Flu Fuels Profit Taking Pre-Chinese New Year
Asian equity markets were a sea of red as Wuhan’s coronavirus outbreak sparked profit-taking in advance of Chinese New Year. Memories of and comparisons to the SARs outbreak back in late 2002 and early 2003 are fueling some media hype. The timing for the pneumonia outbreak is especially bad due to the mass migration that occurs around Chinese New Year and the weeklong holiday that begins this Friday. Historically we have seen profit-taking prior to New Year’s as investors raise cash for spending. With the strong performance of markets over the last year, this profit-taking has been more aggressive as evidenced by the fall in Hong Kong. Today was the last day for Southbound Connect trading before the holiday, which likely exacerbated the selling by Mainland investors in Hong Kong.
Stocks that historically do well going into New Year’s, retail/travel/airlines/hotels/Macau stocks, were all plastered. Healthcare stocks on the Mainland managed to gain as the only positive sector. Moody’s downgrade of Hong Kong government debt from Aa2 to Aa3 did not help Hong Kong stocks and reminds me of the saying “Always kick a person while they are down as you’ll never get a better chance.” Protests continue in Hong Kong though they have become more of a weekend phenomenon. Finding a positive catalyst to turn the situation around is difficult.
Over the weekend the PBOC maintained the 1- and 5-year Loan Prime Rates at 4.15% and 4.8%, which the market largely anticipated though may have been hoping for another cut. There is some chatter that policymakers will take their feet off of the stimulus pedal post-Phase One. Personally, I am skeptical of this line of thinking as the global economy needs a sustained turnaround for this to occur.
So, is it time to panic? No. The Chinese government has had a swift reaction to the pneumonia outbreak following the 774 global deaths attributed to SARS. For what it’s worth, having just returned from China late last week I was worried in the last about the outbreak. The market has been primed for a correction and we are getting one. Many investors have been caught flatfooted by the strength of the Mainland market. I would suspect many investors will be putting money to work on the weakness. Mainland markets close this Friday and will reopen on Friday, January 31st while Hong Kong is closed next Monday and Tuesday.
TAL Education Group (TAL US) reported Q3 financials for the fiscal year 2020 before the US market open. While revenue, enrollment, and cash holdings were outstanding, the company’s costs increased substantially which led to lower income and EPS. With the stock up 78.9% over the last year as of last Friday, it is likely to see a meaningful drop today. Sell-side analysts haven’t had time to chime in though we are apt to see price targets cut. I’ll report back with more information tomorrow.
- Revenue increased +47.2% to $862mm versus estimate $839mm
- Income from operations +9.9% to $78mm from $71mm year over year
- Operating costs and expenses +52.4% to $785mm from $515mm while cost of revenues +43.9% and selling/marketing expenses +87%
- Enrollment +66% to 2.318mm from 1.396mm
- Adjusted EPS $0.09 versus estimate $0.16
- Q4 Revenue forecast between $959mm and $980mm; 35% to 38% revenue growth forecast
New Oriental Education (EDU US) reported Q2 fiscal quarter financials yesterday despite the US market being closed. While the quarterly results were decent, the company’s Q3 forecast came in a little light. One of our favorite sell side analysts raised their price target while another firm cut their rating from Buy to outperform. Like TAL, EDU has been a very strong performer over the last year gaining +105.9% from last Friday.
- Revenue +31.5% to $785mm versus estimate $769mm
- Operating income +188.6% to
- Enrollment +63.3% to 3.789mm
- Operating cots and expenses +21.1% to $759mm
- Net Income was $53mm versus a loss $25.8mm
- Adjusted EPS $0.36 versus estimate $0.21
- Q3 revenue forecast $983mm to $1.01B versus estimate $1.01B
The Hang Seng opened lower in what turned out to be the highs of the day traveling from upper left to lower right to close -2.81%/-810 index points to close at 27,985. Volumes surged 19% day over day as turnover reached nearly 2X the 1-year average. Breadth was as bad as possible with 0 advancers and 50 decliners led lower by AIA -3.42%/-93.5 index points, Tencent -2.68%/-82.2 index points and Ping An Insurance -4.31%/-68.7. The day’s “best performer” (tongue-in-cheek) was CSPC Pharma -0.94%/-2.52 index points while Geely Auto was the worst performer -5.26%/-12.2 index points. Chinese companies listed in Hong Kong were off -3.19% while Hong Kong-domiciled companies were off -2.59%, as tracked by the HS China Enterprise and HS HK 35 indices. Neither index had a single gainer with 50 and 25 decliners, respectively. The broad Hang Seng Composite had only 19 advancers and 455 decliners. The Hong Kong-listed Chinese companies within the MSCI China All Shares Index were off -3.17% led lower by discretionary -4.17%, materials -4.15%, real estate -4.14%, tech -3.98%, financials -3.49%, industrials -3.42%, staples -3.33%, communication -2.75%, energy -2.51%, utilities -1.41% and healthcare -1.41%. Southbound Connect flows were the heaviest in recent memory as Mainland investors were sellers of Hong Kong stocks for the first time in recent memory. One broker said it was the first time in 47 days, which feels about right. Southbound Connect accounted for nearly 9% of Hong Kong turnover while mainland investors sold $9mm of HK stocks.
The Shanghai & Shenzhen were off -1.41% and -1.28% to close at 3,052 and 1,806, respectively, as volume increased 2.2% day over day and was above the 1-year average. Breadth was unexpectedly off with 792 advancers and 2,910 decliners as small and mid-caps outperformed large caps slightly. The mainland stocks within the MSCI China All Shares Index were off -2.08% in USD (in CNY the stocks were off -1.5% as USD rallied). Healthcare rallied +0.58% as tech -1.45%, utilities -1.55%, industrials -2.2%, financials -2.25%, communication -2.41%, energy -2.53%, staples -2.6%, staples -2.72%, materials -2.83%, real estate -3.2% and discretionary -3.46%. Northbound Connect flows were negative for the first time since December 31st and only the second time since November 13th. Foreign investors sold $1.033 billion today as both Shanghai and Shenzhen were sold down. Northbound Connect accounted for nearly 5% of Mainland turnover.
Last Night’s Prices & Yields
- USD/CNY 6.90 versus 6.87 Friday
- CNY/EUR 7.67 versus 7.61 Friday
- Yield on 1-Day Government Bond 1.50% versus 1.55% Friday
- Yield on 10-Year Government Bond 3.03% versus 3.08% Friday
- Yield on 10-Year China Development Bank Bond 3.48% versus 3.50% Friday
- Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -1%