Stocks had a poor run over the week, but for Monday when the benchmark index touched an eight month high. Stocks gained following the prospect of an increase in the pace of reform in state owned enterprises. However, the Shanghai Composite declined over the rest of the week.
On Tuesday, the HSBC manufacturing PMI posted a record low, triggering losses for stocks. Financial and energy stocks led losses on Wednesday, dragging stocks down to their lowest level in a month. Losses from financial and energy companies led to a decline in the benchmark on Thursday. Among the positives, YY Inc (NASDAQ:YY) posted earnings which beat estimates. Additionally, China Life Insurance (NYSE:LFC) is set to acquire a stake in TPG Capital.
Last Week’s Developments
Stocks declined on Friday pushing the Shanghai Composite to its lowest level in three weeks. The major cause for these losses was a global selloff which negated an increase in factory orders. The final reading of the HSBC PMI revealed that the index had increased to 51.7, its highest level in eighteen months.
However a credit default by Argentina and dismal corporate earnings led to a 1.5% decline in the MSCI All-Country World Index. These developments negated a series of promising economic reports over the week. The benchmark index lost 0.7%, cutting its weekly gains to 2.8%. The CSI 300 declined 0.9% while its sub-indexes of material, tech and financial stocks lost in excess of 1.3%. The Hang Seng China Enterprises Index moved down1.3%.
Markets and the Economy This Week
The Shanghai Composite Index gained 1.7% to touch an eight-month high on Monday. Commodity and financial stocks were the major gainers following speculation that the government was speeding up reforms of state-owned companies. There were also indications that it was loosening regulations for brokerages which would free capital, enabling expansion. Meanwhile, the official non-manufacturing PMI declined from 55 in June to 54.2 The CSI 300 gained 2% while the Hang Seng China Enterprises Index advanced 1%, recovering from its largest decline in three weeks.
However, the benchmark index declined on Tuesday, after the HSBC services PMI fell to a record low. Additionally, the nation’s largest listed developer reported a decline in sales. The HSBC services PMI for July was recorded at 50, its lowest ever level, following a reading of 53.1 in June. Analysts believe that the decline in PMI is also an indication of the slump in the property market. A sub index of property developers within the Shanghai Composite lost 0.8%. The CSI 300 lost 0.3% while the ChiNext gained 2.3%. The Hang Seng China Enterprises Index lost 0.7% following the day’s developments.
Financial and energy stocks posted losses on Wednesday, sending stocks down to their lowest level in a month. Speculation that the Shanghai Composite’s recent gains were excessive compared to upcoming earnings led to such losses. The benchmark index declined for a second successive day, moving down 0.1%. The CSI 300 lost 0.3% with a sub index of financial shares, which includes developers, declining 0.9%, the most among the industry groups.
The Hang Seng China Enterprises Index moved down 0.3%. Analysts believe some profit taking is occurring as the benchmark has made excessive gains recently. This is a result of monetary and fiscal measures and a revival in manufacturing, leading to speculation that the nation would meet its growth target for the year.
The Shanghai Composite Index declined 1.3% on Thursday, the most in six weeks as energy and financial companies took losses. Fears that recent gains were too high compared to prospects of growth triggered the decline. Sub indices of consumer staples and energy stocks within the CSI 300 each lost 1.9%. The CSI 300 itself lost 1.3%.
Market watchers were of the view that the recent rally was not a sustainable one. Even though the long term outlook remains positive, they were of the opinion that some profit taking would happen over the month. The Hang Seng declined to a near two week low, losing 0.8%, due to losses made by gaming shares and Tencent Holdings. The Hang Seng China Enterprises Index declined 0.9%.
Stocks in the News
YY Inc. reported diluted earnings of 60 cents per ADS for the second quarter of 2014, exceeding the Zacks Consensus Estimate of diluted earnings of 48 cents per ADS. Diluted non-GAAP earnings per share during the second quarter came in at 70 cents, 102.8% higher than the figure recorded in the year-ago period.
