China and Hong Kong Equities

Northbound Trading

  • May recorded a net outflow totalling 53.7 Billion RMB (7.78 Billion USD) from Northbound trading, almost three times as much the 18.0 Billion outflow in April (which was already a 28-month high as of last month)
  • In the month of 18 trading days, only 2 days closed with net buying which amounted to 11% only of the tradeable days
  • The accelerating outflow is a direct consequence of the escalating trade tensions which was set off by the new round of tariff on US$200 billion of Chinese goods imposed by the US since 12-May-2019.
  • US Commerce Department has also put 5G developer Huawei on an “Entity List” based on national security reasons and restricted US chipmakers in the names of Qualcomm and Xilinx from supplying component to the Chinese Telcom equipment producer.
  • Surveillance technology giants like Hikvision Digital and Dahua Technology have also been impacted in a similar way as the ban on US component supply rippled across the 5G space.
  • Many speculated China will adopt a series of retaliatory measures including restricting rare earth exports to the US, similar tariffs on further American imports and “cheaper” fixing for offshore Yuan against the Dollar
  • However, in contrast to the recent pessimism over the US-China trade front, some still believe the China A-shares’ growing inclusion in MSCI indexes will support valuation over the longer term and thus inflow into the China stocks will return.
Northbound Top 10 Names

Southbound Trading

  • Southbound trading recorded a net inflow of 23.0 Billion HKD (2.93 Billion USD) in May from mainland traders as money sought exodus from China amidst worsening trade tension
  • Among the 19 trading days in May, only 4 days are recorded with net sell from Chinese capital despite souring global sentiment was at play on multiple ends
  • Hang Seng Index skidded 10% in the month of May alone but still managed to stand at 4% gain YTD. The index broke below the 27,000 key level on the last trading day of the month, which was also below the 61.8% Fibonacci retracement at 27,442 measuring the rally between Jan to Apr.
  • Mainland Financials, in the likes of CCB, ICBC and Ping An, are often favored by China buyers at times of uncertainty and when equities are entering correction phase
  • With the Dollar against Offshore Yuan treading significantly higher (6.93 in May compared to 6.75 range in Apr), this gave China traders the more reason to turn to Hong Kong equities for a similar exposure in China SOEs in a relatively more stable currency
  • As cold war in technology sector took stage starting from the supply ban to Huawei, major 5G players in ZTE and China Tower took a significant toll and tanked 24% and 16% lower in the month.
Southbound Top 10 Names

HK May IPO recap

  • Mabpharm (2181) shares fell as much as 19% and closed at 1.21 on its listing debut. The IPO was priced at HK$1.50 which was at the lower end of offering range but still failed to draw market interests on an already dismal sentiment in equity space. Product pipeline has yet to gain recognition from investors which is the main reason for the thin turnover to date.
  • Frontage Holding (1521) – a biotech company offering clinical trials and medical writing services to customers in Hong Kong. Shares jumped as high as HK$3.78, 18% above its IPO price, on the first trading day. Market demand is generally stable with valuation in the higher range in relative terms.
  • Xinyi Energy (3868) – Company runs renewable energy projects involving building and maintenance of solar plant and photovoltaic transformation systems. With the first batch of grid-parity renewable projects being announced by the state, the company’s near-term revenue and profit should be sustainable until 2021 period.
  • Pujiang International (2060) – Company is a supplier of infrastructure construction materials in particularly for bridges and highways. Shares gained 1.12% on first trading with market turnover growing on steady pace in the following days. IPO was priced at the lower range due to undersubscription and all remaining shares were re-allocated to international tranche.
  • Mulsanne Group Holdings (1817) – previously known as Alpha Smart, which is the parent company of Chinese menswear retailer GXG, raised around US$111M in its IPO. L Catterton, LVMH’s investment arm owns a majority stake in the company along with another PE firm. Shares have been trading flat to IPO price 4.39 after covering from 4.29 low on second trading day.
  • Medialink Group (2230) – A media content distributor running licensing business worldwide has its share price cut almost by half from IPO level. Price shed by 31% on its first trading day alone as analysts are sceptical about the sustainability of its licensing business and a shift of industry dynamic may impact future growth. Shares became the worst performing IPO of the month.
  • Universal Star Holdings (2346) – Company offers mining and refining of earth minerals and is the best IPO performer in this month. Miners of rare earth minerals became hot attractions on the market as China stepped up their effort in overseeing the mining process and the export of precious minerals in times of intensifying relationship with the US.
  • Sai Leisure Group (1832) – Hotels and resort operator which also provides travel support and services for the retail. The company’s main exposure is in Saipan and Guam where it runs 4 hotels along with individual improvement plans under pipeline to boost future revenue in the medium term. Shares is currently trading 10% below its IPO range.
  • JBB Builders International (1903) is a specialist in reclamation, marine constructions, building and infrastructure services. Shares have been trading stably at 1.25 above its IPO price of 1.18, which represent a solid 5.93% gain from listing.
  • Viva Biotech Holdings (1873) runs a drug discovery platform and provides target protein expression, structure researching, hit screening and dug candidate determination among other services. IPO was priced at the top end with substantial oversubscription. The company also generates a portion of its earnings from its venture investment business which could unfold into an uncertain factor over the longer term.
  • China Everbright Water Ltd (1857) provides integrated water environmental solutions to clients in Shenzhen, Singapore and Hong Kong. Shares has been trading down by 30% with market interests struggling to keep up the average daily volume of the first 2 weeks. Company has dual listing shares in Singapore exchange.
  • Duiba Group (1753) is an advertising platform operator leveraging on big data analysis, platform user operations management and mobile advertising in the Greater China region. While the advertising company’s shares managed to close near its IPO price of HK$ 6 in the first 2 weeks of trading, shares thereafter are struggling to garner market demand which is reflected in the progressively diminishing turnover in the last 2 weeks of May.

HK Jun IPO Outlook

  • 10 candidates are under the HK IPO pipeline in Jun 2019. 4 of the to-be-listed companies are domiciled in Mainland China running businesses among Education, Tobacco, Shipping and Logistic sectors.
  • ESR Cayman is a company pending IPO with global exposures and popularity among real estate investment space.
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