Alibaba Buys Back Big, Reuters Reports US-Listed Companies Preparing For PCAOB Review

Key News

Asian equities were largely higher despite the US’ Fed Chair driven downdraft led by Hong Kong, Japan and India. Alibaba (BABA US, 9988 HK) announced it would increase its buyback program from $15B to $25B, having already bought back 56.2mm shares for a $9.2B. This was a very deliberate sign from the company they believe their stock is inexpensive. As Deputy CFO Toby Xu stated: “Alibaba’s stock price does not fairly reflect the company’s value given our robust financial health and expansion plan.” Well said Toby! The company also announced that Borje Ekhold, President and CEO of Ericsson, will retire from his post as an independent advisor to the board and be replaced with Weijian Shan, executive chairman of the highly respected alternative asset manager PAG. The news lifted Alibaba HK by +11.2%.

This morning, Reuters is reporting that the CSRC has told several US-listed Chinese companies to prepare broader disclosures in anticipation of adhering to the PCAOB’s audit review. If true, this would a strong step in solving the HFCAA. It is very much aligned with our thinking that amongst the China ADRs, the private companies have nothing to hide and should be allowed to comply with the HFCAA. Let’s hope the story, attributed to “sources” is true! Yesterday’s post China close statement from the State Council reiterated support for the economy through “monetary policy tools” while avoiding “flood-style irrigation” i.e., targeted stimulus versus a broad interest rate cut.

Nike’s earning release lifted its supply chain and peers in the category. Last week I mentioned Evergrande had a bond due tomorrow which would require $2B of principal being paid back. Coincidence or not, the company suspended its Hong Kong stock and stated it isn’t able to report financial results. There are already reports of the company receiving support as real estate was an area of Vice Premier Liu He’s speech last week. Real estate was the top sector in the Mainland +3.69% while Hong Kong had a solid showing at +4.34%. Tencent Music Entertainment (TME US) financial results were inline while announcing they will follow Nio’s Hong Kong relisting plan by offering US ADR holders the ability to convert to a new Hong Kong share class.

The Hang Seng Index gained +3.15% while the HS Tech +5.37% led by internet stocks on volume -5.85% which is just 94% of the 1-year average. Advancers outpaced decliners 4 to 1. We would like to see an up move accompanied by strong volume as Hong Kong short selling turnover is well off last week’s highs. Alibaba’s Hong Kong share class made discretionary the best sector +8.09% while Tencent’s +4.19%. Tencent had small net buyers via Southbound Stock Connect while Meituan had a small net buy.

Shanghai, Shenzhen and STAR Board diverged +0.19%, -0.41% and -1.56% on volume -5.43% which is 91% of the 1-year average. Value sectors outperformed with real estate 3.69%, energy +3.15%, financials +1.2% and utilities +0.64% while tech was off -1.43% and healthcare took a breather -2.58%. Foreign investors were net sellers via Northbound Stock Connect to the tune of -$144mm. Treasury bonds were off, CNY was off a touch versus the US $ and copper was off -0.03%.

Hong Kong financial media noted that State Street Global Advisors could be replaced as the portfolio manager of the $14.119B Tracker Fund of Hong Kong (2800 HK) after twenty years in the role by Hang Seng Investment Management. The US asset manager ran into complications from the 2020 Executive Order which prevents US asset managers from holding several Hong Kong listed stocks which are in the Tracker’s underlying index the Hang Seng Index. The news reminded me of a great book called The Ugly Americans by Ben Mezrich about an American trader based in Japan doing index and futures arbitrage. The trader’s big gains came from understanding the Tracker’s inclusion of a new stock and subsequently a Nikkei index rebalance trade which led to spectacular gains and an early retirement. It is an entertaining read with an ETF twist!

Coincidentally I recently finished Angela Duckworth’s Grit: The Power of Passion and Perseverance. The book argues grit i.e., hard work when combined with passion and perseverance, are better indicators of success than talent. It is a good read that I enjoyed and hope to impart on my kids!

Last Night’s Exchange Rates, Prices, & Yields

• CNY/USD 6.36 versus 6.36 yesterday
• CNY/EUR 7.00 versus 7.01 yesterday
• Yield on 10-Year Government Bond 2.83% versus 2.81% yesterday
• Yield on 10-Year China Development Bank Bond 3.08% versus 3.06% yesterday
• Copper Price -0.03% overnight