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MOMO Releases Mixed Q1 As Traders Prepare For MSCI Rebalance Tomorrow

Key News

Asian equity markets saw another mixed day as Japan rose heading into a significant index rebalance day tomorrow. Below the surface, things are more disconcerting as tech was off regionally on growing US-China political tensions. I am concerned politicians might get a lesson in ECON 101 as clearly no one remembers or noticed how badly the US and global economy suffered during the trade war, which led to a Fed interest rate cut. The consensus view from brokers on the US revoking Hong Kong’s special trade status was that the move was no surprise.

The WSJ had an article on Chinese banks following a release yesterday from the US China Economic and Security Review Commission. The latest and greatest idea is that cutting Chinese banks off from US dollars would be highly problematic on many levels. Look up this Congressional commission and you will find that it lacks any representation from US businesses.

One group of investors that appears to believe the political rhetoric is more bark than bite are foreign investors in Mainland China who have bought $1.417B worth of Mainland stocks this week. Hong Kong’s most heavily traded stocks by value were Tencent -2.81%, Alibaba HK -1.93%, and Mietuan Dianping +1.26%. Tech was off significantly in Hong Kong while healthcare was weak following CSPC Pharma’s announcement of a price cut in one of their drugs. Defensive sectors outperformed on the Mainland. We will do a full review of the Two Sessions and Premier Li’s press conference tomorrow. There was chatter that both and NetEase’s Hong Kong listings are moving forward.

As I have discussed previously, the delisting bill will be put up to a Senate vote without going to committee. The vote was passed by unanimous consent, meaning that no one objected but also that no one actually voted in favor. In an attempt to “punish China”, clearly no one thought about the $1 trillion in US savings that will be put at risk. It appears that the House will send the bill to committee prior to a vote, which might not occur until this summer. By tapping the brakes, it provides the SEC the opportunity to provide their opinion. More disclosure is necessary, but hurting US savers is a terrible idea. The vast majority of US-listed Chinese companies are P-Chips i.e private companies. The companies themselves have done nothing wrong as their listings were approved by the SEC. Chinese law should change to allow for their auditors to provide their auditor papers to the PCAOB. This issue should be put to bed!

If the US revokes Hong Kong’s special trading status it may accelerate an index change. Hong Kong-domiciled stocks such as AIA and HK Exchanges are in the MSCI Hong Kong Index, which is a developed market index like the MSCI EAFE Index. China-domiciled companies listed in Hong Kong are in the MSCI China Index, which is an Emerging Market index. The MSCI Hong Kong Index has 43 holdings with a market cap of $457mm versus MSCI China’s 704 holdings with a market cap of $2.065 trillion. If MSCI Hong Kong were rolled into MSCI China it would increase China’s weight in MSCI EM by 18%. I want to be clear that no one believes this will happen anytime soon if ever. In fact, no one other than myself has even thought about this issue. Just putting it on your radar.

Meituan Dianping (3690 HK) is having its market cap adjusted upward in MSCI indices in what should be a big trading day for the company’s stock. I am not predicting the stock will go up or down, but it is sure to see huge volume. Be sure to check out BILI tomorrow at 3:59. The power of passive will be on full display.

Momo reported mixed Q1 results prior to the US open this morning. The results were off year over year (YoY) though they did beat analysts’ lowered expectations. The results highlight the issue of advertising-dependent companies as offline retailers struggled during quarantine. Management cut costs, which led to a jump in net income and EPS. There are pros and cons from the results as the company’s conservative Q2 forecast is a little downbeat though it could be a lower bar for the company to exceed.

  • Revenues declined 3.5% YoY to $507mm (RMB 3.594B) from RMB 3.722 though beat analysts’ estimate of RMB 3.483B
  • Cost & expenses -10% YoY to $427mm (RMB 3.026B) from RMB 3.349B
  • Monthly active users declined to 108mm in March versus 114mm YoY
  • Net Income $75mm (RMB 537mm) from RMB 286mm
  • Diluted EPS increased to $0.17 (RMB 1.23) from RMB 0.70
  • Announced a dividend $0.76 a share
  • Q2 forecast revenue RMB 3.8B to RMB 3.9B/-8.5% to -6.1% YoY

H-Share Update

The Hang Seng had a choppy trading day closing -0.72%/-168 index points at 23,132 on volumes that were +19% from yesterday and well above the 1-year average. Breadth was off with 15 advancers and 33 decliners led by Tencent -2.81%/-76 index points, China Construction Bank +1.48%/+29 index points and the day’s worst performer CSPC Pharmaceutical -10.2%/-22 index points. Shenzhou International was the best performer +3.31%/+7 index points. China-domiciled companies held up considerably better than Hong Kong-domiciled companies -0.17% versus -1.16% 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 lost -0.93% with discretionary +0.82%, financials +0.69%, staples +0.19%, utilities +0.13%, materials +0.07%, energy +0.06%, real estate -0.13%, industrials -0.95%, communication -2.43%, tech -2.43%, and healthcare -4.2%.

Southbound Connect volumes were light with trading skewed to selling. Volume leader Tencent saw sellers outpace buyers 5.5 to 4, Semiconductor Manufacturing had sellers just outpace buyers, and Meituan Dianping was sold 2.5 to 1. Mainland investors sold -$199mm worth of Hong Kong stocks today as Southbound Connect accounted for nearly 7% of turnover in Hong Kong.

A-Share Update

The Shanghai & Shenzhen bounced around the room to close +0.33% and -0.25%, respectively, on volumes that were flat from yesterday and just below the 1-year average. Breadth tilted lower with 1,074 advancers and 2,610 decliners as large caps managed small gains while mid and small caps lost. The Mainland stocks within the MSCI China All Shares gained +0.19% with financials +1.46%, utilities +1.29%, real estate +0.64%, materials +0.5%, staples +0.02%, energy -0.05%, communication -0.14%, tech -0.14%, industrials -0.28%, discretionary -0.61%, and healthcare -1.33%.

Northbound Connect volumes were moderate as foreign investors continue to buy Mainland stocks. Volume leader Kweichow Moutai saw buyers outpace sellers by 9 to 5, China Merchants Bank saw buyers outpace sellers by 6 to 5, Ping An Insurance 2 to 1, while Gree Electric Appliances saw sellers outpace buyers by 6 to 5. Foreign investors bought $393mm worth of Mainland stocks in what has been a surprisingly strong week of inflows.

Last Night’s Prices & Yields

  • CNY/USD 7.15 versus 7.17 yesterday
  • CNY/EUR 7.89 versus 7.87 yesterday
  • Yield on 1-Day Government Bond 1.35% versus 1.36% yesterday
  • Yield on 10-Year Government Bond 2.72% versus 2.75% yesterday
  • Yield on 10-Year China Development Bank Bond 3.00% versus 3.04% yesterday