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China Stock Research

About the Author China Stock Research

Several years experience as an analyst in the hedge fund world. Investment knowledge includes long/short equities, credit, macro, arbitrage, distressed debt, and special situations. Previous research publication experience includes Japanese small cap research distributed to institutional investors. Education credentials include BS in Computer Science, MBA in Finance, and CFA Charter. Follow on Twitter @ChinaStockRsrch Follow on StockTwits @ChinaStockResearch

Week In Review – February 13, 2015


China stocks traded in the US turned in a flat performance for the week, with the PowerShares Golden Dragon China Portfolio ETF (NYSEARCA:PGJ) closing the week exactly where it finished the week prior, literally 0%. Such a bland performance contrasts with equity markets in the US (+2%), Europe (+2.3%), and Mainland markets (+4%), all of which turned in strong performances this week. Although a 0% week may ordinarily be nothing to cheer about, arguably this time it was.

Last week started off on a down note, with import and export data released prior to the start of trade which was, in a word, awful. Imports sank nearly -20% YoY in January, completely missing estimates, and exports for the month also came in under consensus. There was some question about how much impact falling oil prices had on import data, of which there was certainly an impact, but not enough of a factor to explain the 20% drop. The data seemed to point unambiguously to a slowing economy, of that there was little debate.

Then came the official reading on inflation, which added fuel to the fire that the Chinese economy was weakening further. Consumer price inflation slumped to a +0.8% YoY pace vs. +1.5% in December, and producer prices fell further into deflation territory with a -4.3% YoY reading vs. -3.3% the previous month, dropping at a faster pace in over a year.

So in summary, this week’s data was tough, and there weren’t too many bright spots to focus on, except hope that policymakers in China would be forced to prop up the clearly sputtering economy. The idea that policy changes may be on the horizon is one reason that mainland markets pushed significantly higher than otherwise could be expected in the face of weak economic data.

But there were some earnings which also weighed on market sentiment. Sohu.com (NASDAQ:SOHU), Changyou.com (NASDAQ:CYOU), and Baidu (NASDAQ:BIDU) reported Q4 and full-year results, which were somewhat mixed, but the collective Q1 FY2015 outlook was somewhat soft. Chinese New Year was a factor (it’s right in the middle of Q1, so both the pre- and post-holiday slowdown are fully in Q1), but another theme was continued investment spending to drive further growth in mobile, signaling more competitive pressures.

But how big of a factor is Chinese New Year, really? Actually, it has a significant impact on life in China’s main economic areas (Beijing, Shanghai, and Guangzhou/Shenzhen). In the lead-up to the holiday, it’s basically the go-to conversation topic (when are you going back to your hometown, what gifts are you bringing, etc.), and generally speaking, businesses focus on wrapping up affairs from the current year instead of looking ahead to next year.

Another wrinkle for companies in China is the inevitable employee turnover typically following the Lunar New Year, which can further lengthen “getting back to normal” after the holiday. Conversely, seasonal job-hopping is actually a boon to some of the headhunting companies like 51job.com (NASDAQ:JOBS), and Zhaopin (NYSE:ZPIN) which see seasonal demand from jobseekers around the Lunar New Year. But for many other pockets of the economy, the annual migration from metropolitan areas back to hometowns means a general slowdown which doesn’t clear up for a few weeks into the new lunar year.

What this means for investors and analysts looking at China is that this year’s distortion of economic activity makes it even more tricky to plot what’s next for China’s economy. There isn’t much data from the NBS for the rest of the month, which means waiting until March for more economic data. The usefulness of that data will be further handicapped because of the lunar year timing shift compared to last year (i.e. not exactly an apples-to-apples comparison).

Now What

The next few weeks will likely be relatively quiet in terms of news flow, with the Chinese New Year celebrations quickly reaching full swing. There are some earnings announcements (Vipshop.com and Zhaopin.com on Monday, here’s a calendar), and we’ll get official real estate prices on Monday as well. Unofficial home price data was released at the beginning of the month, which had a definite positive tone (the first time prices were higher MoM since the current downtrend began in May 2014), so confirmation from official sources would be encouraging.

