Aug 11 FT HK Arrests, China hawks active, PLA and vaccines and more

13 Aug

Aug 11 FT HK Arrests, China hawks active, PLA and vaccines and more

MARKETs at 1:30 om HK time
JAPAN opened flat and trended lower through the morning. EcoWatchers data out at lunchtime time missed which may raise hopes of more stimulus. After lunch the market has worked higher Currently -0.4%
S KOREA Kosdaq opened flat and traded sideways initially but worked higher since midday currently +0.6% and the Kospi opened higher and continued to work higher currently +1.5% at 2,386 with the expectation that it will test 2,400 in the near future.
TAIWAN opened flat but initial rallied and then traded sideways after good earnings from TSMC, UMS and others currently +0.5%
CHINA opened lower and saw some initial selling, then worked higher buthit resistance at yesterdays closing level but broke above in thePM and worked higher but currently dipping Currently +0.3%
HONG KONG Opened higher and squeezed up 150pts in early trading then worked higher totes 25,000 around 10:30am but failed to break above and consolidated back to 24,900before working higher into lunch. PM after an initial dip it is testing 25,000 again currently +2.2%
EUROPE Expect a flat open with investors watching the Geman ZEW data and UK Unemployment data.
US Futures opened flat Data due today is NFIB Business Optimism Index, PPI, Core PPI, Redbook, API Curde Oil Stock Change. Earnings still in focus but news on a new stimulus package remains a key for market confidence.

EARNINGS today SoftBank, BioNTech, Sysco, Casper Sleep, Canada Goose, Super Micro, Viavi Solutions, Vir Biotechnology.

Beijing strikes back against US curbs with sanctions on senators. Beijing’s response was like for like in terms of sanctions although it didn’t give details about what the sanctions were.
But yesterday also saw the arrest of a number of people under the new security law with Jimmy Lai being one of the most high profile along with Agnes Chow.
Many now expect the US to take a sterner line against China although it is interesting to note the comments from Sec State Pompeo who said that Jimmy Lai was a patriot and that the action in Hong Kong showed that China was unlikely to change its position.

Next Digital stock soars as activists back arrested Lai At one point yesterday the stock was +344% @ HK$0.40 and it closed at HK$0.255. The rally came after Jimmy Lai, his sons and an number of executives were arrested. It is unclear who was buying the stock; but the trading volume was 14x its average. The stock is trading higher again today and is currently +268%. Some pro democracy supporters are reported as buyers but there may also be some buying on the hope that Jimmy Lai’s arrest means he will be forced to sell out. Other local media stocks also rallied yesterday. But having rallied so hard now for two days the stock is hardly cheap. Short term it could be seen as a rallying point for Hong Kong activists. As the court case against Jimmy Lai and the other arrested will be.

LEX Jimmy Lai: buy orders on democracy. Suggests that the surge in the share price is a reverse boycott. Next Digital it says is 'a benchmark for resistance to Chinese authoritarianism in other ways’. It has survived despite Chinese political pressure and a advertising boycotts by Chinese companies and yet it readership increases during the unrest.
'Investors with ethical policies may have awkward questions for HSBC and Standard Chartered. These UK-listed banks have expressed support for the law under which Mr Lai was detained. The arrest of a chief executive warns multinationals to locate elsewhere. The New York Times has already moved part of its Hong Kong operation.
Next Digital’s own future base may be Taiwan, where it gets a quarter of its group sales. The arrest puts the group on the map internationally, however distressing it may be for Mr Lai.
The speed of Beijing’s clampdown suggests Hong Kong, once a key Asian forum for trading goods and ideas, will soon be just another Chinese city.'

China hawks swoop to exploit Trump’s anger Advisers scent opportunity to push US president further as he battles for re-election. Notes that Trump has decided to make China ‘a bogeyman’ in the US 2020 elections and that some of the China hawks in his administration are seeking to get legislation enacted that will be hard to reverse if his losses to Biden. That is likely to be bad news for Chinese companies longer term.

Chinese military steals march in race for vaccine. Looks at how PLA soldiers receive doses in closer collaboration between armed forces and business. Quotes Adam Ni a director of the China Policy Centre, a research group in Canberra, who says 'the military’s advanced medical research in areas such as contagious diseases and biological weapons made it a natural resource for Chinese leaders to tap. “The PLA has done a lot during the pandemic,” he said.’
It explains how CanSino a Hong Kong listed company whose shares have risen 350% this year has kept up and even beaten some of the top global companies with its research. Key to that has been Chen Wei head of the Academy of Military Medical Sciences and one of China’s leading epidemiologists. She has previously worked 'to develop an Ebola vaccine that was never widely distributed but was given to Chinese peacekeeping troops in central Africa,’
CanSino is not the only Chinese company linked to the PLA developing a vaccine others are Suzhou Abogen Biosciences and Walvax Biotechnology.
Recently CanSino released results from a study on civilians in Wuhan that showed 'the vaccine significantly increased antibodies in the vast majority. The authors concluded it was safe, with only 9 per cent of high-dose participants reporting severe adverse effects, mainly fever and fatigue and injection site pain.’
It is not known how much testing is donor PLA soldiers but as Mr Ni says testing on them gave Beijing better control of information and “If something goes wrong, then the bad news is more easily contained.”

