Daily Posts

ATMX (Alibaba Tencent Meituan Dianping Xiaomi) Follows FAANG Higher, Sogou Receives Buy Offer From Tencent

Key News

Asian equities had a strong day led by growth stocks following vaccine hopes and US dollar weakness. Hong Kong had a strong day as Tencent played Atlas lifting the market, accounting for 136 of the 169 index points that the Hang Seng added today. A new useful acronym is “ATMX,” Hong Kong’s FAANG, which had a great day. ATMX is comprised of Alibaba HK +2.34%, Meituan Dianping +3.24%, Tencent +4.52%, and Xiaomi +1.5%. Though not included in the new acronym, Semiconductor Manufacturing (SMIC) rose +5.84%. Tencent, which recently became the largest social media stock globally, was lifted on news of its plan to purchase US-listed search engine Sogou (SOGO US). Tech, which is comprised of semiconductors, hardware, and software, had a strong day in Hong Kong, Taiwan and Mainland China following positive expectations for Apple’s earnings release, which is expected on Thursday. Recent IPOs JD.com HK gained +2.79% and NetEase HK +2.09%. Mainland China had a strong day as Kweichow Moutai rose +2.92% as the company reported earnings after the close. For the 1st half of 2020, revenues rose +11% year over year to CNY 43.95B ($6.277B) and net income rose +13% to CNY 22.6B ($3.228B). I suppose the results prove why alcohol stocks are considered a staple.

Yesterday, Chinese search engine Sogou Inc. (SOGO US) jumped +48% to $8.51 after Tencent offered to buy the remainder of the company for $9 a share. A longstanding issue for SOGO has been its ineligibility to be included in MSCI indices because it did not meet the minimum market cap requirement. The irony is that, at the present market cap, it may have qualified for inclusion. Dominant search provider Baidu (BIDU US) was off -2.66% on the news. Embedding Sogou’s search in the WeChat ecosystem makes a great deal of sense. However, the good people at Microsoft can tell you all about how challenging it is to overtake an established rival in search. Tencent also raised its stake in Century Huatong, an auto parts company. One interesting aspect of Tencent’s purchase is that it came after Sogo had returned nearly 50% since its March low. Many investors will look at markets and decide that they missed the boat and stay on the sidelines. I can’t predict the future, but it is worth noting that Tencent has not flinched after a tremendous rally since March.

There was broker chatter that Trip.com (formerly Ctrip.com) could be taken private. So far, this is only a rumor but we’ve seen several examples of good companies scooped up at low valuations such as SOGO and Tencent buying online auto sales company BITA earlier this year. Domestic travel is coming online while, obviously, international travel is going to come back online at a far slower pace. I hope the rumors aren’t true considering that the company’s long term prospects are very strong. Clearly, management believes the fundamentals are stronger than the market does.

President Xi gave the keynote at the annual meeting of the Asian Infrastructure Investment Bank (AIIB), which supports the Belt & Road Initiative. AIIB has 102 country members though the US and Japan are conspicuously absent. It is worth noting that India is, in fact, a member and would greatly benefit from putting China’s infrastructure know-how to work.

The Wall Street Journal published an article heralding the strong performance of Chinese hedge funds relative to their global peers. The article cited the Eurekahedge Greater China Long/Short Equities Hedge Index returned 8% YTD. And that’s considered good? If we charged 2 & 20, I’d be on the beach already!

H-Share Update

The Hang Seng opened higher, then eased lower, and ended the day with a rally into to close +0.69%/+169 index points at 24,772. Volume declined another -10% after yesterday’s -24%, but was just above the 1-year average. Breadth was positive with 29 advancers and 20 decliners led by index heavyweights Tencent +4.52%/+136 index points, HK Exchanges +2.66%/+35 index points, and HSBC -1.56%/-33 index points. Today’s worst performer was CK Asset -2.11%/-6 index points. China-domiciled companies +0.76% versus +0.77% for Hong Kong-domiciled companies using the HS China Enterprise and HK 35 indexes as proxies. The 205 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index rose +1.98% with communication +3.9%, tech +3.5%, discretionary +3.05%, staples +2.57%, health care +1.61%, utilities +1.34%, industrials +0.75%, real estate +0.43%, financials -0.13%, energy -0.56%, and materials -0.58%.

Southbound Stock Connect volumes returned to earth as Mainland investors were net buyers of Hong K ong stocks. Volume leaders on the Shanghai Connect were Tencent, which was bought by 5 to 1, SMIC, which was sold slightly, and Xiaomi, which was sold by 2 to 1. On the Shenzhen Connect, Tencent and SMIC were sold by a very small margin while e-cigarette maker Smoore was bought by 20 to 1. Mainland investors bought $498mm worth of Hong Kong stocks today as Southbound Connect trading accounted for 10% of Hong Kong turnover.

A-Share Update

Shanghai and Shenzhen bounced around the room to close +0.71% and +1.37% at 3,227 and 2,173, respectively. Volume fell -2.8% following a decline of -30% yesterday but remained above the 1-year average by healthy amount. Breadth was positive with 2,417 advancers and 1,181 decliners. Mid and small caps outperformed small caps. The 509 Chinese companies listed on the Mainland and within the MSCI China All Shares Index gained +1.06% with staples +3.07%, communication +1.13%, tech +1.1%, discretionary +1.02%, industrials +1%, materials +0.79%, real estate +0.76%, utilities +0.42%, energy +0.39%, health care +0.37%, and financials +0.14%.

Northbound Stock Connect volumes were off their recent hyper levels but remained well above the 1-year average. Like yesterday, foreign investors net sold Shanghai stocks and bought Shenzhen stocks. Volume leaders on the Shanghai Connect were Kweichow Moutai, which was bought by a small margin, Ping An, which was sold 10 to 9, and China Tourism, which was sold by just under 2 to 1. Volume leaders on the Shenzhen Connect were Wuliangye Yibin, which was bought by 11 to 10, Luxshare, which was bought by 2 to 1, and East Money Information, which was bought by 9 to 8. Foreign investors sold -$318mm worth of Mainland stocks today as Northbound Stock Connect trading accounted for 6% of Mainland turnover.

Last Night’s Exchange Rates & Yields

  • CNY/USD 7.00 versus 6.99 yesterday
  • CNY/EUR 8.22 versus 8.23 yesterday
  • Yield on 1-Day Government Bond 1.32% versus 1.32% yesterday
  • Yield on 10-Year Government Bond 2.92% versus 2.88% yesterday
  • Yield on 10-Year China Development Bank Bond 3.39% versus 3.35% yesterday