In this briefing:
- Double Bubble, Double Trouble?
- Hong Kong Exchanges & Clearing – Further To Run
- Cathay Pacific Rights – The Flow Dynamics
- Asia Short Interest Weekly – PingAn, WuXi Bio, Meituan, SMIC, Fast Retail, Sumitomo, Yageo, Genius
- Hong Kong Financials: Bluff and Bluster? Taxi Driver Tip Time in China?
A review of U.S. and global markets reveals that market leadership has narrowed to NASDAQ and Chinese stocks. If this is the start of a new bull, or a continuation of the old bull, can it rest on the narrow leadership of a handful of NASDAQ stocks and the Chinese market?
Is this just a double bubble, and does that imply double trouble ahead?
We are not sure. We are torn between Bob Farrell’s Rule No. 4:
Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
And Rule No. 7.
Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
Investors need to be aware of the tension between Rule No. 4, which raises the possibility of a stock bubble, and the risks posed by the narrow leadership warned by Rule No. 7. Tail-risk is high in both directions. In this environment, it is worthwhile to return to basics and re-visit investment objectives and risk tolerances in order to balance risk and reward. There are no perfect answers and each will be different.
Regardless of what direction the market takes, investors can count on a climate of high volatility in the near future.
* Solid Prospects: Hong Kong Exchanges & Clearing’s (388.HK) [HKEx] share price has increased HKD 152.40 (72.1%) since its pandemic panic trough of March 21, 2020. The run appears to price in the entire suite of US-listed mainland Chinese ADRs to be ambitiously shifted to HKEx along with market velocity. HKEx looks to be the beneficiary of derivatives and ETF business development, and the IPO listing share for HKEx;
*June Ahead of Expectations: HKEx June volumes were ahead of expectations in both the cash and the derivatives markets; and
*Just Pay The Dividend: HKEx is sitting on an enormous level of excess cash of over USD 3 bn which likely will be managed more properly when a less deal happy CEO takes over the helm by October 2021.
On 9 June 2020, Cathay Pacific Airways (293 HK) called for a trading halt, and four hours later – just before 1pm local time – announced a…
HK$39.0 BILLION RECAPITALISATION PROPOSAL INVOLVING (1) PROPOSED ISSUE OF PREFERENCE SHARES AND WARRANTS; AND (2) PROPOSED RIGHTS ISSUE OF RIGHTS SHARES ON THE BASIS OF SEVEN RIGHTS SHARES FOR EVERY ELEVEN EXISTING SHARES (link here).
This was announcement was discussed admirably on the same day by David Blennerhassett in Cathay Pacific’s Government Stop Gap, with more in-depth coverage of the pro-forma balance sheet combined with run-rate cash-burn estimates in Cathay Pacific: A Bonfire For Money. As you can tell from the titles, he was bearish. That was when the shares were 25% higher than here.
The Circular was announced on 19 June 2020, and the EGM is scheduled for 13 July 2020 at 2pm. If approved on Monday 13 July, the last day of shares trading WITH RIGHTS will be the 14th of July.
Starting the 15th of July, the shares will trade ex-rights, and the nil-paid rights themselves will trade between the 24th and 31st of July, inclusive.
Shareholders will receive 7 rights for every 11 shares held, at a rights subscription price of HK$4.68 (46.9% discount to the close of 8 June, and 35% discount to the then-TERP of $7.20) to raise aggregate proceeds of ~HK$11.7bn (there are, of course, pref shares and warrants for another HK$21.5bn).
There are two days left before the shares go ex-.
The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.
Short Interest in Korea decreased in almost all industry groups led by Media & Entertainment, Pharmaceuticals, Technology Hardware and Materials.
Short Interest in Taiwan decreased in almost all industry groups led by Technology Hardware, Semiconductors, Capital Goods and Telecommunication Services while shorts increased in Banks and Automobiles.
In these stressed times, risk assets seem excessively buoyed by liquidity again despite what gold, US treasury yields, and the still elevated VIX tell us. The market seems to have given up on earnings and bases a bullish thesis on 2021-22 guesses. We are not, despite what some national media outlets inform us, out of the COVID woods by any means. Are governments throwing in the Health towel before wealth priorities?
