MCM Partners August month in review: an awful summer
August month in review: an awful summer
China | Equities | Month in Review
·
Shanghai, HK fall lower for the third month in a row along with
macro
·
Witch hunt for “malicious forces” selling A-shares includes
regulators
·
Valuations, not pretty to start, taking a back seat until dust
settles
·
Bubble is deflating a little; many PEs>100 with mkt cap >
US1bn
·
That sucking sound of diminishing volume isn’t seasonal
·
Margin, finally not being government cheer led, slows
·
A fairly important technical event in 92pts
Markets
in Hong Kong and China started off August heading in different directions as
stocks in Shanghai rose through mid-month, while Hong Kong stocks mostly
languished. Factors influencing trading included another installment of
macro data painting a grim picture, a surprise devaluation of the RMB, the PBOC
slashing interest rates and the RRR, and the rumor mill in full-force regarding
government support measures.
As if
those variables weren’t enough, there were also some earnings announcements
from both Hong Kong and US-listed names thrown in the mix, which seemed to
matter little while trading sentiment was dominated by dwindling risk appetite
as indexes slid lower through month-end.
Both
the Hong Kong’s Hang Seng index and Shanghai Composite ended August -12% lower,
the third consecutive month of losses.
Macro
Data Shows More Clouds Forming
Recapping
macroeconomic data released in the month (July’s data), bright spots were hard
to come by. Inflationary pressures were weak both for consumers and producers
(CPI was +1.6% YoY, but after stripping out food prices, was an anemic +1.1%;
PPI fell to a -5.4% YoY pace, levels not seen since late 2009). Industrial
production slipped to +6.0% YoY, close to lows for the year, and fixed asset
investment and investments in real estate development continued to shrink
compared to earlier in the year. There were also signs of ongoing stress for
China’s manufacturers, as the official PMI reading for July was a neutral 50,
but private survey data released mid-month from Caixin/Markit raised concerns
of ongoing contraction for August (an early estimate reading of 47.1 vs. 47.8
final reading for July). Official PMI data released on Tuesday confirmed that
manufacturing in China was indeed stagnating.
Bucking
the trend, however, were July retail sales, which although softer than
expected, still grew at a pace above the YTD average. Authorities in China are
hoping that as consumption grows, it can become an engine of economic growth,
reducing the need for increasingly shaky growth based on investment spending.
There are signs of progress; China’s NBS noted that consumption contributed
over 50% of GDP growth in 1H 2015.
In a
sharp contrast to the official line that China’s economy continues to adjust to
a “new normal”, the surprise weakening of the RMB suggested otherwise.
Following the release of weak export data in early August, China devalued the
RMB by about 2% near mid-month, claiming at the time that it was not a move to
help struggling manufacturers or exporters. The sell-off in commodities pointed
to widespread disbelief.
Following
the shock devaluation of the RMB, equity markets headed sharply lower on fears
that China’s economy was slowing more quickly than earlier thought. The fear
quickly grew to near-panic levels when the NBS released weak monthly data,
which was followed by the Caixin/Markit PMI indicating more of the same. The
central bank ignored calls for a relaxing monetary policy for a few days, but
eventually buckled and cut the required reserve ratio and reduced the benchmark
deposit and lending rates. (For our take on the PBOC’s moves, please see our “PBOC cuts RRR, rates...so what?” from
26 August 2015...spoiler alert not needed.
After
the dust settled, the Shanghai Composite was down nearly -24% from levels in
mid-August, a violent downward move spanning only six trading days, which wiped
out all of the gains YTD. Although there was movement on the policy front, it
wasn’t until state-sponsored support launched near month end saw equities move
higher, recovering some of August’s earlier losses.
Where
the market goes from here is an intriguing question. While on one hand
authorities in China have been urging brokers, funds, and ordinary investors to
save the market, there has also been a witch hunt to find those responsible for
August’s swoon. Both regulators and the media have been caught up in the net, a
surprising turn of events when considering that it was the state-run People’s
Daily churning out market hype on a regular basis which kicked off the Shanghai
Composite’s massive bull run to over 5,000 points.
Looking
at valuations, the Shanghai Composite is significantly cheaper than a few
months ago (a -40% fall can do that), trading on a trailing P/E of about 15.6x,
according to Bloomberg data. Stocks in Hong Kong trade on a more compelling
valuation of a 9.3x trailing P/E ratio.
But
do valuations really matter? Although they should,
perhaps in China they might matter less, particularly while the main barometer
investors are trying to interpret is government policy toward market
stabilization. Indeed, for most of 2015, any “bad” economic news was reason to
rally higher on hopes of future stimulus.
Looking at the technicals
Along
with the downturn in macro numbers, there are plenty of technical indicators deserving
our readers’ attention. We’ve been quite diligent in warning why China was in
an overbought/overvalued state and how it got there. What follows are a few
points to consider regarding why things may get worse before they get better.
