China Market Update: Alibaba’s Hong Kong IPO, Baidu Earnings, Fentanyl Bust

baidu_pic

Baidu's headquarters in Beijing.

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Key News

The Commerce Ministry’s Geo Feng didn’t announce that the US and China would remove tariffs incrementally during Phase One negotiations until 2:30am Eastern time. With daylight savings, this didn’t occur until 3:30pm in Hong Kong while the Shanghai & Shenzhen Stock Exchanges were closed already. Hong Kong and Asian equity markets ripped higher on the news as the day was going to be a mixed/flat day. Shanghai & Shenzhen posted their gains despite US headlines yesterday blaring about problems with a Phase One. Overnight it was released that President Xi would visit Brazil for the BRICS summit beginning November 10th. With Xi in the hemisphere maybe a get-together isn’t that far-fetched.

Alibaba (BABA) gained +1.19% yesterday as chatter arose yesterday that their HK IPO could be announced as early as next week. The company is looking to raise $10B to $15B despite reporting $6.6 billion of cash as of Sept 30, 2019. Why list in Hong Kong? 1) To provide their 693mm users the opportunity to owns shares via Southbound Connect since Mainland investors have limited access to foreign markets. 2) The company likely believes US investors aren’t valuing the company properly. The stock is off its all-time high of $210, which it reached back in June 2018 as trade war concerns weigh on the stock despite the company’s fundamentals not changing at all as evidenced by their 40% year over year revenue growth. US investors are afraid to hold a China stock during the trade war so the company is finding potential investors who aren’t. The positive for US investors is that the Hong Kong and US stocks will trade close to one another. This will be fun to be watch! The crazy thing is the BABA HK stock will be added to MSCI indices. MSCI China has major allocations of 14% Alibaba and Tencent 13%. Do we really believe nearly 1/3 of China works at two companies?

A Chinese court gave a fentanyl trafficker a death sentence while eight others were given a variety of sentences ranging from ten years to life. The drug gang was busted in a US-China joint effort, which is a great first step hopefully leading to more.

Remember MSCI’s pro-forma today at 5 PM.

H-Share Update

The Hang Seng ripped in the last half of trading to gain +0.57%/+158 index points to close at 27,847 on light volumes +6.8% day over day but well off the 1-year average. Breadth was strong with 35 advancers and 13 decliners with China Construction Bank +1.71%/+36.8 index points, AIA +0.66%/+18.8 index points and ICBC +1.38%/+18.19%. CSPC Pharma was the best performer +4.39%/+13.3 with Sino Biopharma +2.2%/+5.5 index points as investors cheer CSPC’s recent drug approval and pipeline. Apple supplier AAC was off -1.33%/-1.4 index points while several real estate names were off. The Hong Kong stocks within the MSCI China All Shares Index were +0.52% led higher by healthcare +2.35%, utilities +1.57%, financials +0.98%, discretionary +0.79% and staples +0.66%. Tech was off -0.48%, real estate -0.19% and communication -0.09% despite Alibaba Pictures popping 4.54% post earnings. Southbound Connect volumes were moderate/light with buyers active, though CCB had and Tencent slightly selling though Meituan Dianping had a VERY strong inflow day.

A-Share Update

The Shanghai & Shenzhen were 0.0% and +0.64% as volumes collapsed 12% day over day and well off the 1 year average. Breadth was moderate 2,325 advancers and 1,149 decliners as mid and small caps outperformed large caps by ~50bps. The mainland stocks within the MSCI China All Shares Index gained +0.59% led higher by tech +1.14%, healthcare +1.14%, communication +1.06%, staples +1.03%, and real estate +0.78%. Utilities was the only down sector off -0.23%. Northbound Connect volumes were light, though buyers were active as Shenzhen Connect volumes and buying exceeded Shanghai Connect. Foreign investors purchased a total of $302mm of mainland stocks today.

Baidu (BIDU) reported Q3 earnings after the NY close yesterday. The company’s press release placed a heavy emphasis on quarter over quarter (QoQ) results, which were strong, rather than year over year (YoY), which were weak. The company’s net income was off due to its stake in Trip.com (formerly Ctrip.com), which it took after the sale of its online travel business Qunar to its rival back in 2015. The company used an exchange rate as of Sept 30 which was RMB 7.1477/US $ so the RMB’s appreciation versus the dollar would have improved results. The best thing Baidu has going for it is beating very low expectations as many sell-side reports note that virtually every element of bad news is baked into the stock price. We create a short squeeze though the company’s fundamentals are very inexpensive while sales of their smart home speaker (akin to Amazon’s Alexa) are strong. Revenues slightly down YoY to $3.929B (RMB 28.080B) from RMB 28.203B despite the company noting QoQ revenue grew 7%.

