Alibaba Prepares For PCAOB Audit Review, MSCI Rebalance Day Leads To High Volumes

Yesterday, U.S. China ADRs fell partly due to a Reuters article stating that Alibaba and JD.com will have PCAOB audit reviews. The “news,” which should be expected based on the size of the companies, led to an absurd sell-off. We would remind investors of Alibaba’s CFO statement back in 2020. Bring on the audit review!

….Alibaba’s financial statements are prepared in accordance with U.S. GAAP, and since our inception in 1999, we have been audited by PwC Hong Kong, PwC Hong Kong is the local affiliate of the worldwide PWC firm, and its auditing standards are overseen by the PwC national office in the United States. The integrity of Alibaba’s financial statements speaks for itself. We have been an SEC filer since 2014 and hold ourselves to the high standards of transparency. Each year we have received — and qualified by the opinion of our financial statements from PwC.

Alibaba Earnings Conference Call on May 20, 2020 – Maggie Wu, Chief Financial Officer & Head of Strategic Investments.

Key News

Asian equity markets were mixed on heavy volume driven by MSCI’s Quarterly Index Review and month-end rebalancing while India and Malaysia were on holiday. Hong Kong volumes jumped +42% yesterday as the world’s asset managers rebalance their index/passive portfolios globally at market closes. Hong Kong internet stocks had a decent day despite yesterday’s US ADR sell-off. Baidu (BIDU US, 9988 HK) fell -3.28% versus -6.54% in the U.S. yesterday despite financial results that beat analyst expectations. Some chatter management’s conservative Q3 outlook was the culprit, but I’ve given up trying to explain moves like yesterday. Hong Kong shorts increased their bets as short sale turnover increased 26% from yesterday to 128% of the 1-year average. JD.com HK saw its short volume increase to 50% of total turnover while Meituan had 32% of volume short, Tencent 22%, and Alibaba 22%. These short volumes should start becoming a P.R. problem for the HK Stock Exchange. To their credit, the Hong Kong Exchange provides more short volume transparency than any exchange globally. BYD (1211 HK) lost -7.91% on news that Berkshire Hathaway trimmed its stake to 218.7mm shares from 220mm.

The Mainland market reacted negatively to last night’s release of the “official” August Manufacturing PMI of 49.4 versus expectations of 49.2 and July 49 though the Non-Manufacturing PMI beat expectations of 52.3 and July’s 53.8 with 52.6. The latter could be a good indication that Chinese consumers are coming around.

After the close, Premier Li had a press conference reiterating the government’s support for the economy. In addition to strong inflows from foreign investors overnight at a healthy $1.145B via Northbound Stock Connect, several mega-cap companies with large index weights had a decent day. These names tend to be favorites of big domestic institutional investors affiliated with the government, like the Social Security Fund. The “National Team” tends to buy low when they see opportunities. Yesterday’s news on the Party Congress occurring mid-October could see Covid measures eased. In the meantime, Coivd is running rampant in China and Hong Kong. though restrictions are not as severe as Shanghai’s lockdown.

The Hang Seng and Hang Seng Tech gained +0.03% and +1.09% on volume +42% from yesterday, which is 104% of the 1-year average. 246 stocks advanced while 216 declined. Hong Kong short sale turnover increased 27%, which is 128% of the 1-year average, as short sale turnover accounted for 20% of total turnover. Growth and value factors were mixed as small caps “outperformed” large caps, i.e., fell less. Top sectors were tech +0.98%, healthcare +0.87% and real estate +0.85% while energy -1.73%, industrials -0.76% and materials -0.62%. The top sub-sectors were Tik Tok-related, online education, and property management companies, while E.V., battery, lithium, and auto were among the worst. Southbound Stock Connect volumes were light/moderate as Mainland investors sold -$150mm of Hong Kong stocks, with Tencent buying light, Meituan buying moderate, and Li Auto buying light.

Shanghai, Shenzhen, and STAR Board fell -0.78%, -1.95%, and -1.96% on volume +19.92% from yesterday, 96% of the 1-year average. Only 763 stocks advanced, while 3,816 stocks declined. Value factors outperformed growth factors as large caps outperformed small caps. Top sectors were staples +1.6%, financials +1.58%, healthcare +1.46% and real estate +1.44% while industrials -2.47%, energy-2.17% and materials -2.08%. Top sub-sectors were drug manufacturers (CROs), insurance, food, and beverages, including liquor, while solar, E.V., and wind were among the worst. Northbound Stock Connect volumes were strong as foreign investors bought $1.145B of Mainland stocks. Treasury bond prices eased as CNY gained +0.23% versus the U.S. $ and copper fell -0.69%.

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.90 versus 6.90 yesterday
• CNY/EUR 6.89 versus 6.92 yesterday
• Yield on 10-Year Government Bond 2.62% versus 2.61% yesterday
• Yield on 10-Year China Development Bank Bond 2.81% versus 2.80% yesterday
• Copper Price -0.69% overnight