December 2, 2020

A Week To Forget, Evergrande Debt Issue Weighs On Property Stocks, Week In Review

Week In Review

  • The deal for Oracle
    ORCL
    to house TikTok’s data in the United States passed initial muster with the US administration on Monday. However, some details of the arrangement have yet to be worked out. ByteDance will now apply for an export license in China, while the US administration will decide whether to ban the TikTok US app while the agreement is finalized.
  • Asian equities followed US equities south on Tuesday in a risk-off day. Risks seemed to pile up for investors Tuesday, among them the lack of a stimulus deal in the US, rising Covid-19 cases in Europe, and accusations that a multitude of global banks skirted anti-money laundering protocols.
  • Healthcare stocks powered modest gains in both Hong Kong and Mainland China as three Chinese pharmaceutical companies are conducting human trials of a vaccine. Meanwhile, Goldman Sachs
    GS
    set its target for the CNY/USD exchange rate at 6.50 compared to the current level of 6.80.
  • Powell made it clear that the ball is now in Congress’ court with regard to stimulating the US economy in a Wednesday press conference. The punt to US lawmakers was met with another risk-off session in Asia.

Key News

Asian equities posted modest gains as India and Indonesia outperformed while Hong Kong and Mainland China lagged. Both Hong Kong and Mainland China were lifted early by news that FTSE Russell will include Chinese government bonds in the prestigious World Government Bond Index (WGBI). Full inclusion will raise China’s weight from zero to nearly 6% at full inclusion though the inclusion process will not begin until next October.

Early positive sentiment went south on chatter that real estate developer Evergrande’s Mainland IPO might be in trouble. The heavily indebted company needs the IPO proceeds to pay off debt that will be maturing soon. Without the debt, the company would utilize virtually all of their cash to service their debt. Ultimately, it is in no one’s best interest for the company to go under, so the issue will likely get sorted out though property stocks in both markets were taken to the woodshed overnight in sympathy.

It is important to note that, despite the recent risk-off sentiment in Chinese markets, volumes have been light as many investors prepare for the Golden Week holiday, which starts next Thursday. This has allowed sellers to define the market this past week.

The Hang Seng Index was off only -0.32% which masked a bigger off day as the broad Hang Seng Composite was off -0.86%. Hong Kong volume leaders were IPO Ming Yuan Cloud Group, which rose +86%, Tencent, which fell -0.3%, Alibaba HK, which fell -1.15%, Meituan Dianping, which fell -2.77%, Evergrande, which cratered -9.46%, Xiaomi, which fell -0.6%, and Ping An, which declined -0.12%. JD.com HK was down -2.15%, NetEase
NTES
HK dropped -0.41%, and Yum China HK gained +1.85%. Growth stocks and recent outperformers were trimmed again in both markets. Shanghai and Shenzhen posted modest losses. It was a ugly week as the US economy’s importance to the global economy was highlighted by markets. Let’s hope Congress can get a stimulus deal done as global investors are watching.

US-listed Chinese travel company Trip.com (formerly C-trip.com) reported earnings after the US close yesterday. The travel company obviously got whacked by coronavirus though investors remain forward looking. The company, despite forecasting another Q3 decline, was able to calm investors through positive management comments on China’s domestic travel rebounding. In our recent webinar, CICC equity strategist Kevin Liu mentioned his recent business trips from Beijing to Shanghai and Shenzhen. I think the company is creating a low bar to beat in Q3. The company did buy a UK travel company (Skyscanner) a few years back so it is no longer a pure China play, but close enough!

  • Revenue decreased -64% to $448mm (RMB 3.2B) versus estimate RMB 2.37B
  • Gross margin 72% which is off from 79% YoY and 74% QoQ
  • Product Development Expenses -69% YoY to $225mm (RMB 1.8B)
  • Sales & Marketing Expenses-69% to$94mm (RMB 661mm)
  • General & Administrative -37% to $73mm (RMB 661mm)
  • Adjusted EPS RMB -1.93 versus estimated loss RMB -3.11
  • Cash on balance sheet $9.1B (RMB 64.3B)
  • Q3 revenue out look -47% to – 52%

H-Share Update

The Hang Seng eased off morning gains falling -0.32%/-75 index points to close at 23,235 as turnover was flat day over day and just above the 1-year average. Breadth was off with 16 advancers and 33 decliners. The 204 Chinese companies listed in Hong Kong returned -0.98% led lower by real estate -3.29%, discretionary -1.98%, health care -1.87%, tech -1.71%, materials -1.36%, and industrials -1.2%. Utilities was the only positive sector, gaining +0.05%. Southbound Stock Connect volumes were light as Mainland investors bought a net $113mm worth of Hong Kong stocks as Southbound Connect trading accounted for 8.1% of Hong Kong turnover.

A-Share Update

Shanghai and Shenzhen also came off morning gains to close -0.12% and -0.23% at 3,219 and 2,143, respectively, as turnover fell -16%, which is well below the 1-year average. Breadth was off with 1,199 advancers and 2,447 decliners. The 517 Mainland stocks within the MSCI
MSCI
China All Shares Index fell -0.1% led by communication +0.59%, financials +0.57%, energy +0.45%, staples +0.34%. Laggards were real estate -2.22%, utilities -1.49%, and tech -0.47%. Northbound Stock Connect volumes were light as foreign investors sold a net -$189 million worth of Mainland stocks today as Northbound Connect trading accounted for 5.4% of Mainland turnover.

About KraneShares

Krane Funds Advisors, LLC is the investment manager for KraneShares ETFs. Our suite of China focused ETFs provide investors with solutions to capture China’s importance as an essential element of a well-designed investment portfolio. We strive to provide innovative, first to market strategies that have been developed based on our strong partnerships and our deep knowledge of investing. We help investors stay up to date on global market trends and aim to provide meaningful diversification. Krane Funds Advisors, LLC is majority owned by China International Capital Corporation (CICC).

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