  • Revenue RMB 28.080 beats analyst estimates of RMB 27.5B
  • Core search business revenue $2.939b (RMB 21.010B) -3% YoY but +8% QoQ
  • Adjusted operating profit $516MM (RMB 3.69B) versus estimate RMB 1.38B
  • Non GAAP EPS $1.76 (RMB 12.61) down -34% YoY from RMB 19.20 though +25% QoQ
  • Q4 revenue guidance $3.78B (RMB 27.1B) to $4.02B (RMB 28.7B) representing a growth rate between -1% to 6% versus estimate 27.48B

Online entertainment/video company and Baidu spin out iQIYI (IQ) reported earnings after the US close yesterday. Top line growth grew along with users but losses ballooned both QoQ and YoY. The issue is not China’s macro environment, but rather ByteDance’s TikTok, which is rapidly amassing market share but more importantly advertisers and their ad dollars. Publicly traded online video companies such IQ, HUYA and YY are feeling the effects of TikTok’s growth on their bottom lines. The sell side chatter is that a lot of the bad news is reflected in the stock.

  • Revenue +7% YoY to $1B (RMB 7.396B) from 6.914B versus estimate RMB 7.03B
  • Subscribers increased 31% YoY to 105.8mm from 80.7mm
  • Net loss was $516mm (RMB 3.7B) versus net loss RMB 3.1B YoY
  • Q4 revenue forecast RMB 6.86B to RMB 7.28B versus estimate RMB 7.03B

After yesterday’s close, Trip.com (TCOM), formerly Ctrip.com (CTRP), announced a partnership with TripAdvisor (TRIP). Trip.com will buy 6.95mm shares of TripAdvisor worth $317mm and own 60% of TripAdvisor China. The idea is that the two companies will leverage their geographic footprints, which makes a ton of sense to me.

October Foreign Reserves           

$3.105 trillion versus estimate $3.1 trillion and Sept’s $3.092 trillion

Takeaway: I might be the only person who noticed that this was released. It seems to only be news when it is falling.

Last Night’s Prices & Yields

  • RMB/USD 6.976 versus 6.9987 Yesterday; 31 basis points appreciation! Wow!
  • RMB/EUR 7.72 versus 7.76 Yesterday; 34 basis points appreciation!
  • 1-Day Government Bond Yield 1.71% versus 1.71 Yesterday
  • 10-Year Government Bond Yield 3.27% versus 3.26% Yesterday
  • 10-Year China Development Bank Bond Yield 3.71% versus 3.67% Yesterday
  • Commodities on the Shanghai & Dalian exchanges were lower with Dr. Copper off -0.42%.

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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Key News

The Commerce Ministry’s Geo Feng didn’t announce that the US and China would remove tariffs incrementally during Phase One negotiations until 2:30am Eastern time. With daylight savings, this didn’t occur until 3:30pm in Hong Kong while the Shanghai & Shenzhen Stock Exchanges were closed already. Hong Kong and Asian equity markets ripped higher on the news as the day was going to be a mixed/flat day. Shanghai & Shenzhen posted their gains despite US headlines yesterday blaring about problems with a Phase One. Overnight it was released that President Xi would visit Brazil for the BRICS summit beginning November 10th. With Xi in the hemisphere maybe a get-together isn’t that far-fetched.

Alibaba (BABA) gained +1.19% yesterday as chatter arose yesterday that their HK IPO could be announced as early as next week. The company is looking to raise $10B to $15B despite reporting $6.6 billion of cash as of Sept 30, 2019. Why list in Hong Kong? 1) To provide their 693mm users the opportunity to owns shares via Southbound Connect since Mainland investors have limited access to foreign markets. 2) The company likely believes US investors aren’t valuing the company properly. The stock is off its all-time high of $210, which it reached back in June 2018 as trade war concerns weigh on the stock despite the company’s fundamentals not changing at all as evidenced by their 40% year over year revenue growth. US investors are afraid to hold a China stock during the trade war so the company is finding potential investors who aren’t. The positive for US investors is that the Hong Kong and US stocks will trade close to one another. This will be fun to be watch! The crazy thing is the BABA HK stock will be added to MSCI indices. MSCI China has major allocations of 14% Alibaba and Tencent 13%. Do we really believe nearly 1/3 of China works at two companies?

A Chinese court gave a fentanyl trafficker a death sentence while eight others were given a variety of sentences ranging from ten years to life. The drug gang was busted in a US-China joint effort, which is a great first step hopefully leading to more.

Remember MSCI’s pro-forma today at 5 PM.

H-Share Update

The Hang Seng ripped in the last half of trading to gain +0.57%/+158 index points to close at 27,847 on light volumes +6.8% day over day but well off the 1-year average. Breadth was strong with 35 advancers and 13 decliners with China Construction Bank +1.71%/+36.8 index points, AIA +0.66%/+18.8 index points and ICBC +1.38%/+18.19%. CSPC Pharma was the best performer +4.39%/+13.3 with Sino Biopharma +2.2%/+5.5 index points as investors cheer CSPC’s recent drug approval and pipeline. Apple supplier AAC was off -1.33%/-1.4 index points while several real estate names were off. The Hong Kong stocks within the MSCI China All Shares Index were +0.52% led higher by healthcare +2.35%, utilities +1.57%, financials +0.98%, discretionary +0.79% and staples +0.66%. Tech was off -0.48%, real estate -0.19% and communication -0.09% despite Alibaba Pictures popping 4.54% post earnings. Southbound Connect volumes were moderate/light with buyers active, though CCB had and Tencent slightly selling though Meituan Dianping had a VERY strong inflow day.

