Key News

Many thanks to our veterans and those currently serving in the military!

Asian equities had a strong day following a mixed day with some modest gains yesterday. Hong Kong had a strong day following better than expected results from today’s volume leader restaurant delivery company Meituan Dianping (3690 HK), which rose +10.41% followed by Tencent +2.11%, and Alibaba HK +1.41%. Macau tycoon Stanley Ho passed away at the age of 98 today. Bargain hunters were active following last Friday’s plunge as the index gained back 432 of the 1,349 index points lost. News that Hong Kong’s security law would not affect the city’s court system intact gave markets better footing. Mainland China also rebounded nicely as investors cheered favorable news from the “Two Sessions” policy meetings regarding auto manufacturing. There were also reports that financing costs for companies will be reduced, which lead to a pick up in sentiment. However, volumes were light on the day.

Passive investors will need to rebalance their MSCI-linked portfolios this Friday at the close due to MSCI’s Semi-Annual Index Rebalance. I’ll find a stock to track and report back as the power of passive will be on full display Friday! I can’t predict if stocks will go up or down, but they will undoubtedly trade with very high volumes. China’s weight within the MSCI Emerging Markets Index will go up +1% to 41.6% as the number of Chinese stocks in the index will rise to more  than 50%.

One simple explanation for why so much manufacturing is in China is due to Asia’s population of 4 billion versus 360 million in the US. If you were selling a good would you place your factory in the backyard of 4 billion or 360 million?

The WSJ published an article today on the Senate passage of a bill to force the auditors of US listed Chinese companies to allow the PCAOB to audit their work. The article notes that House is apt to take the bill up in two months time. As the article notes, US investment bankers have pocketed over $1.4 billion in fees from these listings, which should lead to a significant lobbying campaign aimed at watering down the bill. The article also notes that the SEC and its Chinese equivalent, the CSRC, are talking, which is an extremely positive sign. Ultimately, delisting the stocks hurts US investors because they hold the stocks, not the Chinese. Hopefully, cooler heads will prevail though I find it unlikely any of the stocks will be delisted.

Meituan Dianping reported Q1 results after the close in Hong Kong yesterday. The release exceeded analyst expectations, which were largely that the restaurant delivery company’s core business slumped due to the quarantine. Things were off due to the quarantine, but not nearly as badly as analysts thought. I like this line from the release: “On the consumer side, the pandemic has further accelerated the cultivation of consumption behavior, helping to further educate some of our targeted potential consumers in a positive way.” My translation: old people were forced to try us and they liked it!

• Revenues -12.6% YoY to RMB 16.753B from RMB 19.173B versus estimate RMB 15.59B
• Operating Loss RMB 1.715B from a loss of RMB 1.303B
• Users +8.9% YoY to 448mm from 411mm

H-Share Update

The Hang Seng Index opened higher and stayed there +1.88%/+432 index points to close at 23,384. Volume was off -9% from yesterday though still above the 1-year average breadth was strong with 49 advancers and 1 decliner. Index heavyweights led the way higher as AIA +2.78%/+62 index points, HSBC +3.36%/+61 index points and Tencent +2.11%/+60 index points. Today’s best performer was Henderson Land +4.82%/+ 6 index points while Hong Kong Exchanges -0.95%/-9 index points. Hong Kong-domiciled stocks outperformed China-domiciled stocks +2.24% versus +1.37% using the HS HK 35 HS China Enterprise Indexes as proxies. The Chinese companies listed in Hong Kong within the MSCI China All Shares Index gained +1.69% led higher by discretionary +4.11%, healthcare +2.19%, real estate +2.09%, communication +2%, staples +1.94%, tech +1.67%, utilities +1.45%, energy +1.41%, materials +0.9%, industrials+0.81%, financials +0.79%.

Southbound Connect volumes were moderate to low as Mainland investors were buyers of Hong Kong stocks today. Volume leader Meituan Dianping saw almost 2 to 1 buyers while Tencent saw buyers outpace sellers by 4 to 1 and Semiconductor Manufacturing saw 2 to 1 buyers. Mainland investors bought $543mm worth of Hong Kong stocks today as Southbound Connect trading accounted for 8% of Hong Kong turnover.

A-Share Update

Shanghai & Shenzhen opened higher and grinded higher to close +1.01% and +2.21% as volumes +7% from yesterday though below the 1-year average. Breadth was exceedingly strong with 3,275 advancers and 400 decliners as mid and small caps outperformed large caps. The Mainland stocks within the MSCI China All Shares Index gained +1.39%, led higher by tech +2.92%, discretionary +2.47%, healthcare +2.24%, communication +1.86%, materials +1.6%, industrials +1.32%, real estate +0.81%, financials +0.73%, energy +0.47%, staples +0.43%, utilities +0.28%.

Northbound Connect volumes were light as foreign investors were net buyers of Mainland stocks. Volume leader Gree Electric Appliances was bought 7 to 5 while MSCI Inclusion stock Kweichow Moutai saw buyers outpace sellers by a small amount. Foreign investors bought $544mm worth of Mainland stocks today following yesterday’s $300mm as Northbound Connect trading accounted for 5% of Mainland turnover.

Last Night’s Prices & Yields

• CNY/USD 7.13 versus 7.14% yesterday
• CNY/EUR 7.82 versus 7.78 yesterday
• Yield on 1-Day Government Bond 1.21% versus 0.86% yesterday
• Yield on 10-Year Government Bond 2.74% versus 2.69% yesterday
• Yield on 10-Year China Development Bank Bond 3.04% versus 2.99% yesterday