Stocks had an excellent run for the week, but for Wednesday when property stocks took losses. The benchmark index touched a seven-month high on Monday, following expectations of an increase in the pace of banking sector reforms. Technology companies led gains for the Shanghai composite on Tuesday, the sixth successive day when stocks finished in the green.
Stocks declined on Wednesday after a slump in property companies. However, the benchmark index rebounded today to post its highest monthly gains since Dec 2012. Baidu, Inc.’s (BIDU) earnings and revenue beat estimates during the second quarter of 2014. In contrast, Sohu.com Inc. (SOHU) posted losses, which were narrower than estimates.
Last Week’s Developments
Stocks rallied on Friday with the benchmark index posting its largest weekly gains in three months. Markets seemed confident that the Chinese economy can stabilise.
The Shanghai Composite Index gained 1% and moved up 3.3% for the week. This was its largest weekly gain since April. The HSBC flash PMI jumped to its highest level in one and a half years during the week. Reforms by cities in property purchases also aided gains. The CSI 300 increased 1.1% while the Hang Seng China Enterprises Index moved up 0.5% to its best close since Dec 13.
Markets and the Economy This Week
The Shanghai Composite Index gained 2.4% to touch a seven-month high on Monday. The benchmark index closed in the green for a fifth successive session following indications of an economy recovery. Gains were also fuelled by expectations that the government will increase the pace of banking sector reforms.
The “Big Four” Banks gained 2-3.5% while smaller operators in the sector increased over 5%. Analysts believe that such reforms will increase efficiency for all state owned banks. The CSI 300 moved up 2.8% to finish at its highest point for the year. The Hang Seng China Enterprises Index gained 0.7%.
The benchmark index gained for a sixth successive day on Tuesday as technology companies led gains for stocks. This is its longest series of gains in nearly a year. Markets have regained their confidence in the economy as fundamentals continue to improve.
Meanwhile, investors in Hong Kong will soon be able to trade in shares listed on the mainland. These factors have combined to create a bull run of sorts. Following record gains on Monday, the Shanghai Composite Index increased 0.2% while the CSI 300 gained 0.3%. The Hang Seng China Enterprises Index added 0.5%.
Energy stocks notched up gains on Wednesday after the Communist Party began a high level probe. Property stocks slumped and there were indications that the next few days might see profit taking. The country’s largest oil producer, PetroChina Co. Ltd. (PTR) gained significantly after a probe was initiated against its earlier parent company head. China Petroleum & Chemical Corp. (SNP) touched a one month high.
The Shanghai Composite Index lost 0.1%, ending a series of six successive days of gains. The initiation of the probe indicates the government’s anti corruption campaign is nearing its close. This means the government will now focus on economic issues and raises expectations of additional reforms. The CSI 300 lost 0.4% while the Hang Seng China Enterprises Index ended almost unchanged.
The Shanghai Composite Index gained 0.9% today to post its highest monthly gains since Dec 2012. The benchmark index gained 7.5% over the month, following monetary easing, an increase in government spending and bullish manufacturing data. A gauge of property stocks within the benchmark index increased 1%, following the removal of home purchase restrictions.
There are also indications that there would be reforms in the household registration system. The CSI 300 added 1.2%, led by gains in consumer staples and increased 8.6% in July. The Hang Seng China Enterprises Index increased 0.2%.
Stocks in the News
Baidu, Inc.’s second-quarter 2014 core earnings per share of $1.63 breezed past the Zacks Consensus Estimate of $1.24 by 31.5% and improved from year-ago earnings by 33.6%. Expansion in the operating margin was behind the beat. Solid revenues coupled with cost containment boosted the operating margin.
Total revenue of $1.93 billion surged 58.5% year over year, exceeding the Zacks Consensus Estimate of $1.80 billion helped by a 57% rise in online marketing revenues. Management noted that a focus on mobile-related services including mobile search, mobile map and app distribution made the company a winner this season. This was the first time Baidu generated as much as 30% of its revenues from mobile-oriented product and services.
In the quarter under review, operating profit grew about 22.5% mainly on the back of lower bandwidth cost in the proportion of revenues. Though content costs as a percentage of sales rose in the quarter, they slid sequentially.
The outlook was enthusiastic too. Baidu anticipates that its total revenue for Q3 will range between $2.163 billion and $2.221 billion. The projected revenue will likely register a year-over-year expansion of 50.9−55.0%. Not only this, but management indicated enhanced investment in mobile applications in the latter half of 2014.