Those with a thoughtful disposition, based on History, would be forgiven for throwing in the towel on the bear side. Long/Short strategies are looking about as out of favor as value investing.
Despite a mega credit bubble, fixed exchange rate and increasing scarcity of foreign exchange perhaps, CSI 300 could rally hard into YE 2020 with a fortified CNH. This is predicated on a weaker dollar which is by no means a certainty. There is talk of a bull market in China and locals are free with their tips. We are told to buy BABA and Tencent ahead of Google and Microsoft on valuation grounds: is that really coherent?
So what tempers enthusiasm or even euphoria? In one word: Hong Kong. Well, it used to be a single word until 1926. This note arrives just as the government has had to close down schools.
The US continues to flex its muscles regarding China. There is an element of scapegoating for sure, blaming China for its own haphazard and subpar response to COVID. In a sense, China’s “illegal” Security Law was a gift from the Gods to Trump and Pompeo. But there is also a hardening bipartisan existential logic too. The US is fed up with IP theft and CCP meddling in internal affairs. (China would say the same thing). Pompeo though is surely right to highlight the goings on in the South China Sea. It is as reprehensible as actions by scores of colonial powers and state sponsored pirates such as the East India Company in days of yore. (Same logic applies to tree-cutting Brazil). And we do live in times of revisionism.
Can the US be serious about starving China of dollars? China is most certainly not a “swap line” amigo. Trump will sign into bipartisan law next week the Hong Kong autonomy act. The legislation gives the administration the power to impose sanctions on officials accused of undermining Hong Kong’s semi-autonomous status, as well as banks and state entities that do “significant transactions” with them. This applies to banks, asset managers, and insurance companies. For sure, there will be rigorous KYC exercises at many banks, not just Bank of China and Minsheng, the favourites of the CCP at home.
The US sanctions could mean freezing the property of individuals and companies or excluding them from the US financial system. They may stop banks from conducting FX transactions over which the US has jurisdiction: freezing access to dollars. The act could force financial institutions to choose between doing business with the US or China. Hong Kong’s national security law makes it illegal to comply with US sanctions against Hong Kong and China.
Trump signed into law a sanctions bill that requires the administration to compile a report on China’s mass internment of millions of Muslim Uighurs and identify Chinese government officials to impose sanctions on. The Treasury said that sanctions apply to Chen Quanguo, the Communist party secretary of Xinjiang, Zhu Hailun, who helps oversee policy in the province, Wang Mingshan, head of the Xinjiang public security bureau, and Huo Liujun, a former head of the bureau.
Things are certainly complicated by the hiring of Luo Huining as the CCP’s enforcer in Hong Kong: referred to by Kyle Bass as “the butcher of Tibet”. Mr Bass like many before him has his money where his mouth is and its safe to say that he is not long.
Bluff and buster is the response from financiers in Hong Kong. Things will muddle along. While the UK government hardens its stance on Huawei, Standard Chartered and HSBC have openly supported the Security Law. Without Hong Kong and China business, both entities are left rudderless. But the “Five Eyes” security alliance and parts of the EU appear to be taking a stance in the playground of global geopolitics and China’s soft power shortcomings may bring many parts of Asia into the gang. Belt and Road as well as excursions into Africa and LATAM have raised many deep concerns about arrangements though local politicos are only too happy to oblige and do business with the hegemonistic CCP.
Amid the euphoria for Chinese assets, we note a creeping weakness in Hong Kong financials and in HSBC and Standard Chartered. We would avoid both entities. In fact, we do not like the risk-reward in Hong Kong. Prior to the China-US spat, ensuing trade/tech/capital war, and local protests, Hong Kong financials were looking over exposed to the property market while trends continue to erode as measured by our PH Score.
Chinese State Banks might be some of the safest in the world. They might be. This does not make them the best investments as shareholder interests are of course secondary to CCP directives. they do not hesitate, when called upon, to bail out a province if required.
We take a look at Dah Sing Banking (2356 HK) where trends are subpar and CRE exposure remains elevated by system standards.