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Mainland Investors Buy Hong Kong Growth Stocks On Weakness, Alibaba Increases Stock Buyback

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Key News

Alibaba sold off on Thursday’s news that the State Administration for Market Regulation (SAMR) was investigating the e-commerce company for monopolistic practices. As we mentioned Thursday, merchants have to choose between selling goods on Alibaba and on its archrival Tencent’s ecosystem, which includes and Pinduoduo. If you choose Alibaba, then you are not allowed to sell on its rivals’ platforms. That is going to change. Furthermore, Tencent’s mobile payment service WePay is not accepted on Alibaba’s ecosystem. That is going to change. These changes are unlikely to have a material effect on Alibaba as the network effect the company has generated will continue to attract and keep merchants.

Also weighing on Alibaba is the declining value of Ant Group based on regulator conversations. Ant Group’s meeting with regulators focused on the company’s expansion beyond mobile payments into insurance, wealth management, and lending due to their higher margins. The company’s immense growth potential in these areas means that regulators must figure out how to treat the online bank.

Nonetheless, Alibaba’s fourth-quarter financial results will be announced in February and analysts expect revenue growth of +34% year over year.

Alibaba and Ant Group’s regulatory situation reminds me of Baidu’s medical advertising scandal and Tencent’s previous difficulties securing approval for new games based on content. In both instances, the companies’ stocks were adversely affected in the short run. Our experience several years ago with Baidu and Tencent has reaffirmed our basket approach. While Alibaba has become quite inexpensive from a valuation perspective, the market appears to believe others such as Pindouduo might benefit from the Alibaba probe.

Alibaba has increased its stock buyback program to $10 billion from $4 billion as the company believes its stock is cheap.

Ultimately, the internet and e-commerce opportunity in China is not going away. The size of the pie might be redistributed amongst the largest companies but there is nothing to indicate that the overall opportunity has been diminished. It is worth noting that Mainland investors continue to buy internet and E-Commerce names listed in Hong Kong via Southbound Connect. While foreign investors may be spooked by the headlines, local investors appear to be buying the dip.

Asian equities were mostly higher except for the Philippines, which experienced an earthquake over Christmas. Hong Kong was off a touch though the real story was weakness in growth stocks as volume leaders Tencent -6.65%, Alibaba HK -7.98%, Meituan -6.88%, Xiomi -4.01%, JD HK -8.02%, Geely Auto +4.9%, Alibaba Health -13.11%, Ping An +1.31%, ICBC +4.85%, BYD +0.2%, China Construction Bank +2.11%, and HK -2.15%.

Value sectors held up better as health care outperformed. I believe foreign investors might be shifting from growth to value using the Alibaba situation as a catalyst as volumes were high in Hong Kong. The problem is that there are few buyers as many mutual funds and hedge funds have closed their books for the year. This has likely exacerbated the price movement. Tencent and Meituan saw net buying from Mainland investors via Southbound Connect with the former showing very strong buying.

Shanghai and Shenzhen were basically flat as industrial profits came in strong, +15.5% year over year for December though slower than November’s +28% YoY. Alcohol stocks had a strong day along with many consumer plays. CNY was off a touch versus the dollar while bonds rallied.

I mentioned that JD Health was added to Southbound Stock Connect last week. For reference, Tencent and Meituan have 4.29% and 6.26% of shares held by mainland investors via Southbound Connect, respectively. JD Health will likely see a similar distribution.

H-Share Update

The Hang Seng was off -0.27%/-71 index points to close at 26,314. Volume was high +94% from Thursday’s half day session, which is +50% higher than the 1-year average while breadth was positive with 36 advancers and 15 decliners. The 204 Chinese companies listed in Hong Kong and within the MSCI China All Shares Index were off -1.64% led by financials +1.92%, energy +1.74%, utilities +1.12, and materials +1.1%. Meanwhile, communication -5.7%, tech -2.6%, and discretionary -2.17%. Southbound Stock Connect volumes were elevated as Mainland investors bought $1.084 billion worth of Hong Kong stocks and Southbound trading accounted for 14.4% of Hong Kong turnover.

A-Share Update

Shanghai and Shenzhen were basically flat, +0.02% and -0.04% to close at 3,397 and 2,273, respectively. Volume was up +11.4% from Friday, which is +3% above the 1-year average. Meanwhile, breadth was off with 1,034 advancers and 2,780 decliners. The 521 Mainland stocks within the MSCI China All Shares Index were up +0.21% led by staples +2.58%, discretionary +0.77%, and financials +0.34%. Meanwhile, health care -1.4%, communication -1.13%, and tech -1.13%. Northbound Stock Connect volumes were moderate as foreign investors sold -$62 million worth of Mainland stocks today and Northbound Connect trading accounted for 7.2% of Mainland turnover.

Last Night’s Exchange Rates & Yields

  • CNY/USD 6.54 versus 6.54 Friday
  • CNY/EUR 7.99 versus 7.97 Friday
  • Yield on 1-Day Government Bond 0.40% versus 0.45% Friday
  • Yield on 10-Year Government Bond 3.16% versus 3.19% Friday
  • Yield on 10-Year China Development Bank Bond 3.58% versus 3.59% Friday