Key News

Asian equities were mostly positive with Japan, Hong Kong, Taiwan, Korea, Singapore, Malaysia and Indonesia rising, while China, India and Thailand posted small losses. A broker noted that Hong Kong’s move yesterday appeared overdone as it rebounded overnight. The move was led by a Sands China (1928 HK) gain of +2.54% after posting surprisingly strong financial results. As we had noted previously, Mainland visitors can bypass Hong Kong by flying into Macao’s airport, which Sands’ earnings appear to confirm. Tencent (700 HK) closed below the HKD 320 level at HKD 319. We noted yesterday that such a breach might trigger short term selling due to structured products, called warrants, though volume was slightly below the 52 week average. Mainland investors were buyers of Tencent via Southbound Connect. Mainland news was quiet other than some profit taking in staples, which has been a strong performer YTD. It is amazing how quiet the trade war news has become as US domestic news takes center stage. There is news this morning that China will be buying $20B of farm goods.

China’s 4^th Plenary Session will occur from October 28^th to October 31^st in Beijing. The session coordinates policy, including economic, for the year ahead.

Eric Tse received an unusually nice gift from his father and mother Ping and Theresa Tse who also happens to be the CEO/founder and Chairwoman of Sino Biopharmaceutical (1177 HK). They gave 24 year old Eric 2.7 billion shares worth $3.8 billion. The bow on top was making Eric an executive director with a salary of $498,000. With the holidays approaching, I hope to receive Tse sized gifts!

H-Share Update

The Hang Seng grinded higher all day to close +0.87%/+231 index points to close at 26,797 on flat volume day over day and well off the 1-year average. Breadth was very strong with 44 advancers and 4 decliners led by HSBC +1.06%/+29.4 index points, ICBC +1.82%/+1.82% and AIA +0.8%/+20.6 index points. Apple supplier AAC was the best performer +3.94%/+3.8 index points followed by Macao casino names while China Overseas Land & Investments was the worst performer -2.33%/-6.8 index points. The Hong Kong stocks within the MSCI China All Shares Index gained +0.66% led higher by healthcare +1.5%, energy +1.19%, financials +1.08%, industrials +1.06% and real estate +0.9%. Tencent weighed on Communications, which was the only off sector -0.08%. Southbound Connect volumes were light in mixed trading. Tencent did have more buyers than sellers from mainland investors.

A-Share Update

The Shanghai & Shenzhen chopped around to losses -0.02% and -0.13%, respectively, on light volumes flat day over day and well off the 1 year average. Breadth was off with 1,369 advancers and 2,143 decliners as mega caps managed a small gain while large, mid- and small caps were off slightly. The Mainland stocks within the MSCI China All Shares Index were off -0.99% as financials outperformed +0.78%, real estate +0.69% and communications +0.69% while staples were off -0.98%, healthcare -0.66%, discretionary -0.64%, materials -0.51% and tech -0.44%. Northbound Connect volumes were off though foreign buyers were back as Shenzhen volumes and buying activity exceeded Shanghai. Foreign investors bought $79mm of mainland stocks.

Online education company TAL Education (ticker TAL) reported mixed results pre-market. The positives were very strong top line revenue growth, 1.2mm more students enrolled with them and a strong revenue outlook. The company swung to an EPS loss on rising expenses and a $55mm write down of a long-term investment. The stock is trading up pre-market as the algorithms appear to placing more emphasis on the strong Q3 revenue growth than the EPS loss. Nonetheless, to the human beings who actually read the report and listened to the management conference call, the increase in enrollment is simply outstanding.

• Revenue +33.8% to $936mm versus estimate $914mm
• Operating costs and expenses +40.6% to $872mm from $620mm
• Income from operations -13.5% to $69.9mm from $80.9mm
• Net Loss $14.4mm versus $77mm gain/income
• Student enrollment +54.5% to 3.413mm from 2.208mm
• Balance cash $1.542B versus $1.515B
• Adjusted EPS loss ($0.02) versus estimate $0.14
• Q3 Revenue forecast $826mm to $843mm versus estimate $795mm
• Q3 revenue forecast equal to a 45% to 48% year over year gain

Last Night’s Prices & Yields

CNY vs USD and Euro have been remarkably stable over the last week

• Euro/CNY 7.86 versus 7.86 yesterday
• USD/CNY 7.07 versus 7.07 yesterday
• Yield on 1-Day Government Bond 1.77% versus 1.92% yesterday
• Yield on 10-Year Government Bond 3.22% versus 3.21% yesterday
• Yield on 10-Year China Development Bank Bond 3.62% versus 3.61% yesterday
• Commodities were mixed on the Shanghai & Dalian Exchanges with Dr. Copper +0.57%