You Can’t Spell Supply Chain Without China!
6 Min. Read Time
Key News
Asian equities were mixed overnight as AI supply chain stocks rebounded in South Korea, Japan, Mainland China, and Hong Kong, though Taiwan Semiconductor fell by -2.11% and didn’t get the memo.
Today was a quiet, low-volume summer day, which explains why I’m heading off on vacation with the family later today.
AI stocks rebounded following chatter that high-bandwidth memory chips are sold out for the year and Nvidia’s comments about integrating co-packed optics (CPO) into its Spectrum-X Ethernet Photonics switch platform. It was so quiet today that news from yesterday served as a catalyst for AI supply chain stocks, including China’s Integrated Circuit Layout Design Protection Regulations and Mainland-listed semiconductor equipment maker Advanced Micro-Fabrication's strong 1st-half results.
The Hang Seng Index ran into resistance at the 25,000 level while the HS Tech did the same at the 4,900 level as decliners outpaced advancers. Alibaba gained +0.48% and was Hong Kong’s most heavily traded stock by value, though trading volume was below average, with $197 million (HK $1.549B) of net buying from Mainland investors via Southbound Stock Connect. JD.com fell by -0.15% and became the fifth Chinese internet company to reach 1 billion users in June. WuxiAppTec gained +11.17% and lifted the healthcare sector following yesterday’s after-the-close 1st half financial results. The real winners were AI plays such as technology hardware company Zhongji Innolight, which gained +17% on Nvidia CPO comments, as well as electronic equipment, semiconductor, and non-ferrous metals stocks.
Weakness was widespread, with banks (post-HSBC results), auto, telecom, insurance, and energy stocks lower. It was similar in Mainland China, as bank stocks were weak, weighing on the Shanghai market, while semiconductor stocks ripped, sending the Science and Technology (STAR) Board up by +4.09%. Technology hardware, communications equipment, and semiconductor equipment also had a good day. The healthcare and software sectors were positive, though the market was otherwise off. Quiet day!
Reuters reporting the Trump Administration could ban Chinese components in US data centers.
1) I doubt you can build a data center without Chinese parts!
2) Isn’t this the Art of the Deal prior to the Trump-Xi summit in September? Creating leverage is Negotiating 101.
SHEIN’s Hong Kong IPO is on track for a mid-August listing, valuing the fast fashion firm at around $30B to $40B.
It was great to be back in Hong Kong and meet with our ecosystem of traders, researchers, analysts, and clients. My primary takeaway is that local investors are lightly positioned in Hong Kong and Chinese stocks, like most global investors, being overweight the AI supply chain in the US, Korea, Taiwan, and Japan. One issue for professional investors is that the definition of China is 80% Hong Kong stocks, with Shanghai & Shenzhen accounting for just 15% of the index, despite free-float market caps being about the same.
Therefore, Shanghai and Shenzhen stocks are minor percentages of the indices, which is where the vast majority of AI supply chain stocks are listed. Local investors are highly attuned to China’s housing downturn and the knock-on effect on domestic consumption, which is a factor in their sentiment. For strategists, macro, and global investors, MSCI China’s revenue and EPS growth have been less than stellar on both an absolute and relative basis compared to its Asian peers, with consumer discretionary names anemic. Throw in a 17-year period of US stock outperformance and a few more ingredients like US-China geopolitics, a rough February 2021 to September 2024 bear market, and several policy errors, and it makes for a rather unpleasant recipe.
My thoughts:
1) Isn’t China the world's factory, but somehow it’s not part of the AI supply chain? I think not! You have to find those AI names like the semiconductor stocks listed on the Science and Technology (STAR) Board.
2) Aren’t the leading cloud providers in China Alibaba, Tencent, and Baidu? Shouldn’t they be big beneficiaries of China’s AI? We’ll find out in August’s Q2 results, though, if the Mag 7 are benefiting from cloud, shouldn’t their Chinese equivalents do the same?
3) Management’s Q3 forecast should tell us if recent regulatory action on the restaurant delivery war will help the bottom line of JD.com, Meituan, and, to a lesser degree, Alibaba.
4) The recent Politburo meeting should lead to consumption support as China’s GDP is becoming highly reliant on export-driven manufacturing, which is hardly “self-reliant”. Any consumption support should help the E-Commerce companies. All in all, there is an argument that the re-rating is occurring, though off a low base, which is a positive in my opinion.
