Chinese stocks traded in the US closed lower on Friday, but did manage to hold on to some earlier gains to close the week higher. The PowerShares Golden Dragon China ETF (PGJ) rose +2.2% for the week, following domestic US stocks which also rose through Friday (S&P 500 +3%, Nasdaq +2.4%). Reasons behind this week’s rise included some macro data (PMI was released over the weekend), as well as some fireworks from the People’s Bank of China (a RRR cut announced Wednesday night in China, Wednesday premarket for the US).
Gains this week were relatively broad, with about 75% of the US-listed China stocks ending the week higher, covering the entire spectrum of large, small, and microcaps.
Domestic Chinese shares didn’t have the same exuberance to the PBOC move that overseas investors seemed to exhibit, with stocks in Shanghai falling over -4%. There were other pressures on Chinese markets, including the recent crackdown on margin lending as well as increased supply from IPO shares, but the unexpectedly soft PMI was clearly a factor. This week’s drop extended the recent slide to about -9% from the late January peak, the steepest selloff since the A-shares rally began in late 2014.
So which is right, mainland market tilting toward a negative view on the economy, or the foreign consensus which appears to be pricing in more stimulus?
Our view is that there is a degree of truth to both. The debate on China’s economy is no longer focusing on “if” it is slowing, but instead by how much. Fourth quarter GDP did squeak past estimates (a last-minute rate cut looks like it may have helped), and so far, January’s eco data hasn’t been very encouraging.
PBOC officials explained away the recent RRR cut as relating to seasonal cash needs which increase before Chinese New Year, which may be true, but it will fill a supporting role after the holiday ends in late February. So under the auspices of a one-off move, the PBOC appears to have stealthily offered banks’ a helping hand.
Whether or not more stimulus will follow is anyone’s guess, however it seems reasonable to presume that it may trail economic indicators. February is very data-light due to the Lunar New Year celebrations, so many of the standard data points won’t be published until March. That being said, there was an interesting uptick in January’s unofficial home price data, which showed prices rising MoM for the first time prices began to slide last year. The NBS scheduled the release of official home price data for mid-month, which could confirm the unofficial reading. Real estate is a key risk area for China’s economy, and seeing some stability (or at least a deceleration in falling prices), would add weight to the view that the economy will avoid a hard landing.
We maintain our earlier view that US-listed China stocks will see some pressure ahead, partly due to investors re-pricing regulatory risk (the SAIC/Alibaba flap, proposed changes in VIE rules) and economic headwinds. That story could change, however, if corporate earnings surprise to the upside (we have a few next week, with a deluge expected after the Lunar New Year). Many US-listed China stocks are tech/TMT, which could ultimately benefit from a slowing ‘old’ economy as companies look to new ways to boost productivity and efficiency.
ETF and Index Round-up
FXI: +1.9% (both US-listed and Hong Kong stocks, weighted toward financials)
PGJ: +2.2% (holds US-listed China stocks, weighted toward information technology)
S&P 500: +3.0% (index of US-listed stocks)
Nasdaq: +2.4% (index of US-listed stocks, weighted toward technology)
VIX: 17.3, -17.5% (volatility index, a gauge of implied volatility, the so-called “fear index”)
Highpower International (NASDAQ:HPJ): +17%; the stock squirted higher after announcing an order to supply batteries to an iPhone case manufacturer and hiking net income estimates for FY2014. Included in the release was ratcheting down FY2014 revenue to 146-148 million USD vs. 150-170 million USD earlier. This week’s move included a notable gap up on the aforementioned news, with volume, and did close lower after the initial move, which may bring more downside pressure next week looking to close the gap.
Jinko Solar (NYSE:JKS): +15%; solar stocks all had a strong week, pushed higher by a steady stream of positive news for the sector (announcing contract wins, some positive analyst notes, for example). Rebounding oil prices also helped; the rationale being with cheap fossil fuel alternatives, solar can lose some of its economic competitiveness. Other solar names which were higher on the week included Hanwha Solar (HSOL, +15%), Trina Solar (TSL, 13%), Yingli Green Energy (YGE, +8%), JA Solar (JASO, +8%), and Renesola (SOL, +5%).
500.com (NYSE:WBAI,): +13%; after giving up some ground on Monday, this stock pushed steadily higher through Friday, with decent volume, pushing past the previous mid-January high. There hasn’t been any news out from the company, and it looks like the slide which began in Q3 2014 is finally showing signs of a bottom. For those keeping track, the company was called out by a short-seller in September, and a surprise industry audit in Q4 raised some concern about regulatory scrutiny, helping to send investors to the exits. We should see Q4 numbers next week (February 11 BMO).
Lentuo International (NYSE:LAS): +9%; this beleaguered nanocap stock has been just tied to the whipping post recently, losing nearly 70% during 2014, before falling further this year. The business, luxury automobile dealerships, has come under pressure due to the slowing Chinese economy and also the ongoing government corruption crackdown. The company has been trying to poke forward with some new growth initiatives (like pushing into pre-owned car sales, expanding its brand portfolio, and trying to tap into the EV accessories market), but those need time to develop. In the meantime, management has been trying to support the stock price (beneath the $1 threshold), and recently announced a buyback. Although the stock looks like it may be bottoming following a long and painful decline, it’s very small and quite volatile, so significant caution is advised.
China JoJo Drugstores (NASDAQ:CJJD): -6%; this is another tiny stock that has been popular recently, as investors have been looking for exposure to the developing online drug sales theme. It has more than doubled since the early rumors/news concerning online drug sales (late last year) in volatile trading.
China HGS Real Estate (NASDAQ:HGSH): -11%; the company announced Q1 FY2015 results on Friday, which saw the stock drop over -20%. Quarterly results included significant revenue declines (-25% YoY) and lower net income, which management explained was due to seasonal slowness, and added that projects near completion should lead to a rebound next quarter. Real estate prices in China showed some signs of recovery in January, rising for the first time since prices began falling in May 2014, which, if it continues, could provide some support to stocks in the sector.
China Eastern Airlines (NYSE:CEA): -12%; both this stock and China Southern (ZNH) fell for the same reason that the solar names popped (rising oil prices). The companies don’t hedge fuel costs, so rising fuel prices can have a direct impact on margins and the bottom line (ticket prices are controlled, making passing on costs to consumers more difficult). Oil prices appear to be on the rebound (WTI bouncing off of the recent $44/bbl low in late January to over $50), which could lead to further pressure on these shares.
Actions Semiconductor (NASDAQ:ACTS): -20%; the company reported Q4 on Tuesday, which included lower revenues YoY and wider net losses resulting from negative gross margins and increased R&D spending. Not a lot good there. Management didn’t give investors much hope that things would turn around soon, noting that recently launched products wouldn’t contribute to Q1 yet, and it’s usually a seasonally slow quarter.