots of 120k or 110k. Tuesday’s purchase of 110k shares was the 10^th such purchase. Shanghai closed above the 3k level, which could provide support going forward.
• The State Administration of Foreign Exchange (SAFE) removed quota limits on QFII and RQFII. Historically, foreign investors had to apply for a quota in order to invest in the mainland markets. QFII was established back in 2001 while RQFII was established 2012. Investors now only have to apply for approval to invest, but QFII and RQFII have largely been replaced by Stock Connect for equity investors. The STAR Board securities are not Connect eligible so in theory it could help foreign participation on the new board. The move is another example of China’s opening up. It would make sense for regulators to remove Connect quota which will be a sticking point for MSCI in the years to come.
• The China Passenger Car Association reported that auto sales fell 9.9% in August year over year to 1.59 million vehicles sold as the sales slump has fallen in 14 out of 15 months. There has been a loosening on car sale restrictions which has led several sell analysts to call a bottom in the declining trend.
• Nasper’s spin off Prosus (PRX NA ticker) starts trading tomorrow in Amsterdam. As previously mentioned the Dutch listing should see the company included in European benchmarks by month end. The index flows behind the inclusion should help the listing out of the gate.

PPI Better Than Expected Despite Swine Flu

August Year over Year   

CPI                         2.8% versus estimate 2.7% and July’s 2.8%

PPI                         -0.8% versus estimate -0.9% and July’s -0.3

Swine flu is having a material impact on China’s food prices which rose 10% YoY while non-food was a mere 1.1%. The world’s largest consumer of pork is having to deal with higher pork prices, which rose 47% year over year in August as mainland pig herds have been decimated. Unfortunately, US pig imports are not a solution due to 50% tariffs. However, a broker noted that China is allowing in more Brazilian meat to fill the void. PPI came in slightly better than expected though highlighted the global economic malaise as raw materials fell -3.5% YoY while manufactured goods was off -0.8%.

H-Share Update

The Hang Seng chopped around to close +0.01%/+2.28 index points on volumes below the 1 year average to close at 26,683. Breadth was mixed with 22 advancers and 21 decliners as HSBC gained 1.2%/31.7 index points, Ping An fell -1.55%/-24.2 index points and Tencent fell -0.64%/-17 index points. China Unicom was the best performer gaining +4.98%/+7.8 index points due to China’s 5G push while Techntronic lost -2.48%/-6 index points as tech names experienced profit taking. The HK stocks within the MSCI China All Shares eased -0.22% as energy gained 1.36% on higher oil prices, materials +0.78%, and real estate +0.18% while tech fell -1.11%, utilities -1.05% and healthcare -0.59%. Southbound Connect volume was mixed for the first time in weeks on moderate volume. Volume leader CCB saw more 5 to 4 sellers to buyers while Ping An had 4 to 1 sellers.

A-Share Update

The Shanghai & Shenzhen eased -0.12% and -0.11% on volumes well above the 1 year average though off slightly from yesterday. Breadth was mixed with 1,756 advancers and 1,778 decliners as large, mid and small traded in line with one another. The mainland stocks within the MSCI China All Shares were off -0.08% as communications gained 1.28% led by telecom names on 5G, health care +1.15% and utilizes +0.39%. Tech experienced profit taking -1.09%, discretionary -0.49% and industrials -0.32%. Northbound Connect flows were strong again with foreign investors actively buying, though volume leaders and MSCI inclusion names Kweichow Moutai and Ping An did experience more sellers than buyers. Shenzhen Connect volumes exceeded Shanghai Connect slightly. Foreign investors purchased $334 million of mainland stocks overnight.

Both HK and mainland markets are closed Friday for the Mid-Autumn festival.

Today is the celebration of Alibaba’s founding 20 years ago and the retirement of founder Jack Ma.  Ma and seventeen colleagues started the company in his apartment located in Hupan Garden in Hangzhou. Fast forward to today, the company has a market cap of $462B, generated $16.8 billion revenues last quarter and $56B of revenues in their last fiscal year. Bloomberg had a great quote saying Ma presided “over one of the most spectacular creations of wealth the world has ever seen.” While worth $41 billion, I never got the sense Ma was monetarily driven. He brought philanthropy to the China C-suite through numerous efforts. If you haven’t read the book The House that Jack Built I recommend it. It provides a great overview of Jack Ma’s upbringing, learning English as a tour guide, discovering the internet on a visit to Seattle and building a business by overcoming challenges from Ebay and others. It is a great entrepreneurial story! Alibaba’s investor day kicks off on Sept 23^rd in Hangzhou.

C-Trip Earnings

After the NY close Monday, Ctrip.com reported Q2 earnings and announced the company would be known as Trip.com going forward as the firm’s global ambitions go beyond solely servicing Chinese travelers. The company’s results were broadly in line with analyst expectations with the core business performing well, though the Q3 outlook was light. I can’t think of a company better positioned, at least on paper, to benefit from China’s growing urban middle class and desire to travel domestically and globally than Trip.com. The company’s shares have remained in the same range for the last five years despite the macro tailwinds. Increased competition could be a headwind on the company in the short run.

• Revenue increased +19% YoY to $1.3B (RMB 8.7B)
• Gross margin 79%
• Income from operations $194mm (RMB 1.3B)
• Net loss $59mm (RMB 403mm) versus loss of RMB 2.4B YoY
• Adjusted EPS (non GAAP which excludes stock compensation) was RMB 2.25 ($0.33) versus estimates RMB 2.11
• Cash on the balance sheet $9.9B (RMB 67.8B)
• Q3 revenue forecast 10% to 15%

Last Night’s Stats

• CNY 7.10 versus 7.12; 22bps pick up versus the US $
• Yield on 1 Day Chinese Gov’t Bond 2.09% versus 2.08%
• Yield on 10 Year Chinese Gov’t Bond 3.0449% versus 3.0298%
• Yield on 10 Year China Development Bank Bond 3.57% versus 3.55%
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper off -0.02%.