Sept 11FT Thoughts China vs Taiwan, India, Inner Mongolia.. NongFu Water or Yum China and more


15 Sep

Sept 11FT Thoughts  China vs Taiwan, India, Inner Mongolia.. NongFu Water or Yum China and more

MARKETs @ 1:30 HK time
JAPAN opened lower but the pre Market data BSI Large Manufacturing and PPI data beat forecasts. The market has worked higher and is  currently +0.6%  day high.
S KOREA Kosdaq opened lower but initial rallied into the green only to sell down into the red and day low/support (878) before trading sideways in a tight range currently -0.3% Kospi opened lower, initially rallied but failed to break above Thursdays close and trended lower through the morning to 2,374 before seeing support. Now working higher currently -0.6%.
TAIWAN opened higher but failed to hold above yesterday close in choppy trading. Around 10:45am tried to break above again but failed and sold down to 12,620 level before finding support, then traded sideways for an hour having rested the support now working higher; currently -0.4% Good earnings limiting the downside.
CHINA opened lowered traded sidewise in choppy trading, spent much of the morning in the green but sold down into lunch at around the opening level. PM opened higher and rallied to 4,600 but failed to bread above. Currently +0.4%
HONG KONG Opened higher vs -67pts ADR’s and worked higher in the first hour with resistance at 24,450. Eased back into lunch. After lunch rallied back to retest the 24,450 resistance; currently +0.6%
EUROPE I would expect the markets to open lower ahead of Eurogroup and EcoFin Meetings. Data today German Inflation Rate and UK Balance of Trade, Construction Output, Industrial Production, Manufacturing Production, GDP, Goods Trade Balance, NIESR Monthly GDP Tracker
US Futures opened higher +76pts and rose through the morning to +131pts with S&P and NDX +VE too. Data due Inflation Rate, Core Inflation Rate, WASDE Report, Baker Hughes Total Oil Rig Count, Monthly Budget Statement.

Taiwan warns China over incursions Taipei fears PLA military drills in buffer zone signal threat to regional peace. Taiwan says that the large scale exercises are a “severe provocation” and marks a ratcheting up of pressure. In its view the PLA is trying to create a new status quo so that it can regularly operate in the area. Whilst the exercises are in international waters they are on the Taiwanese side of the median line. Which implies that China is no longer adhering to the previously respected agreement. Some say that the PLA is trying to collect electronic signals intelligence. That to me would suggest a significant increase in the threat. The sort of thing one would do prior to an attack. It shouldn’t be just Taiwan warning China. Taiwan’s leadership in semiconductors is important to the many countries and especially the US. The risk of losing those facilities and technology should mean that more countries support Taiwan at this time. The world risks that China will take the lack of support for Taiwan as an endorsement that its current actions are acceptable.

India and China meet over border clashes. Foreign ministers were due to meet in Moscow yesterday, which no doubt is a bit of a snub to Trump who said he’d be willing to help. No news of the outcome but marks the seriousness of the situation. The article suggests that without an agreement the situation is likely to escalate. The article notes the risk that the two sides stumble into a war.

Authorities crush Inner Mongolia protests. Warnings to parents and public manhunts end rallies on teaching in local language. Reports that there has been 'a public manhunt and the threat of parents being fired from their jobs quashed protests against curbs on local-language teaching.’
It further notes 'Under President Xi Jinping, China’s established system of “preferential policies” pledging marginal autonomy for ethnic minorities is being stripped away. Instead, more assertive policies inspired by thinkers who support a unified, singular and Han-Chinese dominated “state-race” are being adopted in an effort to assimilate ethnic minorities.’
Obviously the hope is that by ’teaching’ the children they will be more amenable to Beijing. Many people seem to still be ignoring the government directive and keeping their kids at home.
It is sad reflection on China’s communism when the party has to resort to force and threats to coerce its citizens to do what the party says is in the peoples best interest.
The moves will also add to the concerns for Hong Kong. Already schools are having textbooks and teaching materials ‘reviewed’. There is also the matter of President Xi’s own daughter being educated in the US and who is now rumoured to be living there in preference to living in China.

TikTok’s hopes for a white knight fade as Delhi hardens stance. Reports that hopes of a white knight from within India for its Indian operation are fading as political tensions between India and China rise. It notes that TikTok’s operations in India are more established than in the US and yet interest is minimal. I think that reflects that the US groups are more aware of the potential use of TikTok’s algorithm into other areas.
In India the obvious potential candidate would be Jio but that has built a very nationalistic narrative and so rules it out from stepping in. Jio also has links to Facebook which has launched its own TikTok versions and hence the move to keep a competitor going would be seen as perverse. But interestingly the Indian press keep reporting that Jio is interested; which is strange but has the effect of discouraging others.
The other key issue is monetisation of TikTok Indian has been difficult adding another negative. It also notes that since the ban competitors have been looking to fill the vacuum and poach TikTok’s stars. 'Unlike one of its short videos, there will be no quick fixes for TikTok.'