Bubble apparent in PEs
The
second most blatant signal that SHCOMP was being overcooked was the enormous
number of stocks, excluding micro caps, with PEs greater than 200 when we
pointed this out in June and followed up in July. August sees the number of
companies drop to “only” 78 or 6.6% of actively traded non-micro cap firms. We
used USD1bn as a cutoff for market cap for our look at Shanghai listed A-shares.
The
first, most blatant, signal(s) could be seen in the chart as part of our note:
China – the year of doing it wrong.
There are still some whacked out
numbers (PE of 5,784) with negative returns on equities like Lander Sports
Development (000558), China Shipping (600896) and Nanjing Huading Electronics
(000727).
Summary
of performance for the group of 78:
PE
ROE
P/S P/B
574 2.93% 13.3 7.5
574 2.93% 13.3 7.5
If we pull the filter down to show active
A-shares with a PE of 100 or less,
the number more than doubles to 190 stocks.
Volume
It
wasn’t seasonal. The past two summers have seen an uptick in turnover from June
to August. The halt of many A-shares while engineering the support didn’t just
put a damper on July, it is quite evident that market participants were
sidelined in August as well.
In
this next chart we also show the relationship of margin and SHCOMP moves. Now
that the central government isn’t cheer leading the use of margin and making
new rules that one’s house can be used as collateral for that margin, its use
has tailed off.
The
blue shaded area is margin use which is down 52% from the June peak.
The
“bright side” here is that it should be easier to prop up the market with
volume and margin use on the wane…but at which point does the term “market” no
longer apply for continued trading by fiat?
Technical Event
SHCOMP: At the current rate of volatility, there is a high likelihood of this event occurring over the next three to four trading days. It requires only 92 points to fall away from the 50 day average. Have you guessed what it is?
If the Mainland government
cannot come up with both A) a replacement plan for some of the manufacturing
which has been leaving China in order to line the pockets of those driving the
domestic consumer dream; and B) a much better thought out use of funds once
they increase liquidity [ie. ROE positive/environment/populace assisting
projects], we estimate that this downturn should finish 100% of the move
started in June around October 9th with the SHCOMP at 2,416.
We’ll
see.
MCM
Partners Strategies for Volatile Markets
1.
Market Neutral: Long/short Quant model which
identifies stocks trading away from their established patterns, scaled by the
likeliness of a near-term reversal to established trends.
2.
Quantitative/Technical
analysis: A
systematic quantitative approach to technical analysis which uses a mix of
auto-optimized technical indicators to find reliable long and short trading
signals.
3.
China Going Private Monitor: research focusing on the trend
of US-listed Chinese companies “going private” (announced transactions with
measurable risk/reward profiles).
4.
Non-public
market transactions: private equity investments and direct private secondary
trades offering investors liquidity for otherwise illiquid positions, for
companies both in Asia and the US.
MCM
Partners’ Market Neutral, Quantitative/Technical, and China Going Private
research and performance are available for review, with performance tracking on
the Bloomberg Trade Ideas (TMSG) function. For inclusion into the network,
please contact Hank Terrebrood (+852 2210 0833 or hank.terrebrood@mcmpartners.com) or you MCM Partners’ sales representative.
A recap of this month’s performance is included below.
Name
|
Ticker
|
Return
|
Closed Trades
|
||
Baidu Inc - Spon Adr
|
BIDU US Equity
|
19%
|
Peak Sport Products Ltd
|
1968 HK Equity
|
-1%
|
Peak Sport Products Ltd
|
1968 HK Equity
|
-7%
|
Huaneng Renewables Corp-H
|
958 HK Equity
|
0%
|
Goldpac Group Ltd
|
3315 HK Equity
|
-8%
|
Truly International Holdings
|
732 HK Equity
|
21%
|
Fu Shou Yuan International
|
1448 HK Equity
|
7%
|
Smartone Telecommunications
|
315 HK Equity
|
-3%
|
Shun Tak Holdings Ltd
|
242 HK Equity
|
-7%
|
Nagacorp Ltd
|
3918 HK Equity
|
-14%
|
Greatview Aseptic Packaging
|
468 HK Equity
|
-16%
|
Greatview Aseptic Packaging
|
468 HK Equity
|
-18%
|
China High Speed Transmissio
|
658 HK Equity
|
-21%
|
Consun Pharmaceutical Group
|
1681 HK Equity
|
-10%
|
Stella International
|
1836 HK Equity
|
4%
|
Citic Telecom International
|
1883 HK Equity
|
-9%
|
China Dongxiang Group Co
|
3818 HK Equity
|
-11%
|
Sinotrans Limited-H
|