China rating boost for local government vehicles raises default doubts. (Was in yesterdays note from the on-line) Bond issuers are upgraded despite fiscal income declining and analysts warn of potential wave of defaults.
The article says that the Local Government Financing Vehicles have been upgraded on the basis of good performance at the end of 2019 with the impact of covid being discounted on the basis it was unclear what the long term impact on the economy would be. Saying they could downgrade later if they impact was more severe than they are currently expecting.
The stronger rating makes then more appealing for investors with a mandate to buy high grade securities and lowers the cost for local governments. They are a key part of the governments plan to restarting the Chinese economy with local infrastructure projects; so many think the upgrades are more political than fundamental.
It highlights how China along with many other nations id seeking to draw in fund to kick start their economies while the real impact of covid remains a big unknown.

Diller places $1bn bet on digital wins at MGM casinos. IAC group has bought a $1bn stake in MGM Resorts, the casino company, for the billionaire mogul’s latest bet in online media: gaming. Notes that on-line at present is only a small part of the business but they see potential growth there. He is focused on the US business and wrote “To operate true sports betting and digital gaming, a provider is currently required to partner with a local casino operator,” he wrote. “And while we believe that regulatory environments generally catch up with consumer demand, it’s taken quite a while in this category, so we found one of the leading players operating in seven going on 11 states by the end of 2020: MGM.”
Macau operators are up today but that is more to do with the easing of travel restrictions to enable more people to visit Macau from Wednesday 12 August.
It will be interesting to see if the other US operators also look to increase their on-line gaming presence too.

Luxshare takes key role in Apple supply chain. Deal for two Wistron units puts a Chinese group at the centre of iPhone production for the first time. Looks at how the Shenzhen listed company has managed to get into the current position; due in part to support from Apple and Tim Cook especially. The founder was previously with Foxconn and the article notes how she has followed many of the practices encouraged by its founder Mr Gou. For Apple the use of Luxshare also has advantages it means it has more than one supplier but also that as it hopes that close alinement with Chinese companies mean it is less likely to be subject to Chinese sanctions.
It notes that one of Luxshares competencies is raising efficiency and profitability of new units which will be crucial as margins are very thin; which is one reason that Wistron is exiting the sector, it was one of three assemblers with only 10% of the orders so the business was becoming a drag on the rest of its operations. It’s worth noting that for Apple keeping manufacturing costs down is a key part of the business and it does so by introducing new players to its process.
An interesting read and certainly looks alike a company worth having on the radar screen. It has grown significantly since 2018. Recent resistance was at 60 CNY which it was tested a few times over the past month, currently trading at 53.10 CNY it needs a driver to break out but accumulation at these levels could be worthwhile.

Chinese smartphone maker Realme targets young consumers in emerging Asian markets. A low cost phone maker which is making a name for itself with significant growth selling low cost high spec smartphones. It targets young buyers who like tech but have a limited budget.
Its founder Sky Li previously worked for Oppo, China’s third largest smartphone maker, which is where he saw the opportunity of selling 'flashy and sleek but inexpensive smartphones in emerging markets.’
To an extent Realme is riding the same wave as Oppo and both companies are part of the network of models backed by Shenzhen-based conglomerate BBK Electronics, which is also an investor in brands Vivo and OnePlus. Next Realme want to expand in China where there is likely to be good demand in lower tier cities. Its main rival there will be Xiaomi the Hong Kong listed company, but it has an inconsistent reputation when it comes to launching well priced new models.
Seems to me that the real winner is Shenzhen-based conglomerate BBK Electronics who are making the phones; that company is owned by Oppo Electronics. BBK Electronics mainly sells phones into Russia.

Barrick basks in glow of soaring gold as investors turn away from bonds. Good results from the company and it says its restructuring plans are being implemented with success and it's on track to meet is lowered production guidance. Stock is trading just off its 5 year highs but is +60% this year. Likely to perform in line with the gold price unless it can provide more good news on mines being re-opened or production being increased to really drive the stock higher.

NY Fed fears credit crunch among high-debt companies. It says a ' “sizeable share” of US publicly listed groups faces a potential credit crunch,’ The key being that their cash flow is not enough to meet their increased interest expense. Raising concerns about how they will react to further liquidity shocks. Key area are mining, oil, entertainment, hospitality and food. If these types of company fail the impact will be harsh especially for those in low paid jobs in hospitality and food sector were the opportunities to find alternative work are very limited.

For Interest
Investor concerns about looming inflation after the crisis are overblown
by Michael Strobaek Global CIO of Credit Suisse. His view is that most of the established indicators are at flawed in the current situation and that we should focus on the political economy and whether the current pandemic is going to mean Central banks lose their independence.
He thinks its unlikely in Europe due to the ECB’s constitution and the norther countries stance on inflation.
China’s PBoC will do whatever the government deems necessary but in China there is caution having learnt from past experience about the dangers of inflation.
That leaves the US and he doesn't see a change there either. Trump or Biden could put pressure on the Fed but both are likely to be meet with resistance.
As such he does think inflation is a issue.
A neat read but I think that whilst historical indicators may currently be unclear one shouldn’t dismiss them. With so much money being thrown at the pandemic and much of it going direct to individuals we are face with a new scenario which is new to everyone and we still don’t know how long the current pandemic will last before we get a vaccine or cure and whether like the flu we well be facing a new form of the virus at the end of the year.
Investors at this stage need to be balanced and not dismiss any possible outcome. Having at least something to hedge against possible inflation I think makes sense. Gold ETF’s appear to the be the most accessible and liquid way of taking a position.

FT BIG READ. BANKING Banks braced as pandemic poses biggest test since financial crisis Provisions for loan losses are the highest in a decade as lenders prepare for large-scale company bankruptcies and a period of lower profits while investors remain sceptical about the sector’s value.

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