Quite expectedly, Baidu’s beat enthused investors as the stock traded in the green in after-hour trade. Following the earnings release on July 24 after the closing bell, its shares advanced about 6.23%.
In any case, investors were extremely confident about such a performance, borne out by a 2.07% rise in shares during the trading session of July 24. In fact Baidu had gained 62% over the last one year as of July 24, while shares soared by over 10.8% in Friday’s session.
Sohu.com Inc. reported loss of $1.16 per share in the second quarter of 2014, which was narrower than the Zacks Consensus Estimate of a loss of $1.29 per share. However, Sohu had reported earnings of 56 cents per share in the year-ago quarter.
The second quarter loss can be attributed to a massive surge in operating expenses related to compensation and promotional activities.
Revenues jumped 18.1% year over year to $400.2 million, which however missed the Zacks Consensus Estimate of $405.0 million. The year-over-year increase was primarily driven by strong performance from online advertising, brand advertising and search & other segments, which more than offset the decline in revenues in the Online Games segment.
Gross margin contracted 900 basis points (bps) from the year-ago quarter to 57.5%. Operating expenses jumped 81.6% year over year to $292.1 million. The year-over-year increase in operating expenses was mainly due to an increase in salaries and compensation expenses as a result of increased headcount and higher marketing and promotional expenses.
For the third quarter of 2014, Sohu expects revenues in the range of $427.0 million–$442.0 million. Management estimates brand advertising revenues in the range of $148.0 million to $153.0 million, representing 19.0% to 23.0% year-over-year growth.
Changyou.com Ltd (CYOU) reported earnings of 4 cents per share in the second quarter of 2014, as against the Zacks Consensus Estimate of a loss of 19 cents per share.
However, revenues for the second quarter declined 3% to $177.8 million, missing the Zacks Consensus Estimate of $188 million. Revenues from online gaming dropped 9% to $153.9 million. On the other hand, online advertising revenues increased 46% to $14.7 million.
The company expects non-GAAP loss per ADS between $0.00 – $0.11 during the third quarter. Total revenues are projected between $186.0 million – $192.0 million.
Trina Solar Ltd (TSL) responded to the anti-dumping duties levied by the U.S. Department of Commerce (DOC) on imports of solar modules and photovoltaic cells from China and Taiwan. The DOC has levied a preliminary anti-dumping rate of 26.33% on Trina Solar following its investigations. Taken together with anti-subsidy duties announced in June, Trina Solar will face an effective rate of 29.3%.
Though the company opposed the preliminary findings, it said it is committed to serving customers in the U.S. as well as its business partners. In a statement the company said: "Trina Solar believes that because of its competitive cost structure, in-house manufacturing capacities, global strategies, strong brand image and quality products and global strategies, it will continue to grow its business in the United States and to play an important role in the U.S. market."
Yingli Green Energy Holding Co. Ltd. (YGE) also voiced its discontent regarding such duties, but also promised that it would continue to serve customers in the U.S. Yingli faces an anti-dumping duty of 42.33% and a combined tariff of 47.27%. Companies which refuse to cooperate with the DOC will have to pay the highest possible rate of 165%, which amounts to 191%, taking into account the anti-subsidy duty.
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 |
|
NQ |
+18.28% |
-56.29% |
|
SFUN |
-6.95% |
-27.63% |
|
BIDU |
+7.50% |
+40.02% |
|
CTRP |
+2.42% |
+62.84% |
|
TSL |
-0.52% |
-23.10% |
|
JD |
+3.45% |
NA |
|
QIHU |
+3.03% |
-2.06% |
|
YOKU |
+0.05% |
-31.94% |
|
YGE |
-5.28% |
-44.01% |
|
KNDI |
-7.51% |
+44.23% |
Next Week’s Outlook:
The market has ended July on a high, posting its best monthly gains since Dec 2012. Economic reports and manufacturing sector data in particular has been encouraging. Investors seem convinced that the economy is on track for a recovery. Stimulus measures are bearing fruit even as the government continues to undertake further sectoral reforms.
Several analysts believe that final numbers on manufacturing will also be encouraging. This will provide a further boost to markets which continue to move higher. If the majority of earnings are also on the positive side, stocks would continue to surge ahead.
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