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Key News

Asian equities had a mixed day on light summer volumes, despite news prior to the open that USTR Lighthizer and Treasury Secretary Mnuchin had a call with Vice Premier Liu He. Both sides had positive comments on the Phase One trade deal as the discussion involved China opening the Mainland markets to foreign institutions and addressing intellectual property concerns. Hong Kong was off slightly though rebounded for a small loss, as social distancing measures will be eased and company earnings are front and center for the few investors not on summer holiday. Hong Kong volume leaders were Tencent, which was off -0.64% (US-China releases didn’t mention WeChat), Alibaba Hong Kong +1.82%, Meituan Dianping -3.08%, Xiaomi -1.74%, JD.com Hong Kong -0.33%, while Apple suppliers Sunny Optical and AAC were off -4.8% and -7.36% on analyst downgrades.

Mainland China was led by the DnD trade (drugs i.e. health care/pharma and drinks ie alcohol stocks) as liquor companies Kweichow Moutai and Wuliangye Yibin were up +1.81% and +4.71%, respectively.

China removed the 20% cap for IPOs on the ChiNext Board, which should support small-cap companies. Apple's Mainland Chinese suppliers rebounded, led by iPod maker GoerTek up +1.2% on the trade discussion. It is interesting to note that Chinese bonds sold off today.

HSBC raised their China 2020 GDP forecast to 2.4% from 1.7% based on a pick-up in exports and on the potential for cuts to the bank reserve requirement ratio and to the loan prime rate. According to Bloomberg, the 70 China economists who provide an estimate have average GDP growth of 2% in 2020 and 8% in 2021. While GDP percentage growth garners much attention, there is little attention paid to the value of GDP growth. In 2010 and 2000, China’s GDP grew by 22% and 9.85% in US dollars using current prices. The values of GDP growth are $333B and $31B. The value of China’s GDP growth in Q2 was $624B after falling by $1.076B in Q1. The size of China’s growth is significantly larger today, even though the percentage growth is much smaller.

Unsolicited quarantine book recommendation: Erik Larson’s “The Splendid and the Vile” on Winston Churchill and life in London during the Blitz. I don’t feel that sorry for myself in quarantine after reading about nightly bombings. 

A friend shared a report from the Gallup/Knight Foundation titled “American View 2020: Trust, Media, and Democracy”, which surveyed 20,000 Americans on their views on reporting. The key point “…party affiliation remains the key predictor of attitudes about the news media.” 86% of those surveyed believe there is a “great deal” (49%) or “fair amount” (37%) of political bias in reporting. I believe Josh Brown articulated the thesis of Evidence-Based Investing. It would be great if the same were true for media headlines.

Online car seller Autohome (ATHM US) reported earnings before the US market open. I’ll provide a full recap tomorrow, though the results appear to have beaten analyst expectations despite the fact that revenue, net income, and EPS were off slightly year-over-year. 

Ant Group filed its IPO prospectus after the Hong Kong market close in advance of listing on the Hong Kong Exchanges and Shanghai Stock Exchanges’ STAR Board. I have not read all 674 pages but tried to pull out important data. The company, the largest fintech unicorn globally, is apt to be the largest IPO globally this year with a valuation of $200 billion. What’s not to love?  The company is big, profitable, and growing. One interesting factoid from the filing: 75% of China’s population doesn’t own a physical payment card because there is no need. Your smartphone is your credit card!

• For background, Alipay was founded in 2004 as a digital payment solution during the early days of Chine e-commerce to protect both buyers and sellers. In 2011, Alipay spun off from Alibaba, which retains a 33% stake.
• In the twelve months ended June 30, 2020, total payment volume (TPV) in China reached RMB 118 trillion ($17 trillion).
• International (non China) TPV RMB 622 billion ($89 billion)
• Alipay has over one billion annual users, 711 million monthly users, and over 80 million participating merchants
• Digital payment via the Alipay platform, 35.9% of revenue, will get a lot of attention but Ant Group has business lines in InvestmentTech (15.6% of revenue), CreditTech (39.4%), and InsureTech (8.4%)
• InvestmentTech is Ant’s mutual fund business famous for its Yu’ebao money market fund (Bloomberg ticker TGEUTMM CH) with RMB 1.22 trillion ($176B) in AUM
• CreditTech is a revolving credit line for consumers and small businesses.
• InsureTech is shipping insurance for returned goods purchased on Alibaba’s e-commerce platforms that has evolved into providing traditional insurance needs such as life, auto, and health insurance.

Six months ended June 30, 2020 

• Revenue RMB 72.528 billion ($10.491B)
• Gross profit RMB 42.484 billion ($6.144B)
• Operating profit RMB 24.903 billion ($3.6B)
• Profit RMB 21.923 billion ($3.171B)

H-Share Update

The Hang Seng mitigated losses with an afternoon rally off -0.26%/-65 index points to close at 25,486. Volumes were down -8% from yesterday while breadth was off with 20 advancers and 28 decliners, led by HSBC up +1.33%/+28 index points, Shenzhou International Group +7.87%/+23 index points, and AIA -0.83%/-22 index points. Hong Kong domiciled companies were off -0.15% versus -0.44% for Chinese domiciled companies using the HS Hong Kong 35 and China Enterprise Indexes as proxies. The 205 Chinese companies listed in Hong Kong within the MSCI China All Shares were off -0.67%, led by energy +0.82%, industrials +0.7%, utilities +0.01%, materials -0.24%, financials -0.29%, staples -0.31%, communication -0.7%, discretionary -1%, real estate -1.31%, tech -1.5%, and health care -2.13%.

Southbound Stock Connect volumes were light with Mainland investors small sellers of Mainland stocks. Shanghai Stock Connect volume leaders were Meituan Dianping, which was sold 4 to 3, Tencent, which was sold very slightly, and Poly PPT , which was bought 5 to 4. Mainland investors bought $133mm worth of Hong Kong stocks today as Southbound Stock Connect accounted for 10% of Hong Kong turnover.

A-Share Update

Shanghai & Shenzhen came off the day’s highs to close off -0.36% and up +0.11% at 3,373 and 2,280, respectively. Volumes were up +4% which is 1/3 higher than the 1-year average while breadth was off with 1,477 advancers and 2,213 decliners. Large caps outperformed mid and small cap stocks. The 510 Mainland stocks within the MSCI China All Shares Index returned +0.03% with staples +1.71%, health care +0.43%, discretionary +0.17%, financials +0.0%, communication -0.04%, real estate -0.29%, materials -0.68%, tech -0.73%, industrials -0.77%, energy -0.9%, and utilities -1.44%.

Northbound Stock Connect volumes were light with foreign investors buyers of Mainland stocks. Shanghai Connect volume leaders were Kweichow Moutai, which was bought nearly 3 to 1, China Tourism, which was sold 2 to 1, and Ping An, which was bought 7 to 5. Shenzhen Connect volume leaders were Luxshare, which was sold 11 to 7, BOE Technology, which was sold 2 to 1, and Wuiangye Yibin, which was sold slightly. Foreign investors bought $251mm worth of Mainland stocks today as Northbound Stock Connect trading accounted for 7.1% of Mainland turnover.

Last Night’s Exchange Rates & Yields

• CNY/USD 6.91 versus 6.92 yesterday
• CNY/EUR 8.18 versus 8.16 yesterday
• Yield on 1-Day Government Bond 1.15% versus 1.45% yesterday
• Yield on 10-Year Government Bond 3.04% versus 2.99%
• Yield on 10-Year China Development Bank Bond 3.58% versus 3.53%