ETF and Index Round-up

FXI: +2.2% (both US-listed and Hong Kong stocks, weighted toward financials)

PGJ: +0.0% (holds US-listed China stocks, weighted toward information technology)

S&P 500: +2.0% (index of US-listed stocks)

Nasdaq: +3.1% (index of US-listed stocks, weighted toward technology)

VIX: 14.7, -15.0% (volatility index, a gauge of implied volatility, the so-called “fear index”)

Stock Advancers

iDreamSky (NASDAQ:DSKY): +13%; this move higher has been due for a while, after the stock plummeted over 30% in January and has been looking to find support since. There hasn’t been any major news to spur this week’s gains, and volume has been somewhat thin (about $2 million per day), but the recent move is a definite positive for the stock.

NQ Mobile (NYSE:NQ): +13%; the stock had a decent move up this week, pushing higher throughout the week with sequential gains before closing lower on Friday. Rumors of all kinds have been swirling around the stock for a while, and until there is some kind of closure to allegations brought by a short seller and questions about senior management shuffles, the stock will likely continue to bounce around. Caution advised.

BitAuto (NYSE:BITA): +12%; following a nearly 40% drop from highs in early January, the stock seems to be attracting some bargain hunters. The drop was on the heels of an investment by JD.com (NASDAQ:JD), and Tencent (OTCPK:TCEHY), which are apparently going to plow in a collective $550 million into BitAuto (dilution can do that). The street remains skeptical about just what the tie-up will mean, but this week’s trading (five days of gains with decent volume), suggests the market is taking a more positive view. The chart is still pretty tough (the short-term MA is about to pierce the long-term MA), so this recent run-up may invite further pressure.

Yingli Solar (NYSE:YGE): +11%; the stock continued pushing higher after rising +8% the first week of February. One reason for investors snapping up shares in Yingli and other solar names (as well as other clean energy stocks) has been the rebounding price of oil, which has risen about +22% since bottoming at $45/bbl in late January. Cheap fossil fuels play havoc with clean/green energy economics, so seeing the oil price rebound makes these technologies more competitive.

58.com (NYSE:WUBA): +11%; this stock had a strong day on Friday, popping nearly 10% on nearly 2x average daily volume, all without any real news to substantiate the move. There were rumors that maybe shorts were covering, which sounds more like nobody really knew why the shares jumped. The day’s move was kicked off with a pretty large trade right around 10:00, and it looks like afterward momentum traders were trying to get into the mix before more buying came to market. Given such a big pop with little news, if there isn’t a follow through over the next few sessions, some of the momentum traders may close out positions, bringing pressure on the name.

Stock Decliners

YY.com (NASDAQ:YY): -9%; pretty wholesale dumping here this week, backed by increasing volume exacerbating the falling price. There hasn’t been any news on this stock per se, but there were some relevant headlines about China’s Internet police cracking down on some illicit activity (solicitation) on other messaging platforms which could be making investors nervous about YY’s core video chat business. That being the case, the stock is close to a near-term low (about $62) which could serve as a floor, so watch closely to see what happens if it gets closer to those levels.

500.com (NYSE:WBAI): -10%; earnings, earnings, earnings. The company beat on revenue but missed on EPS, sending the stock lower through Friday. The stock did gap down on the announcement, which it may close. There are some perplexing issues surrounding the name, specifically regarding an industry audit which should be completed soon, hopefully answering questions about future regulatory action focusing on online sports lottery services. Although the stock has picked itself up off of earlier low levels after the nearly 6-month long sell-off, taking a nibble here may be a bit premature. Risk control is key.

Changyou.com (CYOU): -10%; earnings story. Takeaway – the ‘turnaround’ is still, well, turning… and progress so far is slow. The company did report some headway in mobile, hyping its TLBB 3-D mobile game on the call, but one game does not make a company. There had been some rumors that Changyou was going to sell its 17173.com platform, which would have ended the experiment to turn itself into a platform company instead of a game developer and publisher, but there was no mention of that on the call.

Pingtan Marine (NASDAQ:PME): -23%; this stock popped following an announcement that it was entering into an agreement with the China Agriculture Development fund which would see the fund invest about $64 million into the company. After the initial euphoria, the stock sank lower, perhaps in part due to potential dilutive effects of the investment. As a reminder, this stock is still in the twilight zone; it fired its auditor in September last year and later filed a scary 8-K in November, alerting investors that it needed to restate some financials… from FY2012 onward. Avoiding this stock until it becomes more ‘boring’ seems like a good call here.

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