598 HK Equity
|
30%
|
Sa Sa International Hldgs
|
178 HK Equity
|
12%
|
Beijing North Star Co Ltd-H
|
588 HK Equity
|
27%
|
Powerlong Real Estate Holdin
|
1238 HK Equity
|
-11%
|
Open Trades
|
||
Market
Neutral Pair
|
Long 991 HK – Short 902 HK
|
0.7%
|
Market
Neutral Pair
|
Long 1910 HK – Short 669 HK
|
2.1%
|
Market
Neutral Pair
|
Long 1928 JT – Short 1925 JT
|
0.1%
|
Kongzhong
Corp-Adr
|
KZ US Equity
|
-12%
|
China
Nepstar Chain Drug-Adr
|
NPD US Equity
|
10%
|
Sungy
Mobile Ltd
|
GOMO US Equity
|
2%
|
Sungy Mobile Ltd
|
GOMO
US Equity
|
2%
|
Maoye International Hldgs
|
848
HK Equity
|
22%
|
Homeinns Hotel Group-Adr
|
HMIN
US Equity
|
-11%
|
Jd.Com Inc-Adr
|
JD
US Equity
|
-22%
|
E-Commerce China-Spon Adr -A
|
DANG
US Equity
|
-10%
|
Zoomlion Heavy Industry - H
|
1157
HK Equity
|
24%
|
Summit Ascent Holdings Ltd
|
102
HK Equity
|
22%
|
Idreamsky Technology Co-Adr
|
DSKY
US Equity
|
-8%
|
Bona Film Group Ltd-Spon Adr
|
BONA
US Equity
|
1%
|
Xueda Education Gr-Spon Adr
|
XUE
US Equity
|
5%
|
Xueda Education Gr-Spon Adr
|
XUE
US Equity
|
5%
|
China Cord Blood Corp
|
CO
US Equity
|
19%
|
Renren Inc-Adr
|
RENN
US Equity
|
-8%
|
Xueda Education Gr-Spon Adr
|
XUE
US Equity
|
2%
|
China Cord Blood Corp
|
CO
US Equity
|
12%
|
21Vianet Group Inc-Adr
|
VNET
US Equity
|
-11%
|
Sany Heavy Equipment Intl
|
631
HK Equity
|
6%
|
Ctrip.Com International-Adr
|
CTRP
US Equity
|
-8%
|
Momo Inc-Spon Adr
|
MOMO
US Equity
|
-24%
|
Wuxi
Pharmatech Cayman-Adr
|
WX US Equity
|
-3%
|
Country
Style Cooki-Spon Adr
|
CCSC US Equity
|
-4%
|
Vimicro
International Co-Adr
|
VIMC US Equity
|
-4%
|
MCM
Partners’ Non-public market transactions continue to gain momentum as investors
in prominent private companies are searching for liquidity while the outlook
for the global market becomes increasingly complex. Investors from both inside
China and abroad are also showing interest in investment opportunities with
pre-IPO growth companies, and interest is particularly strong for innovative
transportation, e-commerce, and O2O businesses.
One
reason underpinning the growth of these transactions is clearly volatility in
global markets, which impacts the ability and willingness of companies to tap
IPO markets for growth capital.
The
range of investor profiles interested in non-public market transactions is as
diverse as the opportunity landscape. MCM Partners’ network of contacts
includes hedge funds, mutual funds, and venture capital investors, all of which
are actively exploring, and transacting in, non-public capital market
transactions.
For
further discussion about MCM Partners’ capabilities in this area, please
contact your MCM Partners sales representative.
Research
review from this month:
§ Going-private
China – Spreads widen on volatility, slumping A-shares
§ Desk
commentary - PBOC cuts RRR, rates...so what?
§ China:
the pain isn't over
§ Going
private update - spreads widening while deals make progress
§ China
flash manufacturing PMI skids lower, HK & China stocks to follow
§ Vimicro
(VIMC) going private? How likely is it?
§ SmarTone
Telecom/0315.HK SELL: trend breakdown, lackluster biz dev't
§ KongZhong
(KZ) Q2 FY2015 results disappoint
§ Country
Style Cooking (CCSC) going private? BUY
§ Shun
Tak/0242.HK is a good bet on technicals and fundamentals
§ Going
private update - spreads widen on RMB, but progress continues
§ China
retail sales decent, but e-commerce not
§ China
data today - new loans, M2, and a weaker RMB
§ Ctrip.com
(CTRP) reiterating BUY on a strong chart, positive outlook
§ China
Mobile Games and Ent. (CMGE) - a done deal
§ Pax
Global/0327.HK -23% in two days: you're doing it wrong!
§ NetEase
(NTES) BUY this gamer on a strong chart, positive outlook
§ China
Shipping - in search of a miracle cure
§ China
PPI July -5.4% YoY; getting worse more quickly
§ Sinotrans/0598.HK
SHORT this slow boat to nowhere
§ Sany
Heavy/0631.HK SHORT on Technicals, RV
§ China
CPI +1.6% in July, but ex-food much weaker
§ 58.com
takes control of Leftbrain, adds auto portal
§ China
Cord Blood (CO) - competitive bidding coming?
§ Technicals
look good, BUY Stella International/1836.HK
§ Going-private
China – activity continues, spreads narrow
§ Citic
Telecom/1883.HK BUY on long-term uptrend continuing
§ Final
Caixin/Markit PMI for July 2015 47.8 vs. 49.4 in June
§
New home prices continue to rise in July across
China
Our
research above is available on Bloomberg, ThomsonReuters, S&P Capital IQ,
Factset, and SeedAlpha. Alternatively, please get in touch if you’d like to be
on the distribution list.
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