Markets had a dismal week, after snapping a five-straight session of gains on Tuesday. Stocks moved up for a fifth consecutive day on Monday following gains from tech companies. However, the Shanghai Composite Index moved lower on Tuesday following a decline in industrial profits.
Stocks declined again on Wednesday following concerns that funds moving into equities will decline. Speculation that further regulatory scrutiny of margin loans activity will cause leveraged investors to cut holdings caused the benchmark index to move lower today.
Alibaba’s (BABA) 15.4% stake held by Yahoo! Inc. (YHOO) will be spun off into a separate company. Meanwhile, China Petroleum & Chemical Corp. (SNP), also known as Sinopec, and YPF S.A. (YPF) have inked a memorandum of understanding regarding the development of petroleum projects in Argentina.
Last Week’s Developments
Last Friday, the Shanghai Composite Index increased for a fourth consecutive day, advancing 0.3%. Gains were powered by a better than expected reading of the HSBC Flash PMI, which came in at 49.8 for January. Financials gained while tech stocks declined in both Hong Kong and Shanghai. The CSI 300 gained 0.1% while the Hang Seng moved up 1.2%. The Hang Seng China Enterprises Index jumped 1.8% to its highest level in three years.
However, the benchmark index lost 0.7% over the week. This brought a series of 10 consecutive weekly gains to a close. Meanwhile, the H-share index added 1.2% over the week. The Shanghai Composite Index plunged 7.7% last Monday following regulator action on margin trading. Weekly losses were reduced by gains from stocks on all subsequent trading days.
Over the week, a sub-index of financials stocks within the CSI 300 added 1.4%. This gauge emerged as the only gainer among the 10 industry groups. Meanwhile, the sub-index of tech stocks declined 2.6%, emerging as the largest loser.
Markets and the Economy This Week
Stocks moved up for a fifth consecutive day on Monday following gains from tech companies. These gains were fuelled by speculation that such companies will benefit from higher government spending on defense. According to the Xinhua News Agency, the government will create a “professional team” in charge of national security.
The benchmark index increased 0.9% to its highest level since Aug 5, 2009. The CSI 300 advanced 1%. A sub-index of tech stocks within the CSI 300 gained 2.8%, the highest among the 10 industry groups. The Hang Seng advanced 0.2% while the Hang Seng China Enterprises index lost 0.3%. This ended a four-day rally for the H-share index over which it increased 6.8%.
The Shanghai Composite Index lost 0.9% on Tuesday following a decline in industrial profits. According to the National Bureau of Statistics, industrial profits came in 8% lower compared to last year. This is the largest decline since Oct 2011. Analysts took the view that this provided investors with an opportunity to book profits. Losses were led by financial and commodity stocks.
The CSI 300 moved down 0.9%. A gauge of financial stocks within the CSI 300 dropped 2.3%, the highest among the 10 industry groups. The Hang Seng declined 0.5% while the Hang Seng China Enterprises Index lost 1.5%.
Stocks declined again on Wednesday following concerns that funds moving into equities will decline. These fears were sparked off after certain banks cut their leverage on trust products investing in stocks. The Shanghai Composite Index declined 1.4%. Analysts took the view that regulators may want to reduce leverage following concerns that the market was overheating.
The CSI 300 lost 1.4%. A sub-index of property companies within the benchmark index declined 2.3%. This gauge emerged as the largest loser among the five industry groups. Meanwhile, energy companies took losses following reports that the northern province of Shanxi would not give approval to new coal mines before 2020. The Hang Seng China Enterprises Index moved down 0.6% while the Hang Seng advanced 0.2%.
The Shanghai Composite Index lost 1.3% today, moving lower for the third consecutive day. Speculation that further regulatory scrutiny of margin loans activity will cause leveraged investors to cut holdings was primarily responsible for this decline. According to the Xinhua News Agency, the market regulator was planning new safeguards on margin lending activity of brokerages.
The CSI 300 moved down 1.2%. A sub-index of financial stocks within the CSI 300 lost 1.9%, the most among the 10 industry groups. The Hang Seng lost 1.1% while the H-share index declined 1.9%.
Stocks in the News
Alibaba’s 15.4% stake held by Yahoo will be spun off into a separate company. Yahoo plans to return $40 billion in holdings to shareholders by spinning off its stake in Alibaba. Shares of Yahoo jumped 6.7% to $51.20 in afterhours trading on Tuesday following the announcement.
The holdings will be spun off into a newly-formed, tax-free independent, publicly traded investment company, called SpinCo. Investors reacted positively to the highly anticipated decision as it will enable the company to avoid a tax bill that would have cost billions in the future.
The spinoff is likely an effort to make sure that SpinCo shareholders benefit from future sales of Alibaba stock and are taxed at a lower rate. Yahoo would have to pay had it held on to the interest in Alibaba. However, the tax-free spin-off would make Yahoo a much smaller company than it has been in years, largely due to the removal of BABA shares from its net worth.
