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China’s White Horses Gallop, Week in Review

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Week in Review

  • It became clear Monday that margin calls on Archegos Capital Management, a family office, were responsible for most of the selloff in some Chinese internet stocks last week. Fortunately, the seller has been removed as its positions have been fully liquidated.
  • Meituan reported Monday that its Q4 2020 revenues grew +34.7% to RMB 37.9 billion versus analyst estimates of RMB 26.8 billion. However, the company’s bottom line was hurt by intense investment activity, which comes at an inopportune time due to the value rotation.
  • Online pharmacy and health care products provider JD Health (6618 HK) reported Tuesday that revenue increased +78.8% to RMB 19.382 billion, beating analyst expectations of RMB 18.561 billion.
  • China’s March manufacturing and non-manufacturing PMIs were released at 51.9 and 56.3, respectively, on Wednesday. Within the Manufacturing PMI, output and new orders rose from February along with import and export orders while inventories of raw materials continued to dwindle in a good sign for commodities.
  • Asian markets were a sea of red on Wednesday, the last day of the quarter, and in advance of market holidays on Friday and Monday, before reversing course led by growth stocks on Thursday.

Key News

The Asian equity markets that were open did well as Japan and China’s STAR Board outperformed though volumes were light. It was fairly quiet on the news front following a strong day in the US as one broker cited falling US Treasury yields, tax cuts in China, and bargain hunting in Chinese stocks as catalysts.

Our favorite China internet analyst reminded me that we need to prepare for Alibaba’s anti-monopoly fine, which is likely to be between $800 million and $1 billion. However, this is nothing for the company, which has $69 billion worth of cash on the books. Nonetheless, we know that the media is going to bonkers on this. The critical issue will be whether this finally puts the issue to bed for the company. It is feasible that the company may have to divest from some non-core/non-E-Commerce units. But, those units are unprofitable for the company. Is regulation the end of the world for the companies? No. China needs these companies. They are critical to the government’s goal of raising domestic consumption.

Up until now, fintech companies had avoided being regulated as banks. As Tencent President Martin Lau said on their conference call, they are adhering to the new rules. We have dealt with regulations in the past such as with Tencent and NetEase on violent video games just a few years ago. As our analyst friend stated, this comes with the territory. At the same time, she noted that seasoned investors have been taking advantage of recent market volatility and advantageous prices.

The Caixin Services PMI will be released Monday night.

Hong Kong and the Mainland are closed Monday, so there will be no China Last Night on Monday.  Get out there and enjoy the weekend with family and friends before I start the tears in the rain monologue from Blade Runner. “I’ve seen things you people wouldn’t believe………”

H-Share Update

Hong Kong was closed today and will remain so until Wednesday.

A-Share Update

Shanghai, Shenzhen, and the STAR Board gained +0.52%, +0.89%, and +2.62%, respectively, while the 517 Mainland stocks within the MSCI China A Index gained +1.26%. Growth sectors and stocks were the leaders today as communication, discretionary, and staples outperforming while value sectors such as utilities and real estate underperformed. Breadth was mixed with 1,886 advancers and 1,926 decliners while volumes increased +8% from yesterday though still just 81% of the 1-year average. Volume leaders by value traded were a who’s who of growth stocks, our DND trade (drugs and drinks, i.e. pharma and alcohol stocks), and appliance makers, which are often referred to as “white horses”. Volume leaders included Kweichow Moutai, which gained +5.75%, broker East Money, which gained +2.38%, Wuliangye Yibin, which gained +4.2%, BYD, which gained +4.02%, TCL Tech, which gained +5.01%, BOE Tech, which gained +2.08%, Longi Green Energy, which didn’t get the memo and fell -0.81%, Zijin Mining, which gained +4%, Ping An Insurance, which fell -0.4%, and China Tourism, which gained +3.59%. Northbound Connect trading is closed until Wednesday though YTD foreign investors have bought net of sales +$15.135 billion of mainland stocks. Since the beginning of 2020 that brings net foreign buying to $46.141B. Bonds were off a touch, CNY appreciated versus the US $ and copper gained.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.57 versus 6.55 yesterday
  • CNY/EUR 7.73 versus 7.69 yesterday
  • Yield on 1-Day Government Bond 1.65% versus 1.81% yesterday
  • Yield on 10-Year Government Bond 3.20% versus 3.19% yesterday
  • Yield on 10-Year China Development Bank Bond 3.58% versus 3.57% yesterday
  • China’s Copper Price +0.95% overnight