Daily Posts

Pinduoduo Revenues Grow But So Do Expenses, PBOC Cuts Prime Rate, Alibaba HK IPO Pricing, Congress Passes HK Bill

Key News

Asian equity markets were off other than India and Indonesia though volumes were light as one Mainland Chinese broker called the day “boring”. The PBOC’s LPR cut was pre-market and therefore weighed on financials as analysts worry the cut will hurt banks’ margins. Another positive development in central bank policy is the PBOC instructing banks to lend to private companies, which account for somewhere between 50% to 75% of China’s GDP. Private manufacturers are being hurt by the trade war’s tariffs though consumption appears to be quite strong.

Hong Kong was weak as investors raise cash for next week’s Alibaba IPO. Let’s address the elephant in the room: Congress passes the Hong Kong Human Rights and Democracy Act. Ultimately Hong Kong’s geographic location is its most important asset. The second is the court system followed by the its standing as a financial and trade hub. None of these are changing so we shouldn’t overreact to the passage as undermining Hong Kong’s trading status would be the worst conceivable outcome. The passage of the bill does negate the fallacy that China will wait out the election. The bipartisan bill highlights China’s lack of supporters in DC. Markets have been wobbly as investors worry about how trade talks are progressing. Thus far, nothing has been shown that things are not progressing despite the media’s necessity to create headlines suggesting otherwise. Ultimately, both sides want a deal which is why it will occur. A seasoned sales/trader who works in the China space called the recent downdraft a consolidation move in an uptrend. Fingers crossed that he is right!

Alibaba’s Hong Kong IPO pricing rolling in at HK $176, a slight discount to the US price though I suspect the price may have to be adjusted lower if they want to maintain a 2.9% discount. The IPO is set to raise $12.9B that the media says will be used to fuel expansion. That might be true, though I believe it is mainly to the raise the US stock price, which US investors use as a proxy for US-China relations instead of for Alibaba’s business. The HKeX announced that Alibaba options and single-stock futures will be available on the day of listing. Interesting that Alibaba can secure futures and options before even listing itself while MSCI still does not have China A futures listed.

E-commerce juggernaut Pinduoduo (PDD US) reported disappointing results before the US market open today. Despite revenue growing +123% to $1.051B (RMB 7.513B) it missed analyst expectations of RMB 7.65B. Gross merchandise value grew +144% to $117.5B (RMB 840.2B) while average monthly users +85% to 429.6mm. All good right? Sales and marketing expenses grew +114%, general and administrative expenses +43% and research and development expenses grew +240%. This led to big operating and EPS loss. Stock is off 20% pre-market. Based on PDD’s previous rapid growth it is clear that Alibaba and JD.com are focused on growing their business in lower tier (smaller cities) where PDD’s early efforts were focused.

Gaming company Netease (NTES US) reports after the US market close today.

The fantastic Martin Wolf of the Financial Times had a thought-provoking piece yesterday on China. He cites the US’ history of intellectual property theft in the 1900s during the industrial revolution. It wasn’t until the US had intellectual property that the US began to enforce intellectual property rights. Sounds familiar……The article is worth checking out!

Loan Prime Rate Cut

1-Year Loan Prime Rate: 4.15% versus October’s 4.20%

5-Year Loan Prime Rate: 4.80% versus October’s 4.85%

Takeaway: PBOC’s right foot presses on stimulus gas pedal. This is even in the face of a rising CPI. However, the PBOC may have reason not to worry about inflation. CICC’s Kevin Liu mentioned in our webinar that, excepting skyrocketing pork prices, prices have actually gone down overall.

H-Share Update

The Hang Seng fell -0.75%/-204 index points to 26,889 though volumes were light, falling an incredible -21.7% day over day. Breadth was poor in a classic risk-off day as only 8 stocks advanced and 40 declined led by AIA -2.14%/-56.7 index points, HSBC -0.59%/-15.6 index points, and CSPC Pharma was the day’s worst performer following a sell side analyst cut -3.52%/-10.2 index points (the stock is just off its 52 week high). Apple supplier AAC Tech was the best performer gaining +1.24%/+1.4 index points with a number of real estate names managing a gain. The Hong Kong stocks within the MSCI China All Shares Index lost only -0.52%. The loss was toned down in the index representation because neither AIA nor HSBC are Chinese stocks, due to their Hong Kong domicile, and are therefore represented in the MSCI Hong Kong Index, which is a developed market index. Healthcare was the worst performer -0.94% followed by industrials -0.94%, industrials -0.92%, tech -0.78%, financials -0.72%, energy -0.71%…you get the point. Materials did manage a gain of +0.33%. Southbound Connect, trading of Hong Kong stocks from Mainland China, had moderate volumes with buyers outpacing sellers. Volume leader CCB had almost 20 to 1 buyers to sellers, ICBC 7 to 1 buying though China Shenhua Energy 2 to 1 sold.

A-Share Update

The Shanghai & Shenzhen were off -0.78% and -0.71%, respectively, as volumes nudged up +1.5% day over day in trading that one local broker called “boring”. Both indexes are sitting just above support levels of 2,900 and 1,600, which is worth watching. While breadth yesterday was incredibly positive, today’s was far from it as only 897 stocks advanced and 2,701 declined as Large caps were weighed down by financials though mid and small caps struggled. The Mainland stocks within the MSCI China All Shares Index were off -0.99% as financials were off -1.78%, tech -1.35%, real estate -1.05%, industrials -1.01%, discretionary -0.79%, utilities -0.6%, communications -0.55%, healthcare -0.5% etc. as every sector was off on the day. Northbound Connect, foreign investors accessing the mainland markets, volumes were moderate/light as foreign investors strongly preferred Shenzhen stocks over Shanghai stocks. Shenzhen Connect volumes and buying exceeded Shanghai Connect volume as the latter had a small amount of selling pressure, while the former had net buying today. Today, foreign investors bought $26mm of Mainland stocks, mostly in Shenzhen.

Last Night’s Prices & Yields

Big bond rally continues.

  • CNY/USD 7.034 versus 7.0243 Yesterday
  • CNY/EUR 7.79 versus 7.78 Yesterday
  • Yield on 1-Day Government Bond 1.78% versus 1.86% Yesterday
  • Yield on 10-Year Government Bond 3.17% versus 3.17% Yesterday
  • Yield on 10-Year China Development Bank Bond 3.55% versus 3.55% Yesterday
  • Commodities were higher on the Shanghai & Dalian Exchanges with Dr. Copper +0.55%