The tax-free spinoff is expected to be closed by the fourth quarter of 2015. The one-year lock-up agreement with Alibaba will also expire by then. Following the completion, SpinCo will get ownership of Yahoo's remaining 384 million shares in Alibaba, valued at $40 billion. Existing Yahoo! shareholders will get stock of the new company. Moreover, SpinCo will assume no debt in the transaction and Yahoo will keep its cash.
China Petroleum & Chemical Corp., also known as Sinopec, and YPF S.A. have inked a memorandum of understanding regarding the development of petroleum projects in Argentina. The two companies ultimately wish to jointly develop oil and gas projects in that country. According to an official from YPF, the company’s chief executive Miguel Galuccio concluded the MOU with Sinopec’s Chairman Fu Chengyu in Beijing.
This partnership would result in YPF aiding Sinopec to raise its conventional output. At the same time, Sinopec will jointly invest with YPF to increase shale oil production.
Baidu, Inc. (BIDU) has entered into an agreement with Hyundai Motor Co to offer cars with in-vehicle infotainment systems within China. The announcement was made by Hyundai following Baidu’s launch of its in-car platform CarLife in Beijing earlier this week. Hyundai will launch a Sonata sedan in April, which is compatible with the new platform.
The carmaker said that it decided to partner with Baidu since China’s government has still not indicated whether it will allow vehicles with Apple’s (AAPL) CarPlay and Google’s (GOOG) Android Auto.
Meanwhile Audi and GM have also committed to introducing CarLife in the cars they sell within China. However, they are yet to announce a release date. According to reports, CarLife will offer a number of Baidu services, free navigation and will support third-party apps. Baidu Maps will form the center of the new system and will provide navigation and traffic alerts in real time. Additionally, it will also offer a large database of restaurants and stores in China, among other information.
Qunar Cayman Islands Ltd. (QUNR) had formed an alliance with 22 leading hotel chains. These include the likes of Wyndham Worldwide Corp. (WYN), Banyan Tree, Howard Johnson, Club Med and Millennium. These groups will offer their global inventories on China’s leading online and mobile travel website.
Qunar now covers 540,000 hotels worldwide. Qunar will develop a large number of products along with these hotel chains. This includes prepay, pay-upon arrival and group buy facilities. The company will also offer combined flight and hotel packages and conduct integrated marketing campaigns along with these hotel chains.
Additionally, Qunar will offer consumer intelligence to these hotels, enabling them to improve yield management and raise occupancy rates. Recently, the company launched a “flight+hotel” offer which combines flight bookings with relevant hotel recommendations. The partnering hotel chains are expected to gain from this cross sales program.
Noah Holdings Ltd. (NOAH) has said that Keywise Capital Management, Hillhouse Capital Management and Greenwoods Asset Management will purchase aggregate principal amount of $80 million of convertible notes. These notes were issued by Noah Holdings via the private placement route.
These notes will offer a return of 3.5% starting from the date of issue till their maturity in Feb 2020. The notes offer the option of conversion into American Depositary Shares (ADS) at a conversion price of $23.03 per ADS where one ordinary share is equivalent to two ADS’. Noah Holdings plans to utilize the funds secured from the issue of these notes to execute its strategy for broader growth.
Performance of Most Actively Traded US-listed Chinese Stocks
The table given below shows the price movements of 10 Chinese companies with the highest three-month average trading volume on U.S. exchanges. Price movements over the last five days and during the last six months have been included.
|
Ticker |
Last 5 Day’s Performance |
6-Month Performance |
|
BABA |
+1.44% |
+4.8% |
|
JD |
+5.4% |
-11.9% |
|
SFUN |
-3.1% |
-46.9% |
|
VIPS |
+4.8% |
+6.5% |
|
BIDU |
+0.1% |
-2.4% |
|
TSL |
-1% |
-23.8% |
|
QIHU |
+7.2% |
-42.3% |
|
NQ |
-11.7% |
-45.2% |
|
CTRP |
+6.3% |
-26.6% |
|
YOKU |
+2.2% |
-12.3% |
Next Week’s Outlook:
Stocks have experienced a dismal week, primarily due to concerns over regulatory action. There are indications that the market regulator may want stocks to cool down following the recurring view that recent gains have been excessive. This is why it is moving to expand scrutiny on margin traders.
At the same time, it is moving to restrict leverage activity which has fueled heightened stock purchases in recent times. This has led to an overall decline, with financial stocks losing the most among all industry groups.
Economic data has been mixed in nature. While industrial profits have triggered losses for stocks, HSBC flash PMI data has provided markets with much-needed impetus. Several important economic reports are scheduled for release next week. This includes both official and private data on the manufacturing and services sector. Any positive indications on this front will help stocks return to their winning ways in the days ahead.
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