China tycoon sets out to quench investor thirst. Nongfu Spring IPO sees Zhong join ranks of multibillionaires but backers will demand success beyond bottled water.
Looks at how the company will now face shareholder pressure to grow its business. It has built a very successful brand in the very competitive water business and now will be under pressure to maybe push into other drinks areas. Part of the success in the water sector is the high margins they achieve and those who sell its products do too, which explains its local dominance. Part of those margins must also come down to cheaper costs as it uses natural water not purified. To me that will be fine until there is some contamination which must be arise in China. People are buying bottled water because they don’t trust tap water. It’s hardly a luxury and pitched at a low price point but it is something that those aspiring to join the new middle class in China are prepared to pay for. Key now is breaking into the even more competitive higher price drinks where it may not enjoy the same cost advantages but will probably maintain its generous revenue sharing models to ensure its distributors continue to push its products. The article notes that 'The successful launch of sugar-free tea drinks lifted its market share to 17 per cent in 2018 from less than 2 per cent just a few years ago. Yet its performance in the juice market has been less successful, with its share remaining well below industry leaders.’ It is also looking at other products from instant coffee to soybean yoghurt. Repeating its success in low priced water into higher priced items without the cost advantages will be the crucial test. Shares were trading -1.8% at HK$35.25 going into the lunch break)

Retail options craze fuelled SoftBank’s ‘whale’ trade. Millions of smaller investors form ‘mighty legion’ with more heft than the giant institutions. Questions whether it was just Softbank’s derivative action pushing the Nasdaq higher or whether it was just part of the story with the much of the lifting being done by a 'massive shoal of much smaller but frenzied fish — retail investors.’
The reality is that it was a combination of both. Retail momentum traders following the trend set by the ‘whale’ and also buying call options. These appeal to retail investors because they cost less than actually buying the underlying. It also notes that once a dealer has sold a call option they tend to hedge themselves by buying the underlying which again pushes the markets higher. The fact that it was concentrated into a small number of stocks which dominated the index would also have amplified impact.
The duration of the options also plays a part too.
The key questions from here are whether the Nadaq sell down continues and what the whale and the shoals of other investors do next.
The longer question is whether the regulators get involved. Softbank currently +0.8%


Investors lose appetite for Yum China as shares drop 6% on ‘homecoming’ debut. Not as popular as Nongfu. Concerns about its ability to expand significantly being cited. It's been operating in China for 30 years after all and already has 9,000 outlets. Key being that whilst it can increase volumes it may not be able to increase profit margins. Some just put it down to unfortunate timing, although considering the success of Nognfu Water that seems unlikely.
I still think that it's likely to be successful. Short term because it intends to use to money to double its footprint. Today that may mean even more units as the rents are going to be lower than they were six months ago and the potential to acquire better locations will have improved too. Covid will have killed off a lot of ‘local’ competitors too. Also being a recognised chain and with hygiene now being more important to a lot of Chinese consumers it will see added appeal especially in some of the more provincial cities.
The short term problem that it faces is that the business model still basically revolves around cramming people into a restaurant.
Yum China was -4.8% at lunchtime today

Hong Kong police detain suspects over Next Digital price surge. Looks at the arrest of 15 people in connection with the price surge after the arrest of Jimmy Lai. The police held a briefing on the matter yesterday and suggested that the group have colluded on social media to use the stock higher. Seems they used the tried and tested method of putting in false trades and cancelling them before they were executed to drive the price higher. The police declined to say if they had been in contact with the SFC over the matter and the SFC didn’t comment either. The fact that the shares have continued to trade would suggest that the SFC couldn’t find evidence of manipulation from the trading side. Hence the police investigation and collusion evidence.

Buffett shows the way for money managers into overlooked Japan. Another look at Buffets foray into the Japanese markets. Notes that with Jefferies and CLSA both having large virtual Asia investment conferences in the next few weeks there are going be a lot of pitches of more money into Japan now.
It does question why the trading houses since only one of them has a five year return on equity that is higher than its cost of equity. Although he did mention looking for mutual trading opportunities. Buffet has also funded the venture well by issuing Yen denominated bonds over the past years that carry a weighted average interest rate of 0.67%.
So whether brokers can convince other to follow Buffet’s lead will remain to be seen.
'As Masatoshi Kikuchi, strategist at Mizuho, notes, by one simple valuation ratio — the Topix divided by the S&P 500 — Japanese stocks are at their cheapest levels in years. US equities account for nearly 60 per cent of the MSCI World index while Japanese stocks make up only 6.5 per cent.
Berkshire’s move could be presented as a reminder that no global money manager should pass by the real treasures in Japan’s curiosity shop — such as the solidly managed, cash-rich companies in robotics, factory automation and specialty chemicals that are dominant in their sectors — and a long, long way from Wall Street.’

For Interest
FT BIG READ. INVESTING. Covid-19 sparks dividend drought

Financial support from government and central banks has helped save struggling businesses from ruin during the crisis. It has also made it more difficult for them to keep handing money back to shareholders.
Well worth a read.

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