A-Share Update

The Shanghai & Shenzhen were 0.0% and +0.64% as volumes collapsed 12% day over day and well off the 1 year average. Breadth was moderate 2,325 advancers and 1,149 decliners as mid and small caps outperformed large caps by ~50bps. The mainland stocks within the MSCI China All Shares Index gained +0.59% led higher by tech +1.14%, healthcare +1.14%, communication +1.06%, staples +1.03%, and real estate +0.78%. Utilities was the only down sector off -0.23%. Northbound Connect volumes were light, though buyers were active as Shenzhen Connect volumes and buying exceeded Shanghai Connect. Foreign investors purchased a total of $302mm of mainland stocks today.

Baidu (BIDU) reported Q3 earnings after the NY close yesterday. The company’s press release placed a heavy emphasis on quarter over quarter (QoQ) results, which were strong, rather than year over year (YoY), which were weak. The company’s net income was off due to its stake in Trip.com (formerly Ctrip.com), which it took after the sale of its online travel business Qunar to its rival back in 2015. The company used an exchange rate as of Sept 30 which was RMB 7.1477/US $ so the RMB’s appreciation versus the dollar would have improved results. The best thing Baidu has going for it is beating very low expectations as many sell-side reports note that virtually every element of bad news is baked into the stock price. We create a short squeeze though the company’s fundamentals are very inexpensive while sales of their smart home speaker (akin to Amazon’s Alexa) are strong. Revenues slightly down YoY to $3.929B (RMB 28.080B) from RMB 28.203B despite the company noting QoQ revenue grew 7%.

  • Revenue RMB 28.080 beats analyst estimates of RMB 27.5B
  • Core search business revenue $2.939b (RMB 21.010B) -3% YoY but +8% QoQ
  • Adjusted operating profit $516MM (RMB 3.69B) versus estimate RMB 1.38B
  • Non GAAP EPS $1.76 (RMB 12.61) down -34% YoY from RMB 19.20 though +25% QoQ
  • Q4 revenue guidance $3.78B (RMB 27.1B) to $4.02B (RMB 28.7B) representing a growth rate between -1% to 6% versus estimate 27.48B

Online entertainment/video company and Baidu spin out iQIYI (IQ) reported earnings after the US close yesterday. Top line growth grew along with users but losses ballooned both QoQ and YoY. The issue is not China’s macro environment, but rather ByteDance’s TikTok, which is rapidly amassing market share but more importantly advertisers and their ad dollars. Publicly traded online video companies such IQ, HUYA and YY are feeling the effects of TikTok’s growth on their bottom lines. The sell side chatter is that a lot of the bad news is reflected in the stock.

  • Revenue +7% YoY to $1B (RMB 7.396B) from 6.914B versus estimate RMB 7.03B
  • Subscribers increased 31% YoY to 105.8mm from 80.7mm
  • Net loss was $516mm (RMB 3.7B) versus net loss RMB 3.1B YoY
  • Q4 revenue forecast RMB 6.86B to RMB 7.28B versus estimate RMB 7.03B

After yesterday’s close, Trip.com (TCOM), formerly Ctrip.com (CTRP), announced a partnership with TripAdvisor (TRIP). Trip.com will buy 6.95mm shares of TripAdvisor worth $317mm and own 60% of TripAdvisor China. The idea is that the two companies will leverage their geographic footprints, which makes a ton of sense to me.

October Foreign Reserves           

$3.105 trillion versus estimate $3.1 trillion and Sept’s $3.092 trillion

Takeaway: I might be the only person who noticed that this was released. It seems to only be news when it is falling.

Last Night’s Prices & Yields

  • RMB/USD 6.976 versus 6.9987 Yesterday; 31 basis points appreciation! Wow!
  • RMB/EUR 7.72 versus 7.76 Yesterday; 34 basis points appreciation!
  • 1-Day Government Bond Yield 1.71% versus 1.71 Yesterday
  • 10-Year Government Bond Yield 3.27% versus 3.26% Yesterday
  • 10-Year China Development Bank Bond Yield 3.71% versus 3.67% Yesterday
  • Commodities on the Shanghai & Dalian exchanges were lower with Dr. Copper off -0.42%.

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).

Follow me on Twitter or LinkedIn. Check out my website.

I am the Chief Investment Officer of KraneShares, a China-focused provider of exchange-traded funds (ETFs). As a pioneer within the ETF industry I experienced the surge

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