Guru Technical Research

Guru Technical Research
Powered by Blogger.

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
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.