PMIs Beat, Technology Leads Gains

Key News

Asian equities were mostly higher overnight as Hong Kong and Mainland China led gains in the region following the Memorial Day holiday in the US.

It was a good day for growth and technology stocks as stimulus expectations and a better-than-expected PMI release led investors back into some names. Baidu gained over +7% overnight after a positive earnings release on Thursday, discussed below.

Purchasing Managers Indexes (PMIs) are diffusion indexes, meaning that any reading above 50 indicates expansion while any reading below 50 indicates a contraction. While the May PMI release indicates a contraction year-over-year, the readings were above expectations and April’s dismal reading. We can attribute the continuing contraction to falling global demand for China’s exports as global stimulus fades and the better-than-expected reading to pessimism regarding lockdowns in China, which appear to be showing signs of easing.

Shanghai reported 30 COVID cases on Monday and none outside of quarantined areas. Meanwhile, Beijing reported 18 COVID cases. This represents the fewest cases reported in nearly three months. Shanghai will be lifting lockdown measures for residents in low-risk areas starting tomorrow.

In addition to the lockdown reprieve, Shanghai’s local government also announced a slew of stimulus measures including tax cuts, rent reductions, new funding for housing projects, and boosted financial support to foreign trade firms. All these measures will last until the end of the year, at least.

The Hong Kong Stock Exchange (HKEX) released further rules on ETFs’ access to Stock Connect. Hong Kong-listed ETFs must trade in RMB to be eligible for Northbound Stock Connect, which would allow them to trade Mainland-listed A shares. The reverse is true for Mainland-listed ETFs accessing Southbound Stock Connect, which would allow them to trade Hong Kong-listed stocks. The latter must trade on the Mainland in Hong Kong dollars. We believe access to Southbound Stock Connect for Mainland-listed ETFs may increase flows into Hong Kong-listed, China-based companies, which include many of the largest China internet companies, and even secondary listings as these ETFs will be able to trade secondary listings if they meet certain requirements.

Baidu Q1 Earnings Overview

• Revenue increased +1% year-over-year (YoY) to RMB 28.4 billion
• Net Income was RMB 2.7 billion
• Net Income Margin was 9.6%
• Earnings per Share (EPS) was RMB 11.22 versus estimate RMB 5.17

Baidu beat analyst estimates handily on a +35% increase in its non-advertising businesses as advertising was expected to be hit by lockdowns.

“Baidu delivered solid first quarter results, especially regarding our cloud and intelligent driving businesses. Baidu AI Cloud reported another quarter of strong revenue growth and Apollo Go was granted the first permit in China to provide driverless ride-hailing services on public roads in Beijing,” said Robin Li, Co-founder and CEO of Baidu. “Since mid-March, our business has been negatively impacted by the recent COVID-19 resurgence in China. Although challenges related to the virus continue to pressure our near-term business operations, we remain confident that our new AI businesses will boost the long-term growth of Baidu and contribute to China’s innovation-driven economy and sustainable development.”

The Hang Seng and Hang Seng TECH indexes closed higher by +1.38% and 3.02%, respectively, overnight, on volume that nearly doubled from yesterday. Growth stocks outpaced value stocks except for energy, oil, and gas.

Shanghai, Shenzhen, and the STAR Board all closed higher by 1.19%, 1.57%, and 3.37%, respectively, overnight, on volume that was +15% higher than yesterday. Growth stocks outpaced value stocks except for energy, oil, and gas.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.67 versus 6.66 yesterday
• CNY/EUR 7.13 versus 7.18 yesterday
• Yield on 1-Day Government Bond 1.23% versus 1.19% yesterday
• Yield on 10-Year Government Bond 2.74% versus 2.73% yesterday
• Yield on 10-Year China Development Bank Bond 2.98% versus 2.96% yesterday
• Copper Price -0.37% overnight