Last Night's Performance
| Country / Index | Ticker | 1-Day Change |
|---|---|---|
| China (Hong Kong) | HSI Index | -0.6% |
| Hang Seng Tech | HSTECH Index | 0.2% |
| Hong Kong Turnover | HKTurn Index | 1% |
| Hong Kong Short Sale Turnover | HKSST Index | 9.5% |
| Short Turnover as a % of Hong Kong Turnover | N/A | 0.2 |
| Southbound Stock Connect Net Buy/Sell (US $ Millions) | N/A | 328.28 |
| China (Shanghai) | SHCOMP Index | 0.3% |
| China (Shenzhen) | SZCOMP Index | 2.7% |
| China (STAR Board) | Star50 Index | 4.1% |
| Mainland Turnover | .chturn Index | 10.9% |
| Japan | NKY Index | 0.3% |
| India | SENSEX Index | -0.3% |
| Indonesia | JCI Index | 1.4% |
| Malaysia | FBMKLCI Index | 0.4% |
| Pakistan | KSE100 Index | -0.7% |
| Philippines | PCOMP Index | -0.6% |
| South Korea | KOSPI Index | 1.6% |
| Taiwan | TWSE Index | -0.1% |
| Thailand | SET Index | -0.3% |
| Singapore | STI Index | 0% |
| Australia | AS51 Index | 1.4% |
| Vietnam | VNINDEX Index | -0.0005 |
| Indicator | Hong Kong | Mainland China |
|---|---|---|
| Today's Volume % of 1-Year Average | 93% | 82% |
| Advancing Stocks | 219 | 3440 |
| Declining Stocks | 303 | 1570 |
| Outperforming Factors | Growth, Liquidity, Momentum | Momentum, Liquidity, Growth |
| Underperforming Factors | Low Volatility, Dividend Yield, Value | Low Volatility, Value, Dividend Yield |
| Top Sectors | Healthcare, Tech, Materials | Tech, Communications, Healthcare |
| Bottom Sectors | Financials, Staples, Energy | Staples, Financials, Discretionary |
| Top Subsectors | Tech Hardware, Semis, Electrical Equipment | Communication Equipment, Electronic Components, Semis |
| Bottom Subsectors | Banks, Auto, Food | Insurance, Construction Machinery, Banking |
| Southbound Connect Buys | Alibaba, Hua Hong Semi, SMIC (Large), KB Laminates, Z AI (Moderate), Xiaomi, YOFC (Small) | N/A |
| Southbound Connect Sells | Meituan (Large), Tencent (Moderate) | N/A |
| MSCI China All Shares Index | # of Stocks | Average 1-Day Change (%) |
|---|---|---|
| Hong Kong Listed | 165 | -0.48 |
| Communication Services | 11 | -0.51 |
| Consumer Discretionary | 28 | -0.36 |
| Consumer Staples | 13 | -1.23 |
| Energy | 6 | -1.21 |
| Financials | 25 | -2.33 |
| Health Care | 16 | 2.68 |
| Industrials | 22 | 0.32 |
| Information Technology | 12 | 1.54 |
| Materials | 14 | 1.12 |
| Real Estate | 7 | -0.07 |
| Utilities | 11 | -0.79 |
| Mainland China Listed | 386 | 1.35 |
| Communication Services | 8 | 2.18 |
| Consumer Discretionary | 26 | -1.71 |
| Consumer Staples | 19 | -2.09 |
| Energy | 12 | -0.45 |
| Financials | 64 | -1.96 |
| Health Care | 31 | 1.85 |
| Industrials | 58 | -0.17 |
| Information Technology | 95 | 6.61 |
| Materials | 52 | 0.88 |
| US & Hong Kong Dually Listed | Ticker | 1-Day Change (%) |
|---|---|---|
| Tencent HK | 700 HK Equity | -0.6 |
| Alibaba HK | 9988 HK Equity | 0.5 |
| JD.com HK | 9618 HK Equity | -0.2 |
| NetEase HK | 9999 HK Equity | -1.2 |
| Yum China HK | 9987 HK Equity | -1 |
| Baozun HK | 9991 HK Equity | -1.6 |
| Baidu HK | 9888 HK Equity | 0.3 |
| Autohome HK | 2518 HK Equity | -0.2 |
| Bilibili HK | 9626 HK Equity | -0.1 |
| Trip.com HK | 9961 HK Equity | 0.3 |
| EDU HK | 9901 HK Equity | -3 |
| Xpeng HK | 9868 HK Equity | -4.2 |
| Weibo HK | 9898 HK Equity | -0.2 |
| Li Auto HK | 2015 HK Equity | -2.7 |
| Nio Auto HK | 9866 HK Equity | -1.2 |
| Zhihu HK | 2390 HK Equity | 1.5 |
| KE HK | 2423 HK Equity | 0.5 |
| Tencent Music Entertainment HK | 1698 HK Equity | 1.1 |
| Meituan HK | 3690 HK Equity | -0.8 |
| Hong Kong's Most Heavily Traded by Value | 1-Day Change (%) |
|---|---|
| ALIBABA GROUP HOLDING LTD | 0.5 |
| TENCENT HOLDINGS LTD | -0.6 |
| SEMICONDUCTOR MANUFACTURI-H | 5 |
| Z AI CO LTD | 7.4 |
| ZHONGJI INNOLIGHT CO LTD-H | 17 |
| HUA HONG GRACE SEMICONDUCTOR | 6.5 |
| HSBC HOLDINGS PLC | -1 |
| XIAOMI CORP-CLASS B | 0 |
| KINGBOARD LAMINATES HLDG LTD | 3.7 |
| MEITUAN-CLASS B | -0.8 |
| Shanghai and Shenzhen's Most Heavily Traded by Value | 1-Day Change (%) |
|---|---|
| ZHONGJI INNOLIGHT CO LTD-A | 13.2 |
| EOPTOLINK TECHNOLOGY INC L-A | 13.7 |
| CXMT CORP-A | 0 |
| GIGADEVICE SEMICONDUCTO-CL A | 4.5 |
| CAMBRICON TECHNOLOGIES-A | 4.9 |
| SUZHOU TFC OPTICAL COMMUNI-A | 17.5 |
| SUZHOU DONGSHAN PRECISION-A | 10 |
| BLUEFOCUS INTELLIGENT COMM-A | 6.8 |
| HENGTONG OPTIC-ELECTRIC CO-A | 6.1 |
| WUXI APPTEC CO LTD-A | 10 |
Last Night's Exchange Rates, Prices, & Yields
- CNY per USD 6.75 versus 6.75 yesterday
- CNY per EUR 7.77 versus 7.78 yesterday
- Yield on 10-Year Government Bond 1.71% versus 1.72% yesterday
- Yield on 10-Year China Development Bank Bond 1.78% versus 1.78% yesterday
- Copper Price +0.55%
- Steel Price -0.20%
