The “National Team” Buys Dip Late In Session, Week in Review

Week in Review

• Asian equities were mostly lower for the week, though Korea and Pakistan outperformed, managing gains, while Mainland China's tech-focused STAR Market and Shenzhen underperformed.
• STAR Market-listed robotics giant Unitree managed strong gains this week, despite a sell-off in AI supply chain stocks that gripped global markets, and is up 44% in October.
• The 20th Central Committee of the Communist Party of China (CPC) took place in Beijing this week, which could lead to announcements and key signals around consumption and stock market support, especially after China's "National Team", i.e., investment firms associated with sovereign wealth, has become increasingly active in buying domestic equity ETFs.
• Tencent's investment conference also took place in China this week, as the company announced strong user growth for its AI assistant.

Friday's Key News

Asia’s AI supply chain took Intel and Alphabet’s financial results on the chin, as Taiwan, Korea, Japa, and China’s Science & Technology (STAR) Board were all down significantly. Meanwhile, "AI light” India outperformed.

Unfortunately, China's "National Team", i.e., investment firms associated with China's sovereign wealth, did not show up until the damage was already done. As evidence, a STAR Board ETF (588000 CH) listed in China declined -5.03% and saw volumes jump at the last half hour of trading. The ETF’s volume was 9.27 million shares versus the 30-day average of 5.46 million, while the value traded was $1.75 billion versus the 1-year average of $875 million. There was a similar pattern in many of the National Team’s favored ETFs as they showed up too late in the day. The Shanghai Composite is now sitting at 3,600 while the Shenzhen sliced through the 2,100 level, which should raise alarm for this group of investors and lead to more flows.

Mainland China and Hong Kong’s AI supply chain subsectors, i.e., semiconductors, semiconductor equipment, electronic equipment, and communications equipment, all came under significant pressure overnight. Multiple index heavyweights, i.e., heavily owned companies, reported Q3 earnings results that missed expectations despite showing tremendous year-over-year growth.

Q3 Earnings Releases Overnight:

• Mainland-listed semiconductor equipment maker AMEC fell -5.86% on Q3 revenue that increased +28% year-to-date (YTD) and net profit that increased +241% YoY, though Q3 revenue missed analyst expectations, while net income and earnings per share (EPS) beat.
• Optical equipment maker Innolight fell -4.99% in Mainland China and -4.32% in Hong Kong after it missed analyst expectations across the board, despite revenue surging +172% YoY, profit increasing +174% YoY, and EPS increasing +160% YoY.
• Optical equipment giant Eoptolink fell -14.19% in Mainland China after reporting Q3 revenue increased +80% YoY, net income increased +61%, and raising Q4 guidance. However, Eoptolink missed analyst expectations across the board by a large margin.
• Printed circuit board maker Victory Giant fell -13.31% in China on revenue that increased +34% YoY, though net income and EPS declined YoY while missing analyst expectations across the board by a large margin.
• Apple supplier Luxshare fell -5.14% in Mainland China and -4.39% in Hong Kong on revenue that increased +15% YoY, net profit that increased +7%, and EPS that increased +4.2%, as revenue beat, but net income and EPS both missed analyst expectations.
• It was not all bad, as STAR Board-listed Montage Technology fell -5.09%, despite beating analyst expectations, as revenue increased +46% YoY, net income increased +162%, and EPS increased +145%.
• BYD fell -0.58% in Hong Kong and -1.03% in Mainland China on revenue that increased +14% YoY, net income that increased +28% YoY, and EPS that surged +29% YoY, though it missed analyst expectations across the board by a large margin.
• After the close, STAR Board-listed memory chipmaker CXMT reported revenue that increased +613% YoY, though it missed analyst expectations across the board. However, the company did announce a stock buyback of RMB 1 billion to 2 billion.

Q3 positioning shows active funds in China were net buyers of the STAR Market and technology pullback, as October’s price action in the AI supply chain is likely leading to a rotation into defensive plays, which outperformed today. Energy, liquor, and battery giant CATL, which gained +1.68%, all benefited from the defensive trade, along with appliance maker Midea, which gained +1.94% on Q3 results. Hong Kong held up much better than Mainland China, outside of AI supply chain stocks, as banks, energy, and internet stocks such as Tencent, which gained +1.59%, and Alibaba, which gained +0.99, all outperformed. Midea gained +3.37% in Hong Kong, while beverages did well. Mainland investors sold a net -$453 million worth of Hong Kong-listed stocks and ETFs today, bringing the 13-day total to $4.76 billion and trimming the year-to-date (YTD) inflow to only $52 billion.

The 5th plenary meeting of the 20th Central Committee of the Communist Party of China ended yesterday in Beijing. The release focused on governance, though the brief economic comments stated “making full use of macro policies, deeply tapping into domestic demand potential”. The 21st National Congress of the Communist Party of China will be held in Beijing in the second half of 2027. Zhang Shengmin was selected by the plenary of the Central Political Bureau Committee; though at 68 years old, he does not appear to be a successor. 

Reuters is reporting “Chinese President Xi Jinping and Swiss President ‌Guy Parmelin hailed an upgraded trade agreement between the two countries on Friday, which bucks a broader global shift towards ​protectionism.” The South China Morning Post is reporting that Australia’s prime minister will visit China as “tensions simmer”.

Yesterday was the anniversary of Black Tuesday, October 29th, 1929, though it has been a difficult week, month, quarter, year-to-date (YTD), and 1-year for Hong Kong equity investors. Overcrowded positioning in AI plays is the issue, in my opinion, as crowded trades must meet a high bar. At the same time, internet stocks have light positioning going into Q3 results. Let’s hope they beat expectations!

Last Night's Performance

Last Night's Exchange Rates, Prices, & Yields

• CNY per USD 6.65 versus 6.66 yesterday
• CNY per EUR 7.43 versus 7.43 yesterday
• Yield on 10-Year Government Bond 1.65% versus 1.62% yesterday
• Yield on 10-Year China Development Bank Bond 1.69% versus 1.66% yesterday
• Copper Price -0.77%
• Steel Price -0.69%