YY Inc. reported revenues of $135.6 million during the quarter, an improvement of 105.6% from the corresponding quarter last year. This was primarily attributable to a 118.3% rise in revenues from internet value added services (IVAS).
However, gross margin declined to 49.5% during the period comparing to 53.3% in the corresponding quarter in 2013. The decline occurred because a major share of revenues was attributable to online music and entertainment. This is turn led to an increase in content costs and revenue-sharing fees.
China Life Insurance Co. Ltd.will acquire a $250 million stake in private equity company TPG Capital according to The Wall Street Journal. Following the conclusion of the deal, China Life will acquire an ownership stake of 2-5% in TPG and become a general partner of the company.
Incidentally, news of the deal comes as TPG prepares to raise $10 billion for a new global fund for corporate takeovers. It will also add to the permanent capital of the company, which already manages around $60 billion. The deal is of particular importance, as TPG is currently deciding whether or not to float an IPO.
China Mobile Ltd (NYSE:CHL) has held discussions regarding the purchase of a minority stake in Axiata Group. This company is the largest wireless carrier in Malaysia in terms of market value. China Mobile expressed its desire to purchase 20% of the Malaysian carrier. The stake would be valued at $3.7 billion based on Tuesday’s closing price.
However, no agreement could be reached as the carrier and Khazanah Nasional Bhd, its largest shareholder did not agree to sell a stake of that size. This is because they felt that the price offered was not sufficiently high. Analysts believe that China Mobile may have to pay a higher price, since the Malaysian carrier does not need a strategic investor at this time. If concluded, the $3.7 billion deal would be China Mobile’s largest foreign acquisition and the largest telecom deal since 2007 in South East Asia.
Yingli Green Energy Holding (NYSE:YGE) will develop solar projects to generate 30MW in Poland in conjunction with AMB Energia Wytwarzanie. Per the agreement, AMB Energia will be the local partner and develop the facilities with “the strongest support from Yingli throughout all project stages.”
Manuel Seiffe, Yingli’s International head of project business said: "In this strategic alliance, the partners will jointly work on a diversified project portfolio to be ready for inclusion into the auction system in 2015.”
“As a leading developer in Poland, AMB Energia will engage in all stages of the development phases of the solar PV projects. This partnership will furthermore enhance our strong position in the project business as well as in the Polish market,” Seiffe added.
Ctripcom International Ltd (NASDAQ:CTRP) reported diluted earnings of 14 cents per ADS for the second quarter of 2014, exceeding the Zacks Consensus Estimate of diluted earnings of 12 cents per ADS. Diluted earnings per ADS, excluding non-GAAP share based compensation charges were 26 cents per ADS during the quarter.
Ctrip reported revenue of $278 million during the second quarter, which were also higher than the Zacks Consensus Estimate of $270 million. Quarterly revenue increased 38% on a year-over-year basis.
The travel service provider’s accommodation reservation revenues increased 47% year-over-year to $121 million. Transportation ticketing revenues expanded 39% year-over-year to touch $117 million. Additionally, gross margin during the second quarter was 72%, in line with first quarter of 2014. However, it was lower than the figure of 75% in the same quarter last year.
Performance of Most Actively Traded US-listed Chinese Stocks
The table given below shows the price movements of 10 Chinese companies with the highest three-month average trading volume on U.S. exchanges. Price movements over the last five days and during the last six months have been included.
Next Week’s Outlook:
After a series of good weeks, markets are witnessing significant reverses. Investors were probably waiting for the rally to end before indulging in profit taking. This has been compounded by some negative economic data. Such reports were having little impact until Monday, but have become an import factor after Tuesday.
A series of economic reports are due next week which will indicate whether the economy has the ability to achieve its 7.5% growth target. Trade data is due first, followed by reports on inflation, industrial production, retail sales and fixed asset investment. If the majority of these are positive in nature, they could add strength to the markets in the weeks ahead.