Asian Equities Largely Higher, Wind and Solar Stocks Outperform, Week In Review
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Week in Review
- Mainland China’s stock markets were closed on Monday and Tuesday this week for the Mid-Autumn Festival.
- The woes of China mega real estate developer Evergrande weighed on Hong Kong real estate stocks and banks with loans to the developer on Monday. Join us for an Evergrande Briefing this coming Wednesday.
- Evergrande announced Wednesday they would make a payment to CNY bondholders on a $35.9 million coupon due Thursday. However, the firm needs to negotiate with USD bondholders to stave off default.
- Asian equities were mostly higher on Thursday as concerns about the systemic risk presented by Evergrande eased.
Friday’s Key News
Asian equities ended a down week largely higher with China and Hong Kong off as investors took some chips off the table before the weekend. One Mainland institutional broker put the Evergrande situation succinctly, stating that “most onshore investors firmly believe that it is unlikely to trigger systemic risk”. Why? This isn’t the regulators' first rodeo as, unfortunately, they’ve dealt with similar situations in the past. At the same time, Evergrande is not going away as bond and loan payments will require negotiating down the interest payments and extending maturities.
Our friend Larry McDonald of The Bear Traps Report believes Evergrande resembles Greece in 2015. The EU did not want Greece to vaporize $200 billion of EU banks’ loans so they extended the maturity of Greece’s debt and cut the interest payments. This is a likely outcome for Evergrande.
Mainland markets were off overnight though wind, solar, liquor, and rare earth stocks had a strong day while lithium stocks were down. Meanwhile, a fairly similar situation played out in Hong Kong. Tencent was off though Mainland investors were buyers while the company bought shares (again). Reports that Alibaba is selling an online video company weighed on its shares, but the end reality is that Alibaba’s non E-Commerce efforts have not been significant revenue drivers.
I should have mentioned that our buddy Ken in Hong Kong helped form our balanced view on Evergrande’s outcome yesterday. Ken made the exceptional point to his clients that we cannot assume Evergrande plays out in the way we want just because that is the rational outcome. We can hope it does, but we simply cannot say definitively.
Gaotu Techedu (GOTU US) reported Q2 earnings Wednesday. First and foremost, I am not recommending anyone go out and buy this stock. I found the conference call interesting as most have left the after school tutoring space for dead following restrictions. The company showed a level of optimism and willingness to reinvent themselves in accordance with the new rules. It was somewhat surprising that only two analysts asked questions on the call. Examining their earnings release and earnings call transcript, there were several interesting insights. Most would be shocked to hear the firm’s Q2 revenue increased +35.3% year over year (YoY) to a record high of RMB 2.32 billion while selling expenses dropped “substantially” as the company “entirely stopped news feed advertising” due to the education industry experiencing “changes over the past few months”. The company is pivoting to focus on “professional and STEM education”.
The Hang Seng bounced around the room but sold off sharply into the close -1.3% though volumes were off -17.59%, which is only 86% of the 1-year average. The 210 Chinese stocks listed in Hong Kong and within the MSCI China All Shares Index lost -1.49%, led lower by utilities -3.96%, energy -2.5%, real estate -2.45%, discretionary -1.79%, industrials-1.51%, and tech -1.5%. Hong Kong’s most heavily traded stocks by value were Tencent, which fell -0.65%, Meituan, which gained +0.82%, Alibaba HK, which fell -2.76%, AIA, which fell -2.15%, Ping An Insurance, which gained +2.17%, Kuaishou Technology, which fell -9.67%, Li Ning, which fell -5.44%, Xiaomi, which fell -1.78%, Dongyue Group, which fell -19.92%, and Hygeia Healthcare, which fell -8.32%. Southbound Stock Connect volumes were moderate/high as Mainland investors bought $655 million worth of Hong Kong stocks as Southbound Connect trading accounted for 14.6% of Hong Kong turnover.
Shanghai, Shenzhen, and the STAR Board closed -0.8%, -0.7%, and +0.82% as volume eased -2.67% though still 133% of the 1-year average. The 541 Mainland stocks within the MSCI China All Shares Index -0.25% as staples +3.19%, healthcare +0.95%, and communication +0.8% while energy -5.3%, materials -3.47%, and utilities -1.19%. The Mainland’s most heavily traded stocks by value were Kweichow Moutai, which gained +3.61%, China Northern Rare Earth, which fell -3.61%, China Three Gorges, which gained +2.16%, Inner Mongolia BaoTou Steel, which fell -5.33%, Wuliangyee Yibin, which gained +3.14%, China Rare Earth, which gained +10%, Tianqi Lithium, which fell -1.47%, COSCO Shipping, which gained +2.97%, Longi Green Energy, which gained +2.02%, and Sungrow Power Supply, which gained +8.43%. Northbound Stock Connect volumes were moderate/high as foreign investors bought $422 million worth of Mainland stocks today as Northbound Connect trading accounted for 5.4% of Mainland turnover.
Last Night’s Exchange Rates, Prices, & Yields
- CNY/USD 6.47 versus 6.46 yesterday
- CNY/EUR 7.57 versus 7.58 yesterday
- Yield on 1-Day Government Bond 1.50% versus 1.55% yesterday
- Yield on 10-Year Government Bond 2.87% versus 2.86% yesterday
- Yield on 10-Year China Development Bank Bond 3.19% versus 3.19% yesterday
- Copper Price +0.28% overnight