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Wuxi Biologics’ Decline & Global Growth To Value Rotation Continue, Week in Review

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Week in Review

  • A rumor that Alibaba’s registering of 1 billion new shares on Friday was linked to SoftBank selling its stake weighed on China internet stocks on Monday. SoftBank denied the rumor on Wednesday, which led to a jump in Alibaba shares. The registration was likely due to ADR conversion.
  • The US Commerce Department added 33 companies to an unverified/red flag list on Tuesday, including Wuxi Biologics. The company’s addition to the list weighed on its shares and the health care sector all week.
  • Electric vehicle manufacturer Xpeng’s Hong Kong shares were added to Southbound Stock Connect on Tuesday, sending them higher by +8% on volume that surged +337% day-over-day as a result of the Connect inclusion.
  • MSCI released the pro forma for its February index review. The most notable additions to the index provider’s global standard indexes were Southeast Asian ride sharing company Grab, airplane leasing company AerCap, and China fintech company Lufax.
  • With the US hiking rates and China easing, the world’s two largest economies are heading in opposite directions in terms of monetary policy. In this week’s China Market Connect, Dr. Xiaolin Chen explains the types of rates available in China and how the various tools in the PBOC’s toolbox can impact liquidity and the real economy.

Key News

Asian equities ended a good week with a thud though Japan missed the mess thanks to a market holiday.  The Hang Seng Index bounced around the room and ended up pulling an inverse James Bond -0.07% on volume that was +7.7% higher than yesterday, which is 89% of the 1-year average. Hong Kong decliners outpaced advancers by 2 to 1.

It was a quiet night on the news front as US Fed hike fears go global following yesterday’s sky high CPI print as value sectors outperformed growth sectors in both Hong Kong and Mainland China. Real estate was the best performer in Hong Kong, gaining +2.27% on policy support.

Healthcare stocks were off again as Wuxi Biologics fell -2.74% overnight on the US’ inclusion of the global pharmaceutical company on its unverified list. Again, this reaction looks overdone to me as the stock has lost -29% over the last three trading sessions. The company is likely to be removed from this list eventually. Investors appear to be exhibiting a shoot first, ask questions later mentality. The stock is off -61% from its high on June 28th as concerns that China’s national drug procurement program will be expanded and high valuation stocks broadly have been hit by the growth to value rotation. The stock, which is expected to grow revenues +45% this year, has been a professional investor favorite due to the company’s strong reputation, though it has been a crowded trade.

Alibaba HK outperformed, gaining +0.16% on little news though the company did announce that will report financial results before the US market open on February 24th. Hong Kong’s top ten most heavily traded stocks highlight the growth to value rotation as Ping An Insurance gained +3.9%, China Mobile gained +0.16%, AIA gained +1.22%, China Construction Bank gained +0.32%, and China Life Insurance gained +3.32% versus Tencent, which fell -1.53%, Meituan, which fell -2.23%, and Sunny Optical, which fell -4.37.

Value also outperformed growth on the Mainland as Shanghai fell -0.66%, Shenzhen fell -1.72%, and the STAR Board fell -1.57%. Financials and energy were the only positive sectors on the Mainland while coal was the best performing sub-sector on the Mainland, again highlighting the growth to value rotation. Volume increased +6.19% from yesterday, which is 94% of the 1-year average while decliners outpaced advancers by 6 to 1.

Days like today are why we believe in both active and passive investment when it comes to China A exposure. Yes, the high dispersion, in theory, provides an alpha opportunity for active managers. Days like today highlight the beta element of the market as there were only 577 advancing stocks versus 3,749 decliners.

The clean energy ecosystem had another off night, also driven by the growth to value rotation, continued US tariffs, and the crowded trade in these names. For example, electric vehicle (EV) battery maker CATL was off -5.43% overnight, lost -15% this week, and is down -28% from its December 2nd high. No bueno!

Foreign investors used the weakness overnight to add to their Mainland stock holdings, buying $158 million via Northbound Stock Connect, bringing the weekly inflow total to $1.7B. Treasury bonds were off, currency was flat, and copper was up a little.

Yesterday’s news that Tencent increased its position in Didi appear to be false as the company’s original IPO position was bigger than anticipated. I noticed Alibaba sold its position in Groupon, which wasn’t big to begin with.

China will allow foreign companies to list via CDRs, which is their version of an ADR, for the first time. Details are minimal at this point, but this is certainly an interesting development. There will also be Stock Connect trading links established between China, Switzerland, and Germany. Interesting! One cannot deny the continued financial opening that is being pursued by China.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.38 versus 6.38 yesterday
  • CNY/EUR 7.23 versus 7.22 yesterday
  • Yield on 1-Day Government Bond 1.48% versus 1.34% yesterday
  • Yield on 10-Year Government Bond 2.79% versus 2.73% yesterday
  • Yield on 10-Year China Development Bank Bond 3.03% versus 3.00% yesterday
  • Copper Price +0.75% overnight