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Macro Dragon Reflections: Divergence in China Tech Names, WB +47% YTD vs. range of -6% to -18% to -27% on Tencent, JD.Com & DiDi
Summary: Latest Macro Dragon Reflections, checks in on the divergence in the China Tech space that seems to be getting headwinds from all parts of the globe. It highlights the short squeeze an incredible sector outperformance on Weibo $60.03, +47% YTD, in some case that relative outperformance being as high as +65% as the rest of the space is firmly in the red YTD. This includes recently listed DiDi $12.03 which is -14% from the IPO strike of $14.00.
Macro Dragon Reflections: Divergence in China Tech Names, WB +47% YTD vs. range of -6% to -18% to -27% on Tencent, JD.Com & DiDi
(These are solely the views & opinions of KVP, & do not constitute any trade or investment recommendations. By the time you synthesize this, things may have changed.)Reflections…
- TGIF from the Asia Pacific & what a bloody week we seem to be ending on, if you have been an equity bull, bond bear & likely whatever direction you had on the dollar.
- Tuning back into China tech which we have covered a number of times including:
- Macro Dragon WK #28: RBA, ISM Serv. FOMC mins, China Tech (DiDi)…
- Didi shares indicated down 20% on Chinese regulatory crackdown
- The overall bloodletting in the space seems linked to DiDi ll-strategized US listing, the name is now down -14% from its $14 strike IPO price & down -33% from its ATH $18.01 lvl
- Where investors are concerned that there is going to be further waves of crackdown on China tech names which was regulatory headwind that was until recently expected to be behind the space given the talks that Beijing had with the likes of Tencent & Alibaba earlier on in the 1st half of the year.
- On just last 2 wk alone alone the names are down anything from -14% to -6% whether you are talking DiDi, Tencent, Baidu, Alibaba or JD.Com. What makes this even more interesting is that Weibo is up c. +14% over the same period, +24% over the last month & +47% YTD. A clear outperformer to the upside, on a space that has seen prices continue to cave in.
- For context, Tencent & JD.Com are down -6% & -18% YTD… the outperformance of Weibo is at +53% & +65% respectively & likely has less to do with a superior business model (my equity folks say there is nothing exciting here, company is past its prime), & more to do with rumors of privatization (later denied by Weibo company representatives) that sparked a short squeeze over the last few days.
- For context, the avg daily volume of Weibo is 1.5M, on Tue & Wed the stock did 14.4x & 4.4x of this. On Wed it came in at 1.6M pretty much bang in-line with the avg. Before finally closing last wk on Fri at about 2/3 of daily average volume. So if the Macro Dragon 'Weibo squeeze' thesis is correct, we could see the floor disappear under Weibo’s stock price over the next 1-2wks with the ‘easy’ move potentially being to sub $50 from a Friday close of $60.03.
- Note the epic spike in volume, then subsequent petering away after each successive day – there was something like +13x days of short-interest coverage in the name.
- And note the recent 'gap up' on Mon Jun 6, from c. $54 to $59, which is likely to close over the next 1-2wks. The overall move higher seems to have started from $49.16 on the 23 of Jun.
- The chart below shows once the outperformance of Weibo vs. it peers, +22.1% vs. Tencent [700 HK] at -6.1%, or Alibaba [BABA] at -2.5%... in other words a c. +28% & +25% outperformance in c. 13days
- If we look at a chart standardizing the YTD performance below, we see the outperformance is even more extreme. i.e. +53% vs. Tencent [700 HK], +65% vs. JD.Com [9888 HK]
- Key risks to short side expression on Weibo are naturally that the speculative take-over rumors of Weibo – which were refuted by company representatives – somehow end up being true & its taken private at a higher price ($90-100 seemed to be want was indicated). And or the share price stays elevated up until the Aug 13 estimated earnings release where they have blow out numbers that take the stock higher or at the very least allows it to consolidate at these lvls.
- From the Macro Dragons perspective the 55 or 50 strike 20 Aug (40D) puts look interesting at a premium outlay of 1.85 and 0.80 respectively, yes the implied vol is high at 51.94 & 59.22 respectively vs. the 30D historical vol of 36.62… Yet the vol should be well supported if the shares tank. Likely outlay of 25-50bp of risk, so say $25K to $50K premium outlay in a $10M portfolio, with the thesis of potentially making at least +3x to 5x, or +$75K to 250K on that premium outlay.
- Naturally if the Dragon wanted to be short outright, then he’d likely only do so with either a $150K to $65K short position, factoring in for a potential squeeze ‘worst case’ scenario of the take over rumor's being true, in which case a move to $90 to $100 on the stock would have a loss of c. -$25K to -$50K (equivalent to the premiums discussed above).
- Relative value longs vs. short Weibo, could be as a basket or set as a Tencent or JD.Com on the long side.
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