December 7, 2022

Alibaba buys big, Reuters reports US-listed companies gear up for PCAOB review

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Asian equities were significantly higher despite the bearish undertow caused by the US Fed presidency, led by Hong Kong, Japan and India. Alibaba (BABA US, 9988 HK) said it would increase its buyback program from $15 billion to $25 billion, having already repurchased 56.2 million shares for $9.2 billion. It was a very deliberate sign from the company that they thought their stocks were cheap. As Deputy Chief Financial Officer Toby Xu said, “Alibaba’s share price does not accurately reflect the value of the company given our strong financial health and expansion plan. Well said Tobie! The company also announced that Borje Ekhold, Chairman and CEO of Ericsson, will step down as independent advisor to the board of directors and will be replaced by Weijian Shan, executive chairman of highly respected alternative asset manager PAG. The news sent Alibaba HK up +11.2%.

This morning, Reuters reports that the CSRC has asked several US-listed Chinese companies to prepare broader disclosures in anticipation of joining the PCAOB’s audit review. If true, this would be an important step in resolving the HFCAA. This is very much in line with our thinking that among Chinese ADRs, private companies have nothing to hide and should be allowed to comply with the HFCAA. Let’s hope the story, attributed to the “sources” is true! Yesterday’s closing statement after China from the State Council reiterated support for the economy through “monetary policy tools” while avoiding “flood-type irrigation”, i.e. that is, targeted stimulus measures rather than a broad cut in interest rates.

Nike’s earnings release lifted its supply chain and peers in the category. Last week, I mentioned that Evergrande had a bond due tomorrow, which would require repayment of $2 billion in principal. Coincidentally or not, the company suspended its Hong Kong shares and said it was unable to release its financial results. There are already reports that the company is getting support as real estate was an area of ​​Vice Premier Liu He’s speech last week. Real estate was the mainland’s top sector +3.69% while Hong Kong had a strong performance at +4.34%. Tencent Music Entertainment (TME US) financial results were online while announcing that they will follow Nio’s Hong Kong relisting plan by offering US ADR holders the option to convert to a new class of Hong Kong stocks.

The Hang Seng Index gained +3.15% while the HS Tech +5.37% was led by Internet stocks on -5.85% volume, just 94% of the 1-year average. The progressives outpaced the decliners 4 to 1. We would like to see an upward move accompanied by strong volume as Hong Kong short selling turnover is well below last week’s highs. Alibaba’s Hong Kong share class made discretionary the best sector +8.09% while Tencent +4.19%. Tencent had small net buyers through Southbound Stock Connect while Meituan had a small net buy.

Shanghai, Shenzhen and STAR Board diverged by +0.19%, -0.41% and -1.56% on volume of -5.43% or 91% of the 1-year average. Value sectors outperformed with Real Estate by 3.69%, Energy by +3.15%, Financials by +1.2% and Utilities by +0.64%, while Technology was down -1.43% and health down -2.58%. Foreign investors were net sellers through Northbound Stock Connect at -$144 million. Treasuries were down, the CNY was down against the US dollar, and copper was down -0.03%.

Hong Kong financial media noted that State Street Global Advisors may be replaced as portfolio manager of the HK$14.119 billion (HK$2,800) Tracker Fund after twenty years in the role of Hang Seng Investment Management. The US asset manager has run into complications from the 2020 executive order that bars US asset managers from holding several Hong Kong-listed stocks that feature in the Tracker’s underlying index, the Hang Index Seng. The news reminded me of an excellent book called The Ugly Americans by Ben Mezrich about an American trader based in Japan doing index and futures arbitrage. The trader’s big gains came from understanding the Tracker’s inclusion of a new stock and subsequent Nikkei Index rebalancing trade which led to dramatic gains and an early retirement. It’s entertaining reading with an ETF twist!

Coincidentally, I recently finished Grit: The Power of Passion and Perseverance by Angela Duckworth. The book argues that courage, that is, hard work combined with passion and perseverance, are better indicators of success than talent. It’s a good read that I enjoyed and that I hope to pass on to my children!

Last night’s exchange rates, prices and yields

  • CNY/USD 6.36 vs. 6.36 yesterday
  • CNY/EUR 7.00 vs. 7.01 yesterday
  • 10-year government bond yield 2.83% vs. 2.81% yesterday
  • China Development Bank 10-year bond yield 3.08% vs. 3.06% yesterday
  • Copper price -0.03% overnight