Alibaba reported quarterly results prior to the US market’s open this morning. All in all, the numbers look great to me as the company smashed analyst estimates across the board. The stock has had a great 2020 following its listing in Hong Kong in November 2019. Stocks priced for perfection need perfect quarterly results. What’s not perfect? The China Core Commerce grew by 26%, which is lower than in the past. Honestly, that’s it! There is so much good news here, but this one issue could weigh on the stock. I found management’s comments to be quite positive and confident as Alibaba is one of the best-managed companies globally, and this quarter proves that out. Remember we have Alibaba’s Singles Day on November 11^th, which historically has driven strong quarterly results. The company upfront addressed the Ant Group IPO delay for regulatory reasons, but didn’t dwell on the issue. Alibaba has a large amount of cash ($59B) on its balance sheet. It makes you wonder what they will do with all that cash. As shown below, the Digital Media/Entertainment unit hasn’t really generated financial results as the company wants to put more eyeballs into their ecosystem. This is pure speculation, but putting some cash to work to bolster this effort makes sense to me. 

• Revenue +30% to RMB 155.059B ($23.49) versus estimate RMB 154.841B ($23.46B)
• China commerce revenue +26% to RMB 95.470B ($14.061B), this is 62% of revenue
• International Commerce +30% to RMB 7.789B ($1.147B), Alibaba bought Lazada a Southeast Asian e-commerce company, super smart move!
• Cloud Computing +60% to RMB 14.899B ($2.194B) though lost money; not a big deal as only 10% of revenue
• Digital Media/Entertainment grew revenue +8% to RMB 8.066B ($1.188B) though also lost money, not a big deal as 5% of revenue
• Annual active customers +15% to 757mm, mobile users +7% to 881
• Cash increased to RMB 405.912B ($59.784B)
• Cash flow increased 15% RMB 54.296B ($7.997B)
• Net Income adjusted RMB 47.088B ($6.935B) estimate RMB 38.4B
• EPS Adjusted RMB 17.97 ($2.65) versus estimate 13.87 ($2.10)

Key News

Asian equities ripped overnight on strong volumes as markets appear to like US political gridlock and clarity on a White House winner. It’s worth noting the exceedingly strong move in CNY, China’s currency, which appreciated +0.7% versus the US dollar to 6.61! The Hang Seng Index gained +3.25% with all 50 stocks advancing while the broader Hang Seng Composite gained +3.6% with 427 advancers and only 35 decliners. More impressive were the Chinese stocks listed in Hong Kong within the MSCI China All Shares Index, which rose +4.41% (a total China index including full Shanghai and Shenzhen stocks unlike MSCI China, which only has 20% of SH and SZ’s potential weight). Hong Kong volume leaders were led by Tencent, which rose +6.2% (this is a $770B market cap company!), Alibaba Hong Kong, which was up +6.28% ($822B market cap), Meituan Dianping, which gained +5.04%, Xiaomi, which gained +1.25%, Geely Auto, which rose +8.74%, Hong Kong Exchanges, which rose +3.12%, JD.com Hong Kong, which gained +9.39% and BYD, which was up +9.39%. Shanghai & Shenzhen gained +1.3% and +1.67%, though the Mainland stocks within the MSCI China All Shares Index gained +3.12%! Mainland volume leader was BYD, which rose +10% after reporting that EV sales increased 85% in October year-over-year. EV/clean energy, 5G/tech, and alcohol stocks were strong, though it was a broad rally with strong volumes. Technical analysts will be looking hard at these moves. What’s interesting to me is in USD, Shanghai & Shenzhen have broken out from the range they have been stuck in since late June. In local currency, they are still range bound. 

Some will dismiss the pulling of the Ant Group IPO as another sign of China’s regulatory interference in markets. Others will say that the regulator punished Jack Ma for his weekend comments. I disagree with both. Let’s say the company had IPOed today, and then the new fintech regulatory rules were implemented. With 40% of revenue generated by the CreditTech unit, how much would Ant’s revenues, margins, and profitability be impacted? It is a material impact though hard to estimate. The stock likely would have taken a big hit. Wouldn’t that have been worse? I think so. Didn’t the regulator simply say that Ant Group’s financials were backward-looking and were going to be affected knowing the new rules coming? This looks like a smart move that spared investors potential pain. In the long run, it is good for Ant Group, despite the disappointment in the short run. 

President Xi gave the keynote speech at the China International Import Expo (CIIE), which is a huge conference taking place in Shanghai. President Xi said China’s imports will exceed $22 trillion in the next ten years. 

The number of people in my social/kids’ sports/school ecosystem who have tested positive in the past two weeks increased to 5 today. Be careful out there! 

There is chatter that JD.com’s spin-off of JD Health’s IPO in Hong Kong could be next week. 

H-Share Update

The Hang Seng Index rose +3.25%/+809 index points to 25,695 as volume gained +2% from yesterday’s elevated levels. Volume was 150% of the 1-year average while breadth was 50 advancers and zero decliners. The broader Hang Seng Composite rose +3.6% with 427 advancers and only 35 decliners. The 204 Chinese companies listed in Hong Kong within the MSCI China All Shares Index gained +4.41%, led by real estate +6.48%, communication +5.9%, discretionary +5.6%, tech +4.54%, health care +4.24%, utilities +3.69%, industrials +2.81%, etc. Southbound Stock Connect had moderate volumes with Mainland investors buying $212mm of Hong Kong stocks as Southbound Connect trading accounted for 10.5% of Hong Kong turnover.

A-Share Update

Shanghai & Shenzhen gained +1.3% and +1.67% to close at 3,320 and 2,299 respectively. Volume jumped +18%, which is 108% of the 1-year average while breadth was amazingly strong with 3,289 advancers and 475 decliners. The 518 Mainland stocks within the MSCI China All Shares Index rose +3.12%, led by discretionary +4.61%, real estate +4.27%, tech +4.24%, industrials +3.64%, materials +3.48%, utilities +3.28%, staples +3.26%, communication +3.02%, financials +2.04%, etc. Northbound Stock Connect volumes were moderate with foreign investors buying $1.664 billion of Mainland stocks as Northbound trading accounted for 6.9% of Mainland turnover.

Last Night’s Exchange Rates & Yields

• CNY/USD 6.61 versus 6.65 yesterday 
• CNY/EUR 7.82 versus 7.79 yesterday
• Yield on 1-Day Government Bond 1.56% versus 1.56% yesterday
• Yield on 10-Year Government Bond 3.19% versus 3.17% yesterday
• Yield on 10-Year China Development Bank Bond 3.66% versus 3.64% yesterday