Week In Review

• Hang Seng Indexes announced on Monday that secondary-listed and weighted voting rights companies would now be eligible for inclusion in its widely tracked indexes. This move may provide a strong catalyst for such companies, which include (9988 HK) and Meituan Diannping (3690 HK)
• Baidu, Bilibili, Sina, Weibo and iQiyi all released Q1 earnings on Tuesday. Nearly all of the platforms saw users surge during quarantine.
• NetEase reported solid Q1 results on Wednesday, mostly thanks to a surge in gaming activity during quarantine.
• Wall Street economists now predict, on average, that China’s GDP growth rate will be 8% in 2021. This is a surprisingly high figure and suggests that reopening is showing positive results in China, which is hopefully a good signs as the rest of the world begins to ease lockdowns as well.
• The Senate passed a bill stating any US-listed Chinese companies that does not allow the PCAOB to review their audited financials could be delisted. While there are political undertones to this bill, its three-year compliance period allows for ample time to resolve differences and put policies in place between the PCAOB and China’s regulators. Ultimately, we see ample room for a thoughtful resolution, without harming US-listed Chinese firms or their investors

Friday's Key News

Asian equities ended the week with a tremendous thud. Hong Kong had been off on rising US-China political rhetoric though the introduction of a new security law sent the market plunging. It is likely that we will see demonstrations over the law this weekend, which may have a negative effect on the local economy as it goes back to normal. It also raises the likelihood that the US will further scrutinize Hong Kong-China politics. Growth names favored by investors were hit hard as volume leaders Tencent -485%, Alibaba HK -3.88%, and Meituan Diangpoing -7.13%. However, it is worth noting that no sector was spared in the carnage. The Mainland market followed Hong Kong lower on news from the “Two Sessions” policy meetings that there would be no numerical GDP target this year. Nonetheless, we may see further policy support over the coming days, which the market would welcome. The only positive I can find is that Mainland investors were net buyers of Hong Kong stocks.

For my views on the US Senate bill take a listen to my interview on Bloomberg Radio yesterday.

Alibaba (BABA US) delivered outstanding results in their fiscal quarter reported this morning. Very important to note the company’s fiscal year 2021 revenue forecast, which was given on the conference call, was +27.5%. The company provided tremendous clarity on the quarter and navigating the quarantine. Investors should note the strong uptake in BABA’s cloud computing business while the company’s core China e-commerce engine did well. The results were for the quarter as well as the fiscal year. For a company this size to be growing this quickly is truly remarkable. Kudos to management!

• Revenue +22% year over year to $16.144B (RMB 114.314B) versus estimate RMB 107B
• Gross Merchandise Value for fiscal year 20202 $1 trillion (RMB 7.053 trillion) of which 6.589 trillion China GMV
• Chine core Commerce (China e-commerce) accounts for 62% of revenue +21% YoY to $10.014B (RMB 70.905B)
• Total Commerce accounts (above plus China B2B, international e-commerce, delivery) for 82% of revenue +19% to $13.256B (RMB 93.865
• Annual Active Consumers +72mm YoY to 726mm, 180mm International users
• Mobile monthly active users +125mm YoY to 846mm
• Cloud computing revenue accounts for 11% of revenue +58% to $1.725B (RMB 12.217B); % of revenue from 8% to 11% YoY
• Income from operations -19% YoY to $1.007B (RMB 7.131B)
• Cost of revenues +4% to $10.239B (RMB 72.502B) from RMB 55.610 YoY
• Net income -99% to $49mm (RMB 348mm) due to “a net loss in investment income, mainly reflecting decreases in the market prices of equity investments in publicly-traded companies”
• Non-GAAP net income which excludes the investment loss +11% $3.148B (RMB 22.287B)
• Diluted EPS +42% $7.90 (RMB 55.93) from RMB 33.38
• Company cash $50.698B (RMB 358.981B) from RMB 193.238B in Q1 2019

Pinduoduo (PDD US) reported Q1 results with strong topline growth. However, that growth came at a heavy cost as expenses ballooned during the second quarter. Pinduoduo wants to grow its market share versus rivals Alibaba and JD.com, as articulated in our interview with the company a year ago. Historically, investors have given PDD a pass though the market sentiment to high growth/non net income companies has diminished to some degree.

• Revenue +44% to $923mm (RMB 6.541B) from RMB 4.545 versus estimate RMB 4.969B
• Gross Merchandise Value +108% to $163B (RMB 1.1157 trillion)
• Average monthly users +68% to 487mm
• Active buyers +42% 628mm
• Cost of revenues +110% to $258mm (RMB 1.83B)
• Total operating expenses increased a little less than 100% to -$1.286B (RMB 9.108 billion).
• Operating loss doubled year over year -$621mm (RMB 4.397B)
• Diluted EPS loss doubled to RMB (-3.54) from RMB (1.64) versus estimated loss of -RMB 2.42

H-Share Update

The Hang Seng plunged -5.6%/1,349 index points to close at 22,9930. Volumes were +45% from yesterday and 2X the 1-year average while breadth was weak with 0 advancers and 50 decliners. Index heavyweights were off with AIA -9.41%/-210 index points, Tencent -4.85%/-133 index points and HSBC -6.88%/-121 index points. Today’s worst performer was Sino Land -10.3%/-8 index points and Link REIT -10.1%/-38 index points. Today’s “best” performer was Techtronic -2.24%/-6 index points. The China-domiciled companies listed in Hong Kong were off -4.3% while the Hong Kong-domiciled companies were off -6.72% using the HS China Enterprise and HS HK 35 indexes as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares Index were off -4.47% led lower by: Utilities -3.11%, staples -3.52%, financials -3.8%, materials -3.93%, industrials -4.24%, discretionary -4.57%, communication -4.64%, energy -5.3%, real estate -5.34%, healthcare -5.55%, and tech -5.62%.

Southbound Connect volumes were high as Mainland investors were net buyers of Hong Kong stocks. Volume leader Tencent saw buyers just outpace sellers. It is worth noting that Ping An Good Doctor saw massive buyer volume versus a very small number of sellers. Mainland investors bought $569mm worth of Hong Kong stocks today as Southbound Connect turnover accounted for 8% of Hong Kong turnover.

A-Share Update

Shanghai & Shenzhen fell -1.89% and -2.02%, respectively, as volume decreased -4.9% from yesterday while breadth was awful with 662 advancers and 3,063 decliners. Large, mid and small caps were all off. The Mainland stocks within the MSCI China All Shares Index were off -3.46%, led lower by: Utilities -1.85%, discretionary -1.9%, industrials -2.22%, communication -2.37%, energy -2.48%, materials -2.58%, tech -2.64%, financials -2.74%, staples -3.13%, and healthcare -3.21%.

Northbound Connect volumes were moderate as foreign investors were net sellers though it is worth noting that most of the selling was from Shanghai Connect, which is mostly large caps. Shenzhen Connect had sellers barely outpace buyers. Foreign investors sold -$446mm worth of Mainland stocks as Northbound Connect trading accounted for 5.4% of Mainland turnover. For the week, foreign investors bought $1.119B worth of Mainland stocks.

Last Night’s Prices & Yields

• CNY/USD 7.14 versus 7.12 yesterday
• CNY/EUR 7.77 versus 7.79 yesterday
• Yield on 1-Day Government Bond 0.69% versus 0.70% yesterday
• Yield on 10-Year Government Bond 2.62% versus 2.69% yesterday
• Yield on 10-Year China Development Bank Bond 2.93% versus 3.00% yesterday